Greetings, and welcome to Ready Capital Corporation’s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Andrew Ahlborn, Chief Financial Officer. Thank you. 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 on 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 2021 earnings release and our supplemental information, which can be found in the Investor Relations section of the Ready Capital website.

In addition to Tom and myself, we are also joined by Adam Zausmer, our Chief Credit Officer; and David Cohen, Co-President of Bridge Lending on today’s call. I will now turn it over to Chief Executive Officer, Tom Capasse..

Good morning, and welcome to those of you on the call today and keeping with our practice of having members of the executive team join Andrew and me on calls to display the depth of our team. I’d like to welcome David Cohen to today’s call.

David a key leader in our organization is Co-Founder of Ready Capital’s Bridge Lending business, which has grown to be one of the premier sources of capital for owners of lower middle market properties in transition.

Providing loans on transitional, value-add and event driven commercial and multi-family real estate David leads his core lending strategy, which accounts for nearly one half of our capital allocation. Turning to results. We reported distributable earnings per share of $0.64, 23% growth from the prior quarter.

This marks the six consecutive quarter where both return on equity and dividend coverage are in excess of our 10% and 105% targets. Both metrics are among the highest at our peer group reflecting continued contributions across our multiple diverse business lines.

At a high level results continue to reflect post-COVID recovery and net interest margin in our core, small balance commercial or SBC lending business with stable contribution from our government sponsored gain on sale segments.

The post-COVID recovery in the SBC property market is lagging the large balanced commercial real estate market reflected in 36% and 11% year-over-year increases in SBC property sales to over $150 billion and prices through July. This trend is driving loan demand across our diverse product offerings.

We originated $1 billion of SBC loans in the quarter holding consistent with record originations in the prior quarter. The volume was dispersed across our range of products, which target all stages of an SBC properties lifecycle from heavily transitional to stabilized agency loans.

In our Freddie Mac small balance loan program, we originated $136 million and expect annual volume to exceed $700 million in Freddie Mac and bridge to Freddy volume by yearend.

Despite quarterly volume declines due to changes in Freddie’s affordability criteria and rate increases in the third quarter, demand from multi-family housing remains elevated. Freddie’s recent rate reduction to as low as 2.6% in top markets is expected to drive increased volume through the end of the year.

In the quarter activity in our conventional fixed rate segments picked up for the first time since the start of the pandemic. These products target stabilized or stabilizing properties with our fixed rate product, providing flexibility and term, repayment options and property types. Originations in the quarter where the segment exceeded $1055 million.

Fixed rate originations of $71 million had an average rate of 4.1% and are expected to generate a low team levered yield over their nine-year duration. CMBS originations of $34 million would be contributed to the company’s first standalone CMBS offerings and we’ll generate gain on sale revenue.

Our Bridge Lending business, which targets both heavy transitional to light transitional projects was the star performer with over $730 million originated in the third quarter. I’m going to turn it over to David to provide additional insight..

Thanks, Tom. Since the onset of COVID in 2020, and after the initial shock of the assumed negative implications on the commercial real estate lending market, there has been a fully looking momentum in the market as lenders reentered the lending arena.

The Ready Capital Bridge Lending platform quickly adapted to the change market by focusing on certain preferred asset types and markets. We remain disciplined on credit. This is evident in evaluating approximately 1500 new deals in the third quarter and closing on 3.5% for $730 million.

To accomplish our continued growth and market share capture, we focus on several key areas. First, our closed transaction volume was driven in particular by our ability to provide sponsors and brokers with certainty of execution through our unique upfront due diligence review process.

In this market of uncertainty execution certainty is paramount to be designated as the lender of choice. To accomplish these objectives, the Bridge Lending platform enhance its infrastructure in the third quarter with the hiring of an additional for employees to support transaction execution in the areas of production and credit.

Second, we continue to focus on the financing demand for value-add, multi-family and industrial properties. Multi-family properties accounted for 87% of the third quarter volume and 88% of volume funded year-to-date.

Our focus on multi-family assets is based on the company’s proprietary geo tier scoring model, which factors in local, macroeconomic, migration and demographic, and absorption trends, as well as the predisposition towards the better classes of assets with qualified and experienced sponsors and operators that have the proven ability to execute a well defined business plan.

In addition to our geo tier model overlay, we are also focused on the property level credit analysis, which includes evaluating the achievable pro forma rent levels for the value-add improvements from the loan proceeds, vacancy, concessions, and bad debt, along with property a loan basis.

Additionally, we underwrite traditional credit metrics such as stabilized loan to value and debt yield. This strong and detailed underwriting focus provides us with the confidence in the loan that upon stabilization, there is a clear path for an exit to a sale or refinancing into a fixed rate or agency loan.

