Greetings, and welcome to Ready Capital Fourth Quarter 2024 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, sir. You may begin.

Thank you, operator, and good morning to those of you on the call. Some of our comments today will be forward-looking statements within the meaning of the Federal Securities Laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly-comparable GAAP measure is available in our fourth quarter 2024 earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Zausmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capasse.

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. The fourth quarter concludes a year of mixed results in our business. In 2024, we and the broader CREIT (ph) sector continue to be impacted by the later innings of this cycle in our transitional CRE lending business. However, entering 2025, aggressive reserving on problem loans, right-sizing of the dividend, recurring cash earnings in an improving multi-family market will accelerate the path to recovery. In contrast, our small business lending operations experienced significant origination growth of 1.7x harvesting capital investments made over the preceding years. To begin, we have undertaken two aggressive actions to reset the balance sheet and go-forward earnings profile. The first, a $284 million combined CECL and valuation allowances, which marks 100% of our non-performing loans to current values. This reserve resulted a 14% reduction in book value per share to $10.61, but by ring fencing 100% of the problem loans in REO sets a bottom. This action lowers our basis in non-performing loan providing asset managers with more options for accelerated resolutions generating liquidity for reinvestment in higher yield new originations and in turn a recovery in our net interest margins or NIM. The second, a reduction of the dividend to $0.125 per share for the first quarter to better align the dividend with projected cash earnings in the short-term and to preserve book value. It will be our expectation to grow the dividend from this new level with improved earnings in future periods. We also set it at this level to preserve capital for reinvestment in our core portfolio and to allow for more aggressive utilization of the recently announced $150 million share repurchase program. To be clear, we believe these actions will establish the bottom for both book value per share…

Thanks, Tom. Fourth quarter GAAP losses per common share were $1.90, while distributable earnings showed a loss of $0.03. Excluding realized losses on asset sales, distributable earnings were $0.23 per common share representing a 7.1% return on average stockholders' equity. The distributable loss primarily reflects timing differences between valuation allowances previously recorded and realized losses from settlements in the fourth quarter. Four key factors impacted our quarterly earnings. Revenue from core operations, which includes net interest income, gain on sale income, net of variable costs, servicing income and other investment income decreased $12.4 million, or 12% quarter-over-quarter to $91.6 million. The change was primarily due to, first, $900,000 of lower net interest income due to a 7% decline in portfolio assets quarter-over-quarter and a slight increase in non-accrual loans, which averaged 4.6% in the quarter. The gross interest yield in the quarter was 8.7% and the cash yield was 7%. $20.6 million of interest income recorded in the quarter was paid in time interest on our construction loans and $14.7 million of interest income recorded was accrued on modified loans. Second, gain on sale income net of variable cost decreased $5.4 million to $20.9 million. This income was driven by the sale of $211 million of guaranteed SBA 7(a) loan at average premiums of 10.4% and the sale of $116 million of Freddie Mac loans at premiums of 0.9%. Third, servicing income was up $1.3 million in the quarter due to a $1.6 million non-cash impairment in the SBA 7(a) MSR, due to a change in discount rates. The total service balance across all products averaged $9 billion in the quarter. And last revenue from other investment activities which include the collection of rent, proceeds from the sale of working capital loans and income on JV investments decreased $20.6 million.…

Thank you. The floor is now open for questions. [Operator Instructions] The first question is coming from Crispin Love of Piper Sandler. Please go ahead.

Thank you. Good morning, everyone. So first on the dividend and core earnings, probably you've cut the dividend to $0.125. Starting in the first quarter, would you expect cash earnings to cover that level? And then, just how do you think about the earnings power over the next several quarters on a cash and non-cash basis?

