Ready Capital Corp Q3 FY2023 earnings call

• Broadmark integration: Since the merger closed, 13% of the $121 million portfolio was repaid or sold; leverage decreased from 5.1x to 3.4x; 60% of Broadmark's fixed expense base was cut, reducing the OpEx ratio by 200 basis points; the Broadmark product was rebranded in October. • CRE business: Originated $463 million in CRE loans; portfolio credit metrics were healthy with low delinquencies; the current CRE pipeline totaled $740 million with $690 million committed. • SBA business: Originated $129 million in 7(a) loans, with 60-day plus delinquencies at 1%; targeting to double volume to $1 billion in 3 years. • Residential mortgage: Being explored for strategic options to reposition equity into core channels, with the MSR portfolio having value and located in a lower convexity risk area.

The third quarter saw CRE loan originations total $463 million, with $374 million from Freddie Mac (including tax-exempt affordable and small balance multifamily channels) and $90 million from bridge volume (90% multifamily). In the CRE portfolio, 60-day plus delinquencies were low at 2.9%, with 80% concentrated in middle market multifamily. The SBA segment originated $129 million in 7(a) loans during the quarter, with 60-day plus delinquencies in the portfolio at 1%. The residential mortgage business faced pressure due to lower transaction volume and margin compression and is expected to be phased out over the next few quarters. The CRE loan portfolio, representing 82% of $8.2 billion, outperformed CREIT peer group credit metrics. The SBA segment is one of 17 nonbank lenders under the SBA 7(a) program, with a target to double volume to $1 billion over 3 years.

• Anticipates levered yields to increase to historical levels as loans acquired are cycled out and new production begins. • Future incremental dollars will be used for investing at cyclical high 15% to 20% ROEs. • Expects full accretion of Broadmark-related items by the latter half of next year with earnings gradually ramping to or above the historical 10% target. • 2024 CRE pipeline had $740 million total and $690 million committed, with target to double SBA 7(a) volume to $1 billion over 3 years.

• CRE market conditions remaining tight could pressure transaction volumes and existing portfolios. • Bank deposit liquidity issues may impact the acquisition of loan officers for the SBA business. • Potential fraudulent activity in the broker business could pose a risk to Freddie Mac multifamily originations.

Q: Sarah Barcomb asked about the competitive set in the SBA market and growth outlook.

A: Tom Capasse stated that banks are retrenching, allowing Ready Capital to capitalize on loan officers, and the use of Fintech iBusiness for small loans to double volume to $1 billion in 3 years.

Q: Jade Rahmani inquired about issues with Freddie Mac multifamily and originations outlook.

A: Adam Zausmer said they are being cautious with brokers, obtaining source documents directly, but do not expect the issue to curtail originations, with agency volume down but tax-exempt affordable business expected to grow.

Q: Henry Coffey asked about selling the residential mortgage business.

A: Andrew Ahlborn said they are exploring strategic options to reposition equity into core channels, with the MSR portfolio having value and able to be monetized.

Q: Matt Howlett asked about capital allocation.

A: Tom Capasse said they look at deploying capital in areas with the highest ROE, including solutions capital for multifamily borrowers, core franchise direct lending, distressed acquisitions, and M&A opportunities