Another favorable sector focus for us benefiting from ongoing COVID dislocation is industrial with the continuous increase of e-commerce sales, the industrial segment continues to show strength as supply chain demands is driving the need for industrial assets.

With industrial specifically some key factors we evaluate are the properties location, and corridor accessibility and weather suited for local and/or national tendency and last mile distribution to the end user, as well as understanding the properties functional capabilities or obsolescence.

This has been an incredible year for our Bridge Lending platform, as we continue to build relationships and build upon our strong reputation as a prominent, small and middle market balanced bridge lender.

We will continue our path of consistent growth and increase market share by working with best-in-class and experienced brokers and sponsors and providing a well-structured loan with the certainty, our customers have come to expect. Let me turn the call back to Tom..

Thanks, David. To supplement our SBC direct lending, we also acquired $168 million in the quarter. The acquisitions included 49 loans with an average LTVs of 58% and rates of 4.4%. The assets will be contributed to the company’s 11th legacy loan securitization and are expected to generate a 15% return over a four-year duration.

The current acquisition pipeline remains robust at $350 million. I want to highlight the growth in our CRE lending business and acquisitions business in 2021. Our expectation is that the 2021 volume across all products will exceed $4 billion. 2 times our normalized pre-pandemic originations in 2019.

Although, the market backdrop has been constructive to this growth. We believe our investment and expanding our capabilities, the increased recognition of the Ready Capital brand and the flexibility, certainty and reliability we provide to our customers has been a significant factor in this growth.

In our Small Business Lending segment, which focuses on the Small Business Administration’s or SBA 7(a) loan program, post-COVID recovery and small business loan demand continues to drive origination volumes.

During the quarter, SBA 7(a) volumes reached $138 million, which along with the SBA’s 90% guarantee and secondary market premiums averaging 12% resulted in significant gain on sale margins.

The sustained demand from small business is reemerging from COVID, the opportunistic staff and technology investments made into the business over the last four quarters and product expansion such as the 7(a) small loan program will continue to drive growth in this segment.

Our expectation is that annual volume in 2021 will surpass $425 million, almost 2 times a average run rate from 2018 through 2020. I would also like to highlight that we completed the SBAs fiscal year, which ended September 30 as the sixth largest lender nationwide.

Now turning to our residential mortgage business originations remain consistent at $1 billion, but as expected, average margin declined 15 basis points and averaged 92 basis points. Additionally, quarter-over-quarter rate lock commitments fell 17% to $455 million, while the channel mix remains steady with purchase volume at 55%.

On the mortgage servicing rights front, a high retention rate of 32% aided the growth of our MSRs to over $10.7 billion principle balance with a low pool weighted average coupon of 3.4%. We expect volumes to decline 20% in the fourth quarter, due to seasonality and potential rate increases.

Overall commercial portfolio growth was healthy with SBC and SBA loans posting a 13% gain to $6.1 billion. Ready Capital’s portfolio is not only differentiated from the peer group, but provides a superior risk adjusted return.

The portfolio is one of the lowest risk in the peer group highly diversified across 4,500 loans with the largest asset accounting for only 2% of the portfolio and a conservative average loan to value of 64%.

SBC credit performance in the portfolio continues to improve with only 1.7% of loans, 60-day plus delinquent and only 10 basis points in forbearance. SBA performance also continues to improve with 50 basis points of loan, 60-day delinquent and 80 basis points in deferment. Remarkably, we have yet to realize a loss on a new origination.

On the corporate development side, we remain focused on further building scale as a market leader in private debt solutions for our core middle market commercial real estate client base across the property life cycle. The merger with Mosaic Real Estate investors is the next phase of our growth plan and a natural fit for our existing business.

Mosaic founded in 2015 is a leading non-bank lender, having originated over $2.5 billion of loans across construction lending, preferred equity light value-add multifamily and preconstruction development financing.

The $470 million transaction includes the acquisition of the existing Mosaic portfolio with an initial purchase price equal to 82.5% of the portfolio value in a $98 million future earn out depending on the achievement of certain milestones.

Additionally, all origination and asset management staff will be merged into our existing SBC lending operations. This transaction furthers Ready Capital’s competitive advantage via seamless expansion and our product mix from heavy transitional bridge to construction lending.

Few non-banks offer a lower middle market sponsor of full lifecycle financing solutions from construction to agency takeout, but now we do. Aside from the product expansion, the transaction is expected to be accretive to earnings due to the 12% portfolio yield and unlevered balance sheet.