Good morning, Crispin. So the first quarter is definitely going to be the lowest quarter of the year, primarily impacted by the fact that the majority of the non-core bucket will go on (ph) not a full of the, booked on a cash basis given the liquidation strategy. So the effect -- the cumulative effect of that including the red is roughly a 0.14 drawdown from where those assets were in ‘24. So the expectation is over the course of the year that we cover the dividend approximately 1.5 time, but the earnings profile will ramp up to further coverage as we move along in the year. The bridge to that is a couple of items. The first, I just explained what the drawdown is going to be based on the non-core portfolio. OpEx savings mainly from further cuts in funding circle as well as staffing and some other overhead should generate an annual benefit of $0.05 from this level, that'll be -- have a more immediate impact. Madison One, which is our USDA lender is expected to come online towards the back half of the first quarter and into the second quarter. We expect that to generate $0.05 of incremental earnings in the year. The SBA business, as Tom mentioned in his comments, continues to experience exponential growth. We think that volume growth of $200 million to $500 million will add an incremental $0.03 to $0.07 per share. And then, as Tom mentioned, UDF, which we expect to close in March, should add an incremental $0.17. So we think on a pro form a basis, not even taking into consideration the reinvestment of core, the non-core loans upon liquidation, so we get to that 1.5 times coverage on the current dividend level.

Thank you. Our next question is coming from Doug Harter of UBS. Please go ahead.

Thanks. I was hoping you could talk a little bit more around the decision on UDF. And I guess putting that in context, if you look back at the prior acquired deals you've done and kind of given the credit challenges from those portfolios, how you think that the returns penciled out to this point and why acquiring another highly distressed portfolio makes sense?

Andrew, do you want to touch on that? In particular, the basis under which we were acquiring the portfolio, the 10 year history of buying, a little over $100 million of loans and the stress tests around, the GFC stress tests around the home prices?

Yeah. So the mechanics of the merger called for (ph) some fairly aggressive discounts on the current basis in those projects. So we think given the actual basis Ready Capital is booking on those loans that even in a pretty aggressive downturn, the principal in the trade is covered. Now there may be some yield pressure if that happens, but the basis is at a level where we are highly confident that from a credit perspective it is secure. I'd say the other thing that gives us comfort is, as Tom mentioned, over the years, we've done $100 million of loans. Many of those loans are in the projects and some of the projects that we are acquiring as part of the M&A. And so we have a very good knowledge base on these projects. The historical performance of those loans has been pristine. So I think the combination of the basis and the underwriting and our experience in these actual projects gives us that comfort.

Okay. And then you mentioned kind of the reserve actions this quarter looking to ring fence the known problem assets. How do you think about the remaining assets and the risk of kind of additional problems and how should we take comfort that there won't be needs for additional significant reserving actions?

Yeah, Adam. You want to touch on the methodology under which we bifurcated the portfolio. With -- Doug, I think the specific reference is to potential negative migration from the core portfolio, where the risk rating is only two. So maybe to discuss the methodology under which we bifurcated the existing portfolio and then from there the -- we'll call it, if you will, the potential higher risk elements of the otherwise strong credit core portfolio, particularly the modified loans that were previously modified?

Yeah. Sure. Hey, Doug. Yeah. The core portfolio, which is 83% of the overall portfolio, these are really assets that we deem to be long-term holds, where you have healthy credit metrics that generate good returns. We have minimal future losses expected on those. The majority of those are, call it, 86% is multifamily and industrial. The average maturity of that portfolio is 20 months. The mods within the core portfolio, the majority are cash flowing with healthier debt yields. We bifurcated into core where sponsors have equity that they put into these new mods. And the collateral is really closer to executing on the business plan. So, we feel that the probability of takeout at maturity is significantly higher versus the non-core. On the non-core, this is really the bucket of more challenging loans that we've deemed. This represents 17% of the portfolio. These are where we're going to have short-term holdings and the primary asset management strategy as Tom mentioned is really expeditious liquidation. These assets have lower yields, less viable path to stabilization and takeout, the multifamily specifically agency takeout, little or no fresh equity from the borrowers inside of those modifications. And we feel that ultimately, if we don't liquidate specifically on the loan side, there'll be a higher probability of foreclosure. So, we really bifurcated the two, where we are laser beam focused on the non-core on the expeditious liquidations that we expect to execute over the next seven to 10 quarters.