Pending shareholder approval, we expect the transaction to close by the end of the first quarter of 2022. More information on the transaction can be found in the transaction presentation on the Ready Capital Investor Relations website.

In terms of the outlook, the business continued to benefit from our diverse channels, as well as the increasing scale and reach of our lending activities.

The combination of growing net interest margin and servicing revenue, the increased scale of our gain on sale businesses and the remaining benefit from our PPP efforts will continue to produce attractive returns for investors over the foreseeable future and strong support of our best in peer group dividend. With that, I’ll turn it over to Andrew..

Thanks, Tom, and good morning. GAAP earnings and distributable earnings per share were $0.61 and $0.64 respectively for the quarter. Distributable earnings of $49.4 million, represents a 19% growth from the prior quarter and 17.3% return on average stockholders’ equity.

Distributable earnings without PPP hold at $0.45 per share, a 20% increase from the prior quarter. The continued strength in earnings were driven by the growth in the portfolio due to increased lending volumes, the attractive economic climate for our gain on sale segment and the realization of deferred revenue associated with PPP.

Stable and recurring revenue from net interest income and servicing increased 22% quarter-over-quarter to $47.3 million. The growth in net interest income was driven by 13% increase in the portfolio, which as of quarter had a weighted average coupon of 4.9% and average margins of 240 basis points.

Additionally, we recognize a $4.5 million increase in quarter-over-quarter equitable payoffs, which were partially offset by $2.5 million reduction in interest income on mortgage backed securities, due to the continued liquidation of the existing Anworth portfolio.

The servicing portfolio increased to $15.8 billion with a weighted average servicing fee consistent at 29 basis points. Gain on sale revenue from our SBA 7A and Freddie Mac SBL operations remain notable at $19.7 million.

SBA production in the quarter continued to be at a 90% guarantee and given the strength of the secondary markets, a $117 million of sales resulted in net profits of $14.2 million.

As we discussed last quarter, we are currently selling a portion of production at below market premiums, which eliminates day one recognition of earnings, but increases the retained yield over the loans duration.

Freddie Mac sales totaled $110 million in the quarter, generating $1.8 million in revenue with margins remaining consistent at 160 basis points.

As expected, net revenue from residential mortgage banking activities declined 15.6% to $12.9 million, despite consistent quarter-over-quarter production due to the normalization of margins in 92 basis points.

Additional income statement items of note, include a $1.2 million increase in other income related to origination fees, which were offset by increases in compensation expense related to continued growth in staffing and bonus accruals, professional fee accruals and fees due to Ready Capital’s manager.

Included in this quarter’s earnings were $2 million in net income contribution from Redstone, which was acquired by Ready Capital on July 31. Pre-tax PPP related income totaled $17.7 million, which includes $18.7 million of interest income offset by $1.2 million of interest expense and $200,000 of other income.

On a tax affected basis, PPP increased net income available to stockholders by $13.3 million. As of September 30, we had $82.9 million of deferred revenue remaining as well as $8.9 million of reserves pending resolution of their forgiveness process.

PPP assets declined $400 million due to the forgiveness of roughly 18% of the portfolio through September 30. And we expect a majority of the deferred revenue to be accreted into earnings over the next three to four quarters.

On the balance sheet, we continue to focus on the growth of the portfolio, the capitalization of the business and funding the growth of the franchise.

To start, book value per share increased to $15.06, and we expect further growth of book value to both the mark-to-market on the MSR asset, as well as the retention of earnings inside our taxable REIT subsidiaries.

On the asset side of the balance sheet, the loan portfolio increased to $5.9 billion as a result of $1.1 billion in originations and acquisitions net of $500 million in payoff. 73% of the portfolio is floating rate, which 70% of the remaining fixed rate loans match funding.

This growth was complimented with a $25.8 million increase in the servicing asset due to net additions, including those acquired with Redstone, as well as mark-to-market improvements. To fund the growth of the portfolio, we liquidated $140 million of the remaining Anworth RMBS positions in the quarter.

The increase in unconsolidated joint ventures was due to the inclusion of $35.6 million of assets related to the business combination with Redstone. As of September 30, total leverage inclusive of the paycheck protection program liquidity fund was 5.9 times, with recourse leverage at 2.2 times.

We recently closed a $350 million, 4.5% senior secured note offering to refinance our existing notes, as well as to fund the robust pipeline. This deal continues the trend of reducing the company’s cost of capital as we scale. Today, the weighted average cost of corporate leverage is 5.3% compared to 7% on December 31, 2020.

Additionally, the successful repositioning of the preferred stock inherited in the Anworth transaction is reflected in the new Ready Capital Series E on the September 30 balance sheet. In the quarter, we also completed the company’s sixth and largest to-date CRE CLO loan.

The transaction securitized $653 million of originated bridge loans at an advance rate of 83% and weighted average cost of 133 basis points with the most senior bond having a plus 95 spread. We plan to be in the market with our seven CRE CLO in the fourth quarter. With that, we will open up the line for questions..

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Hayes with BTIG. Please proceed with your question..

Hey, good morning guys. First question around the Mosaic acquisition.

Can you just give us a little bit more color around the profile of these loans? How does the collateral compare to what you might lend on from a transitional standpoint? Can you talk about kind of the credit profile and how these loans performed through the pandemic and kind of since the company started since 2015 any material realized losses in that business to talk about or also just want to touch on the maturity schedule.

What that might look like over the next couple of years. Thanks..

Thanks, Tim. Hand off to Adam, just as a preference Adam, we did – Adam and his team conducted extensive due diligence. There’s roughly – what is it, Andrew, Adam, roughly 35 – 38 loans over the last six months. So maybe you can kind of bit of a deep dive in terms of the broad profile, credit profile of the portfolio..

Yes, sure. Hey, this is Adam. Thanks for the question, Tim. So the overall credit profile, this portfolio strong. We have a healthy basis in the loan portfolio, got moderate weighted average as is LTV is based on fresh valuations that we ordered through our due diligence process. The portfolio is good property type and geographic diversity.

Approximately 95% of assets are in, what we call, geo tiers one through three, which is the largest and most liquid assets – excuse me, most liquid markets across the country. Approximately 25% of the portfolio was backed by multifamily properties, which obviously is a lower volatile asset class that we’re very, excuse me, bullish on.

Majority of the construction projects are well into construction phase with guaranteed maximum price contracts. This mitigates rising construction costs that the markets’s experiencing due to materials and labor shortages, and then also supply chain issues. In terms of a breakdown of the portfolio, construction represents about 60% of the assets.

I’d say from a geographic perspective, about 40% of the assets are on the West Coast, markets that we like Los Angeles, et cetera. From a credit performance perspective, the performance through the pandemic has been positive, with over 90% of the portfolio fully performing today. Two assets are in default and there are three REO assets.

Two of the REOs were due to the pandemic and there was one legacy REO. Three to four assets have experienced a lead due to the pandemic, which is material supply shortages and/or crossover runs.

But we’re comfortable with the assets due to the projects being backed by reputable well capitalized developers and sponsors, who during the pandemic contributed additional equity as needed and had executed completion interest in carry guarantees at closing up the deals. There’s six deals that received extensions since the onset of the pandemic.

And I want highlight that six deals have been repaid at par since the beginning of our due diligence process, which is extremely favorable..

That’s great color. I appreciate that. And then just the maturity schedule there, are these – what are the duration on these loans? Do you expect to be facing some repayments in the near-term? Yes, I’ll leave it there and then maybe one or two follow-ups..

Yes, sure. The typical tenure of these loans is three to – excuse me, it’s three to four years. And these have various extension options.

And then also I’d say the weighted average is about two years remaining on the majority of these and then in terms of refinances and payoffs, there’s certainly a number that are in process where we’re working closely, excuse me, where Mosaic is working closely with the sponsors on their refinance and asset sales..

Okay. Got it.

And then, the collateral here, I mean, are these natural candidates for you guys to then offer some type of heavier transitional loan at once it completes construction [indiscernible] or is it different type of collateral than you’re normally targeting?.

It’s very similar, given the bridge program that David walked through. I mean, there’s certainly a significant amount of opportunities for us to do bridge financing on some of these assets, specifically, where there’s – where the projects are in the horizontal phase.

And the entitlements are complete, the pre-development phase is complete and they’re looking to go vertical. So David and his team, they’re going to be building out a construction product at Ready Capital, where we can offer these clients bridge.

And then additionally, on the more stabilized assets that are within the portfolio, there certainly would be a very good fit for our CMBS and fixed rate platforms. So certainly a lot of opportunities there.

And then also – we have multiple investments in multifamily properties focused mostly in the South East, where we can work with some of our partners on the agency side to offer some of the large balance agency, Fannie or Freddie conventional..

Got it. Got it. Okay. It sounds like a, yes, nice, kind of leading pipeline for other parts of the business too. And then you just talked – you mentioned earnings accretion from the deal, any – can you size that for us in the near, long or near/intermediate term.

What you kind of expect the earnings contribution from this portfolio to be upon closing and maybe where you see it growing..

Tim, this is Andrew. I think you got to look at it or we’re looking to it in two ways. The accretion is going to come from the fact that the portfolio on an unlevered basis is earning above our target returns. So it’s roughly around 12% on levered return here. So that’ll be the first part.