Yeah. And I want to just add to that, Doug. I think this is systemic to the industry, especially on the multifamily side where you look to bridge to -- sorry, to loans that have been made it through the rate hike period and '25, there's no saying a year ago, you stay alive to ‘25, while rates didn't go down. So what's now -- what you're now seeing is loans that were previously modified split into two buckets. One is strong projects, good sponsors, liquidity, mark-to-market LTVs in that kind of where we are here in this portfolio in the upper 70s. And those will qualify more highly likely to qualify for either a bridge to bridge or stabilized takeout with the Freddie, Fannie loan. And I point out that the metric there is a debt yield on the core portfolio was 9.7%. And Adam, what's the current debt yield required for refi in the current market?

Yeah. It costs average 8% to 9% debt yield.

Yeah. You see about (ph) -- almost 200 basis point premium on that book versus the non-core, which is significantly lower debt yield. So that I think -- and again, the other thing about our Ready, Ready is that our CRE CLOs are static, so there's no hiding if you will, maybe a strong word, but no ability to not disclose the nature of the status of the bridge loans. So what we're doing here is we're taking a very conservative approach to bifurcating the loans that we think are best suited for accelerated resolution strategies, that's about the non-core, it's about $1 billion marked at $0.82 and then highlight the non-core book. And then going forward, we're able from a transparency perspective, investors are able to track the migration from liquidation of the core and the credit performance of the core portfolio.

Great. Appreciate those answers. Thank you.

Thank you. The next question is coming from Jade Rahmani of KBW. Please go ahead.

Thank you very much. Regarding the 2026 maturities, what's the plan to address those? I think it's -- I estimated around $760 million?

Hey. Good morning, Jade. So we started to address some of it with our senior secured note. We issued last week a portion of the proceeds as we said in the prepared remarks are go to retire those. So when we look at there are a handful of maturities in the beginning part of the year, So there's $158 million due in February, $90 million due in July. We -- for those two maturities, certainly the projected cash flow and liquidity profile of the business support taking those out in cash, but our preference will be to access the markets as we move into the summer months. And then looking out further into ‘26, there's a senior secured note, $350 million that comes due in October and a smaller issuance that comes due in November, which is roughly $100 million. Our plan is to continue to position the business over the course of this year such that the financial profile allows us to start thinking about some of the larger debt markets to handle those securities, those debt issuances, but we continue to believe we've proven access to a variety of corporate markets. We will continue to lean into those markets. And then the only thing I -- other thing, I'd point out Jade is that the asset maturity ladder aligns very closely with the liability ladder. So those are the various paths where we'll undertake to take care of those.

Thank you. On the UDF IV merger, is the rationale that you see compelling value in the assets and upside to the basis at which you're acquiring the assets or alternatively, are you looking to replenish the unencumbered asset pool that the company has in order to maintain unsecured assets? I mean, that really would explain the logic behind the Broadmark and Mosaic mergers because those unencumbered assets allow you to issue debt. And so this kind of a deal is somewhat necessary in order to replenish that pool of unencumbered assets.

Just to -- Andrew, if you could comment on it, Jade, but I'd say, the resin debt trap (ph) for the transaction is 95% number one. It's highly accretive on an EPS basis unlevered, and that's how we viewed the transaction. The icing on the cake, if you will, is the ability to create leverage given the fact that it is unlevered. But we evaluated it, the Board and the management team evaluated this based on again a 10 year relationship with the company. We'll view it as one of our non-bridge strategies going forward in terms of the whole residential lot loan market. So that just to answer your question, I think that's how we viewed the transaction, less the -- again the leverage was not really considered. It was really more the accretion to EPS from the actual asset yield itself. Adam -- Andrew, if you'd add anything to that.

No, I think that's right. I think that Jade, there's an incremental benefit. As you alluded to of bringing on unlevered equity, it improves the leverage ratios, it will improve the unencumbered asset pool. So the financial profile of the balance sheet from a debt metrics standpoint improves post-merger, which will allow us -- should we choose to pull debt out of that equity over time. But the main driver of this transaction was the earnings profile.

Okay. Fair enough. I mean, I find that somewhat surprising because we're in the middle of a credit cycle. There's so many uncertainties. So taking on additional problem assets to work out, adds further stress to the business model, and it might not be the right time for that. But I understand what you're saying about the potential for accretion. The last question is on the SBA business. We like to look around corners and see risks that we may not see coming right now. And I did notice with the SBA lenders, 4Q results showed a notable deterioration in the fourth quarter. It doesn't seem like we saw that within Ready Capital's portfolio. But can you discuss the credit trends you're seeing in SBA? And on the DOGE side, any administrative changes to SBA you're seeing that could potentially impact the business?

Yeah. Actually, let's tackle the first -- the second one first. And Andrew, maybe you could comment on some of the relatively differentiated credit trends we're seeing in our portfolio. Obviously, we're the largest non-bank lender and the second -- fourth largest overall. And we've undertaken a strategy where we -- a dual strategy whereby we use the more traditional loan officer approach for large loans where the average balance has been running goes up to $5 million in the SBA and our average balance in that program has been running $1.5 million. And then we have the small loan program, which uses a scorecard and that's part of our fintech, which is essentially a lender service provider to the SBL, the small business lending company. And that -- and we have about a healthy 50-50 mix there and we've had very strong credit trends in both of those, which -- Andrew you can maybe touch on some of the -- what you're seeing with, what we're seeing with the industry as a whole. Just to on the DOGE side, I've had a couple of conversations, Jade, with the our President of our Business, Gary Taylor, has had a number of conversations with the SBA. And bottom line is, it's mom and apple pie on both sides of the aisle, always has been. Yeah, there's some concerns about what occurred during PPP with fraud and losses there and that sort of thing. But we haven't heard anything that would significantly impact the commitment in terms of the authorization of the -- it's usually about $25 billion to $30 billion a year from Congress. So there may be a few accelerated retirements, but we haven't heard anything specific about any sort of major overhaul of the program, which would impact the commitments, the authorization of -- congressional authorization of the 7(a) program on an ongoing basis. So Andrew -- maybe with that, maybe just touch on any some of the -- in terms of our risk management reviews, what we've been seeing in terms of credit trends in the SBA versus the industry?

Hey, Jade. It's Adam. How are you?

Sorry, Adam. I'm sorry.

Yeah. On the credit side for small business, the 60 plus delinquencies remain at a moderate level, so they're at 2.8% today. Certainly doing over the past year to 1.5, certainly seeing more growth in our small balance in micro loans, which historically, given the non-real estate component have had higher delinquency levels, which is expected for those small loans, that bucket today sits at about 2.4%, 60 plus on the small balance and micro loans. I think from a business perspective, we're still -- lodging is still our largest asset class, and it's historically performed extremely well even through the pandemic. These are really hospitality assets that are in smaller markets, limited service, mom and pop operators that have historically performed well. But yeah, I mean, expectation is that delinquencies could shift up given the growth in the small balance in micro, but at this point, we're -- the asset management teams are monitoring the portfolio carefully, and we don't see any concerning trends.

Thank you. The next question is coming from Stephen Laws of Raymond James. Please go ahead.

Hi. Good morning. You've done most of our topics, but one follow-up on the SBA segment. Can you talk about the cash flow or what is the operating cash flow look like versus the gain on sale of loans and kind of how do we think about the mix there?

Andrew, do you want to touch on that?