The second part will be just the operating leverage that comes with integrating that business into our existing infrastructure. So we certainly expect accretion from that as well. And then just the reinvestment of the additional $470 million of capital, whether through leverage or just the natural cash portfolio into our existing product.

And so when you look at the return profile of the company today, given PPP is pushing it north of 15%, that’s a hard hurdle to overcome. But as that runs off over the next two, three quarters, the profile of this equity is certainly in excess of the – sort of the net run rate of the existing business..

Right. Right. Makes sense. Okay. Appreciate that, Andrew. And then just last question for me, around the acquisitions this quarter, it looks like a portfolio of low LTV, high yielding loans.

Can you just give us a little bit of color on where this acquisition came from? What kind of loans these are? And if you think you can even improve the advance rate looks pretty low on assuming that the financing on the loans there.

I mean, are you able to kind of put those on new lines and get better leverage there and boost that ROE a bit, any color on that would be helpful?.

Adam, do you want to – you have to take them..

Yes, sure. On the recent acquisitions, very consistent with the type of acquisitions that we’ve done historically, small balance loans spread about a nice geographic profile, nice diversity, sourced through a regional bank.

And as you can see, certainly, extremely low LTVs clean pay history is historically nice amortization given the seasoning in these assets. Again, just from a diversity – excuse me, from a diversity profile, it fits very well with what we’ve been doing and those assets are performing extremely well..

Got it. Thanks for the color guys. Appreciate taking my questions this morning..

Thanks, Tim..

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

Hi, good morning.

One quick follow-up on Tim’s question, as you mentioned that 12% unlevered yields, how much leverage is – you think is appropriate for this type of construction loan and kind of how do we think about the type of financing you’ll use?.

Yes. We certainly think to the extent, we apply as a level of financing to the portfolio, probably going to have advanced rates slightly lower than where our existing products are.

But we do think the balance sheet provides optionality and whether we apply asset specific financing or we do something like a term loan given the unencumbered nature of the balance sheet. So we’ll work through those options depending on the markets between now and close. But we do think, it provides us with that flexibility..

Yes. One thing I would just add to that, Andrew, is that one of the unique aspects of construction loans is the existence of a fairly liquid syndication market either [indiscernible] notes. So that’s another way we’re going to look at leverage on this portfolio.

We’re looking to manage the overall exposure, terms of net equity that kind of 10% to 20% on a pro forma basis. This will be what Andrew is 16% net of reserves. That’s kind of how we’re thinking about the – managing the net equity exposure, as well as the overall amount of recourse leverage..

Great. Switching to the resi mortgage banking business, can you talk about you’ve done a great job of maintaining volumes, even as you’ve seen your mix shift more towards purchase the last six months.

Can you talk about the outlook both on volumes and what you’re seeing in margins across the channel and then any opportunities or headwinds created by the likely increase in conforming limits here in the near future..

GMFS has continue to outperform and will in the – in terms of their – versus their peer group as measured by STRATMOR and other data. We track, but to answer your question, I think our guidance is for a decline of roughly 20% in the next quarter. But as far as margins, I think we’ve normalized to a – it was 92 basis points this past quarter.

I think, Andrew, you can chime in, but our expectation is a normalized range now of mid-90s to a little, call it, 1 to 1.25 in terms of a bandwidth.

So I think you’re seeing the expected normalization is occurring, but I will point out that if you look at some of the larger public comps, they’ve outperformed in terms of the both volume and margins and also the stability, remember, the strategy with our residential mortgage banking segment is to utilize – is to retain MSRs as a hedge for production declines, which has worked out very well in terms of normalized ROE.

And there we also – they benefit from a much lower volatility in their lower convexity brisk in their MSR book due to the nature of the underlying geographic area, Louisiana, et cetera, and the lower whack in the portfolio as well..

Great. And lastly, Andrew, one follow-up, you mentioned $83 million of PPP income remaining role and earnings for the next three to four quarters.

Is there any lumpiness to that? Is it going to be sort of straight line recognition? How do we think about putting that into our models?.

Yes, I do think there’s going to be some volatility and how that rolls through earnings. If you look at the speed at which the first round of PPP was forgiven, there were certainly spikes in that processing between month six and ten of which were sort of – were rolling into.

So I do expect there’s going to be some increased activity over the upcoming months with the tail coming behind it. So unfortunately not straight line, do think there’s going to be some increased activity over the fourth and first quarters. And then probably the effects will be less pronounced as we’ve moved from there..

Great, appreciate comments this morning..

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

Thanks, and good morning, everyone. First, on the Mosaic transaction, I’m just looking for a couple of metrics.

Is it fair that, I guess, as it stands right now, that earnings should be a run rate around $50 million to $55 million? And I’m just curious of what Mosaic should be on a deferred revenues and are those revenues primarily or vast majority manages income, therefore, if there’s anything else there..

Yes. I can talk about the current earnings profile, as you look at the numbers this quarter, the normalized business in the absence of PPP is certainly running higher than our expectations on return on equity, as well as the dividend. When you layer on $82 million and change of earnings to be recognized over the upcoming quarters.

We certainly think that’s going to push earnings to levels we’re seeing this quarter for at least the next, call it, two quarters.

And then in terms of the earnings contribution post, closing the way I would look at it is that the equity allocated into the Mosaic strategy is going to earn roughly an 11% bottom line return with the majority of that revenue, in fact, coming on the interest income line item, given there’s no real leverage flowing through the financials today the offset to that is going to be in the form of just some of the normalized outback..

Okay, great. Thanks. That’s helpful. And then just broader on the Ready Capital business, can you speak to this trajectory and the sustainability of core earnings, you’ve definitely posted a really solid quarter this quarter at $0.64.

So I’m just curious a little bit about what you think that trajectory could be and what some of the puts and takes will be. I know recently like a will soften a little bit as you noted with a 20% drop in originations, but SBC originations have remained very strong.

So do you expect that momentum to continue and just kind of how it should flow through and impact the overall core and core earnings of the business..

Yes, it’s a good question.

When we look at our 2022 business plans, what you’re seeing is the trends – if you will the transfer from the large gain on sale revenues, resulting from the pandemic stimulus packages, notably PPP to the relevering of the SBC origination and acquisitions book such that you’re going to see kind of a more prorated mix between – right now, the equity allocation if you look on the deck, I forgot what page it is, but it shows that we’re now at about 90% 90-10 SBC equity allocation and 10% on the gain on sale businesses.

So what you’re going to see in some subsequent quarters is a normalization of the NIM related to that core SBC capital heavy business and that’s being supported by record originations, right. We did $4 billion – we will likely do $4 billion this year 2x the normalized 2019. And so we see that continuing, especially in Dave’s bridge business.

So that – and that – and the other thing to point out there is that with the capital markets execution on our in particular, CRE CLOs, which only trade about 5 basis points higher on the AAAs than the benchmark loans like Blackstone, et cetera.

Our ROEs are better than what they were pre-pandemic, call it maybe by 100 basis points or so on the – on those businesses. So that, that will continue to support kind of a high-single digit ROE.

And then the gain on sale businesses continued to grow post-pandemic in particular the SBA with the rollout of the – we hired number added 20 staff to that business and also are rolling out new products like this SBA 7(a) small loan program. So we expect continued market share gains in that segment.

And then we’re adding incremental businesses like Redstone, which are capital light, and also our benefit from government sponsored programs in that case, the Freddie Mac tax exempt program. And that will be offset a little bit by – as we talked about by the normalization of the residential mortgage banking.

They’re kind of a long way to answer your question, but we are very bullish on the prospects of – on the origination front going in 2022, which will support continued growth in the core NIM high – which supports a high-single digit ROE supplemented by the 1 or 2 points attributable to the gain on sale businesses..

Okay. Thanks, Tom. Thanks for all the color there. And if I could just sneak one more in. During prepared remarks, you talked about the 90% guarantee on SBA.

Do you think that – do you expect that 90% guaranteed stuff holds going forward or do you think it could be moved back to 75% if that were to happen and any big impacts to the business?.

Well, it’s a good question. It’s actually in the reconciliation bill right now to continue the 90, the 90 remember was a was borrowed from the Obama incentives from the GFC, and then obviously implemented as part of the CARES Act.

So but it is in the current reconciliation bill, but that’s the way that works from we’re pretty active in our trade – non-bank trade association – we’re getting guidance from them that, it’s a bit of a coin flip as to whether that stays in.

But from our standpoint, our base case scenario on earnings assumes that a normalization back to the 75, but if we get the 90, that would be upside in the SBC gain on sales contribution. Sorry, SBA gain in sale contribution..

Great. Thank you for taking my questions and congrats on a great quarter..

Thanks..

Thanks, Crispin..

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

Yes. Thanks for taking the questions. Tom, I’m curious what you make of the current lending environment, lot of the mortgage REITs have seen a surge in production, lot of the CRE brokers are citing debt funds as the most competitive and many have a CLO exit.

And also secondarily, how comfortable are you with the increase in average loan size that the Mosaic portfolio will introduce to the Ready Cap business?.