Yeah. From a free cash flow perspective, the SBA business is highly positive. When you just think about the process of the loan, we are basically recovering our full basis in that origination very, very quickly through both sale and financing on the unguaranteed piece. So as we move forward, the incremental growth in that business and the gain on sale that comes off of that business is going to be a key part of improving the free cash flow from operations of the overall company. Now the one thing I will say is, over the last couple of months here, we have been contributing quite a bit of capital down into that business as several warehouse lines wait approval for the SBA. So we currently have three warehouse lines that are in the process of approval and we expect approval totaling $100 million. And so the financial profile of the SBA business, given that there's been more equity invested into it over the last couple of months has declined slightly. But we do expect that to rebound and for the majority of that business to be run through those warehouse lines as we move into the second quarter. But to answer your direct question, the incremental growth in that business basically drops right to the bottom line in terms of improving free cash flows.

Great. Appreciate it. Thank you.

[Operator Instructions] Our next question is coming from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Hi. For the acquisition, what it ends (ph) because the comments was the deal is expected to be immediately accretive to earnings. What's your assumption of delinquencies in that portfolio developing over the next couple of quarters?

Yeah, I think -- Adam, it would be helpful if you could answer that. But just to frame it, it's important to understand that the UDF portfolio represents a very seasoned portfolio of residential lot loans that are essentially the land banking business where these loans, the projects are approved on a serial basis over many, many years. We've been doing business for a decade with the company. And the residential lot loan business is a very well understood private credit asset class in the private markets. So -- and I think there was a prior comment that the portfolio is problem loans. These loans are not -- these are really strong projects in the Dallas, Metroplex with very strong offtake from homebuilders. So Adam, maybe just comment broadly on the question and the portfolio itself and the yield and cash flow profile in terms of the -- for example, the amount of liquidity we've seen in the portfolio today versus when we did the transaction in -- I looked at the transaction in September.

Yeah. Good morning, Christopher. Just to answer your first question regarding delinquencies, this portfolio is fully performing today. Every loan has a maturity through the end of 2028. And these loans, the way these land lot loans are structured, they have accrued interest component. So, through the end of 2028, we don't expect any delinquency in this portfolio. The portfolio is comprised, I think as you know, land lot loans entirely in the state of Texas that continues to show extremely strong metrics in regards to population growth, job growth, etc. And the projects continuing to build national and regional homebuilders are out of these projects continuing to build multiple phases at these sites. I think given the maturity here and the basis that we acquired these -- sorry, the basis that we'll be acquiring these assets at, we feel very comfortable in the credit profile and the recoveries at our basis.

A separate topic, what is the pace of repurchases you're expecting because you guys have a lot of headwinds going on just with the sector and so forth and maturities coming up and it seems like capital is going to be quite scarce even though it might be really attractive to buy back stock. But what's the timeline for the share repurchases?

Hey. Good morning. Yeah. So I think there is a variety of liquidity events happening over the next couple of months here that are expected to generate growth from where we're at today at $185 million. The class of the CLOs in March is expected to generate $60 million. Certainly, the sales of the non-core portfolio are expected to generate a significant amount of liquidity. And so the pace throughout the year is going to be somewhat dependent upon the timing of those items. But given the return profile, it is certainly going to be a key part of our plan to deliver shareholder return. With that being said, certainly, we continue to position the business to carry a higher level of cash given the environment we're operating in. So there is some limitation there, but we expect to be active in the repurchase program throughout the year.

Great. And then just as a comment, going forward, if you guys could provide more time for us to review the earnings release before the call because it was less than an hour and this is quite complex company moving parts. So if you can keep that in consideration, that'd be appreciated.

Yes, we appreciate that.

Thank you.

And we'll undertake to address that.

Thank you. At this time, I would like to turn the floor back over to Mr. Capasse for closing comments.

So with the dividend cut and the CECL reserves, we expect that these actions were critical to accelerate the recovery in net interest margin and ROE over the succeeding year. We fully look -- we are fully highly confident in terms of our ability to develop those goals and look forward to the next quarter's earnings call. Thank you. Thanks, everybody, and have a good day.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log-off the webcast at this time, and enjoy the rest of your day.