Well, first on loan demand and that’s obviously being significantly driven by transaction volume and remember, were you mentioned the other mortgage REITs, they’re in a rarefied space, right. They’re at large balance.

Their average balances on the transitional loans might be in the hundreds of millions and ours is roughly in the call it the $5 million, $12 million to $15 million.

So we squarely focused in the lower middle market and there – you’re seeing kind of a lag recovery in terms of transaction volume through July was up, I forget what it was 17% to $150 billion. So that’s driving a lot of the growth in David’s business. And David, maybe you can just comment on that.

I’ll comment on them and Adam comment on the Mosaic exposure. But Dave just maybe you could comment on what you’re seeing in terms of your core business, in terms of competition from debt funds and demand from your client base..

Yes. I think it’s very competitive right now. And as I mentioned in the dissertation before that the certainty of execution is paramount right now. And I think that a lot of our clients are looking for us through this upfront process. We have to review deals to go from beginning to end without much change.

Now the volume is definitely being driven across the board, all states, there’s a lot of movement and migration to the sun dealt, wherever it may be, but the demand in particular for multi-family has been very, very ferocious. It’s been very – there’s been a lot of volume in that market.

I think that since we focus on asset types, the multi-family and industrial in particular, that’s where we’re seeing the most value-add opportunities right now.

And then followed by I would say self storage and minimal on the hospitality retail, and then some office, but the demand is across the board and it’s going to continue so long as there’s a good work from home platform that tenants are looking to work from.

And yes, I think it will continue going forward, but the volume is the highest I’ve seen it in awhile..

Yes.

And just last point on that and Adam maybe touch on the Mosaic in a moment, but Dave, I think another point you make in our management meetings is the competition in your strata of the market, lower middle market is not as great in terms of new entrance and pricing and credit aggressive, being aggressive on credit in the large balance based, correct..

That’s a 100% correct, Tom. And once you get up to the over $50 million or even over a $100 million of loan size, the whole sphere changes in terms of the competitive nature. But there are very few lenders in the 5 to 20.

And since we focus in that area, in the middle market, small balance, it’s definitely given us an advantage to want to have diversity and also to be able to structure and close on those transactions..

Yes. That’s helpful. So in terms of the second part of the question, Adam, maybe just touch on the current Mosaic transaction, how you and your team are going to manage the existing exposure. And then the go forward in terms of we’re bringing on, they have a very strong team in Mosaic.

Mosaic was formed by a visionary and a pioneer in the CMBS market, Ethan Penner. And they – so that team is going to be based in California and will continue to – we’ll be integrated and continue to originate the construction notes, but maybe just Adam very briefly touch on the existing exposure and then the go forward..

Yes. Jade, I think you touched on the comfort around the larger loan sizes. I think regard to loan sizes, I like to say that, the smaller deals, the underwriting on those are often more complex than the actual larger transactions, right. The risks are the same, et cetera, but you typically have with a smaller loan less sophisticated sponsor, et cetera.

But I think with those Mosaic portfolio, these larger loan sizes, the sponsors and developers or end developers are often more institutional than the small amounts borrowers, like I mentioned, more experienced, well capitalized, should they run into issues, they can easily tap into their equity partners if needed.

So that certainly gives us some comfort on the loan sizes. And then also in David’s bridge business, you’ve seen over the years – within our own portfolio, the existing portfolio that are large that our average loan sizes have been increases. I think that also helps with economies of scale in terms of underwriting and expenses related to the business.

To Tom’s second point about the team that we’re bringing on during the due diligence process, we spent a lot of time out in these markets with the Mosaic asset managers, with their leaders, et cetera, growing the markets, growing the assets, doing deep dives at the asset level.

And what we came around with is that these are very experienced solid asset managers that have strong relationships, not just from a sponsor and client perspective, but from a third-party perspective, from local partners in the market that, that can assist with just local Intel that, that you need on these types of assets.

So working with those has been fantastic. And we’re going to be bringing them on to Ready Capital team. And that also gives us some significant comfort that they’re going to be helping us manage these assets going forward..

Thank you. And just on Mosaic Manager, you mentioned Ethan Penner, wondering what will his role be with respect to Ready Capital? I think the language says that the Mosaic Manager will continue to provide investment management services to certain prospective and existing clients, which I assume is of their own clients.

But just curious about the role that they’ll have with respect to Ready Capital..

Yes. Mosaic will be retained as essentially in a specialist Asset Manager role to manage the number of the assets in terms of disposition strategies, advanced, how we syndication, et cetera.

And that there’s an alignment there in terms of their existing LPs, because there is the contingent equity right mechanism, the $98 million, which will accrete 90% to the existing mosaic shareholders. So that we think this arrangement creates a strong alignment of interest, both for Ready Cap as well as the Mosaic LPs..

Thank you very much..

Thanks, Jade..

Thanks..

Our next question comes from the line of Steve DeLaney with JMP Securities. Please, proceed with your question..

Thanks. Hey, good morning, everyone. Congratulations on the really strong results. Yes, I think it’s when look at what you’ve done with your performance, the legacy businesses and the acquisitions that you’ve bolted on in the last six months. I think you’ve really taken investor focus off of the PPP and the timing of that, et cetera.

So props for that, I think that’s good for the stock. Starting off to, I think Tim nailed it on his first question. I think the question of the day is understanding the port – the Mosaic portfolio in terms of property types in geo. And you certainly covered that.

We also know that the team’s going to stay how many people are – you said they’re based in California, just roughly how many people are coming over to manage that portfolio..

Adam, you want to touch that?.

Yes, sure. On the asset management side, it’s about eight individuals. And then there’s an origination team of two individuals. So the combination of that, right, the origination folks that obviously originated as loans, underwrote them, et cetera. That’s going to be a huge benefit for us as you know we move forward here.

So it’s about 10 folks based in California..

Okay, great.

And that group obviously, you’ve got the existing portfolio, Tom, if you look forward, is this something that you structure something as a separate TRS, or do you see this group as sort of a sub manager to waterfall itself? How does – I guess what I’m really asking Tom is, do you see this other than acquiring a portfolio? Do you see this having legs? And if it does kind of how does it fit into the overall structure of the company?.

Yes, no, that’s a good question, Steve. This unequivocally is a great bolt-on fit for our existing product mix, because think about it, if you’re a sponsor, a lower middle market sponsor, what we offer them now through Dave’s business is a so called heavy transitional, right.

Whether we could acquire it, there’ll be a lot of CapEx, but it’s not ground up construction. So now we go to ground up construction, which is typically the Bailiwick of the banks very to non-banks in this space.

And so like bank of Ozarks, et cetera, they have much – their LTVs by just given the nature of the high capital charges for construction loans with banks. They’re more in the 50s-ish, 60 most. And as a non-bank we can go a little bit up the LTV spectrum not by a lot, but kind of like a unit tranche leverage loan.

But for us, this clearly is a new existing product offering that is a – yes, will fit our existing sponsor base. But for example, just to give you one example with the Redstone, they do construction lending, right, for affordable with a take right from Freddie.

Well, now we can provide that even more enhanced their business by offering affordable construction, sorry, offering construction lending for affordable multi-family with a – yes, with a known takeout with the Freddie tax exempt bonds.

So this clearly is a product fit and the individual Alex, who would come on – who’s coming on board is very well respected in the industry. He’s been – he was with Ethan back in the – more days, 25 plus years ago. So I think we see a very seamless product that for this construction lending vis-à-vis Dave’s transitional lending business..

Great. That’s great to hear. And then a quick follow-up on Redstone, since you mentioned it, I’ve been trying to understand exactly how they fit into the mix and whether do they focus more on low-income housing tax credits, syndications, or actually buying the MRBs and the GILs.

Exactly what is – can you kind of clarify exactly the products they have to support low-income affordable housing?.

Adam, you want to touch on that? I mean just to be upfront though that they’re not a syndicator. They basically utilize the Freddie mortgage tax exempt bond program. But Adam, maybe you could just kind of touch on their core business..

Yes, yes, sure, Steve. So their sole focus is really providing construction and permanent financing for the preservation and construction of affordable housing primarily utilizing tax exempt bonds. So just some things that they’ve done over the years. So they’ve closed over $5 billion of multi-family affordable 60,000 units.

They got a $1.7 billion pipeline today affordable projects. They have a Freddie Mac seller servicer license for the targetable affordable housing. They’d done like 19 tax exempt bond securitizations to date through the Freddie Mac program.

So to Tom’s point, I mean yes, their sole focus is really construction and permanent vice financing for affordable housing. And clearly there’s a significant demand from a tenant perspective to get into the these affordable projects..

Got it. So yes, highly specialized and focused loan brokerage kind of platform. And obviously next year – starting next year, yes, we got an increase in the caps to $78 billion, but 50% has to be affordable. So sounds like a really nice piece addition. So listen, thanks for the questions and for the comments this morning. Thank you..

Thanks, Steve..

Thanks, Steve..

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

Hi, my questions have been asked and answered. Thank you..

Okay..

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks..

Again, appreciate everybody’s time. We – it was a good quarter and we look forward to subsequent calls. Have a good day..

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..