Ready Capital Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: Bulk sale of $494 M legacy multifamily bridge assets generated $85 M in net proceeds and is expected to boost earnings by $0.05 per share this quarter, plus $0.02 per share from reinvestment.
  • Negative Sentiment: Consensual acquisition of the Portland mixed-use asset (including the Ritz Carlton) cost $10 M in cash with a $5.3 M or $0.03 per share negative carry drag in Q2 as the company works to stabilize occupancy and sales.
  • Positive Sentiment: Actions in the capital markets—including collapsing two CRE CLOs for $71 M in improved financing terms and securing an additional $175 M of SBA/USDA warehouse capacity—have generated $221 M in liquidity to fund new loan originations.
  • Neutral Sentiment: The CRE loan portfolio is now segmented into a $5.4 B core arm (hold-to-maturity) and a $695 M non-core arm for accelerated liquidation, with core yields at 10.9% and non-core yields at –10.7%.
  • Neutral Sentiment: SBA 7(a) originations slowed to $216 M in Q2 due to warehouse constraints, but management expects volumes to rebound above $325 M per quarter once new capacity and securitization plans are in place.
AI Generated. May Contain Errors.
Earnings Conference Call
Ready Capital Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 3

Greetings. Welcome to Ready Capital's second quarter 2025 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow today's formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, today's conference is being recorded. At this time, I'll now turn the conference over to Andrew Ahlborn, Chief Financial Officer. Andrew, you may begin.

Speaker 2

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.

Speaker 2

A reconciliation of these measures for the most directly comparable GAAP measure is available in our second quarter 2025 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.

Speaker 3

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. In the second quarter, we completed three initiatives to continue the repositioning of the company's balance sheet coming out of this CRE cycle, the financial benefit of which will be visible in the second half of the year and beyond. First, as part of the broader strategy, each loan in both the core and non-core portfolios is evaluated to determine whether the NPV of asset sale is more accretive to improving net interest margin by disposing of low-yield assets and reinvesting in new originations versus traditional on-balance sheet asset management strategies such as loan modification. In this regard, we completed our first bulk sale earlier this week, selling $494 million of legacy multifamily bridge assets, generating net proceeds of $85 million.

Speaker 3

While the transaction settled in the third quarter, it reflects a sale process initiated in the second. The pool included 73% non-core, 27% core, 40% were delinquent, 33% risk-rated 4 or 5, and 92% non-accrual. An additional $26 million of REO included in this trade is expected to settle by mid-August. This transaction is strategically significant, eliminating 100% of the 2021 vintage syndicated loans while allowing potential upside through retention of a preferred return if certain performance targets are met by the buyer. The pro forma financial benefit is twofold: an immediate increase of $0.05 per share per quarter, representing the removal of the negative carry associated with these assets, and longer term, an additional $0.02 per share per quarter from the reinvestment of the equity into market-yielding loans.

Speaker 3

In the third quarter, the cumulative loss from the transaction will flow through distributable earnings with no material expected impact on book value per share as the transaction was reserved in the second quarter. Second, we took ownership of the Portland, Oregon mixed-use asset, which includes a Ritz-Carlton hotel and branded residences along with Class A office and retail space through a consensual transaction that closed on July 21. We avoided a lengthy and costly foreclosure process with a net cash outlay in the third quarter of $10 million. Since taking title and assuming operating control, we're moving quickly to stabilize the asset. We partnered with institutional property manager, Lincoln Property Company, and are evaluating residential brokers and Ritz resident sale strategies. From a performance standpoint, in the second quarter, RevPAR at the hotel was $192. The retail component is 100% occupied.

Speaker 3

The office is 23% leased, and to date, 11 of the 132 residences were sold at an average price of $1,123 per square foot. The negative carry from the asset was $5.3 million or $0.03 per share for the quarter. Ready Capital fully intends to provide financial and operational support to maximize the value of this premier hospitality asset in the Portland market. Now, third, we took steps in the capital markets to enhance liquidity and increase warehouse capacity to support loan origination. In our CRE business, we collapsed two of the five outstanding CRE CLOs, improving advance rate 7%, generating $71 million in proceeds with nearly a 100 basis point improvement in financing costs. In our SBA business, two of the three warehouse lines pending approval with the SBA were approved, adding $75 million of additional warehouse capacity that is expected to fund over $400 million of 7A production.

Speaker 3

Additionally, we closed a $100 million USDA warehouse facility for the second $100 million facility anticipated to close in the third quarter. These two facilities will facilitate the ramp in USDA volume to our $300 million annual target. Collectively, these three actions: sale of underperforming loans, taking ownership of the Portland asset to accelerate its stabilization, and expanding our funding capacity generated $221 million of liquidity, providing capital for new loan originations to rebuild our NIM. As of the quarter end, the CRE loan portfolio totaled $6.1 billion, now clearly segmented into two parts: a $5.4 billion core portfolio consisting of legacy loans favoring on-balance sheet holds maturity asset management strategies, and a $695 million non-core portfolio consisting of lower yielding assets where asset management strategies favor accelerated liquidation. In the core portfolio, $527 million of payoffs and liquidations reduced the portfolio 8% in the quarter.

Speaker 3

As expected, negative credit migration in the portfolio was muted, with only 17 loans totaling $71 million transitioning to 60-day plus delinquency. 60% of this 50 basis point increase in the 60-day delinquency number was due to quarterly decline in the portfolio balance. Additionally, we modified 14 loans totaling $250 million with a 14 basis point decline in expected yield on those assets. Regarding the earnings impact of the core portfolio, the leverage yield decreased 20 basis points quarter over quarter to 10.9%, producing $43 million of net interest income or $0.26 per share. Several quarters of reduced originations and loan payoffs have reduced our CRE portfolio over 30% from its $10.5 billion peak in the second quarter of 2023.

Speaker 3

As discussed previously, our bridge portfolio was primarily financed via the issuance of static CRE CLOs with industry-tight CLO triggers, where weakening collateral performance resulted in loan payoffs reducing senior bonds rather than providing capital for reinvestment. In turn, relative to the peer group, Ready Capital experienced more rapid deleveraging with less free cash flow to make loans. After a prolonged focus on stabilizing the portfolio, liquidating underperforming assets, and collapsing five of our eight CLOs, we anticipate reentering the origination market in the third quarter. Originations will focus on high-quality multifamily bridge loans underwritten at a lower LTV and healthy in-place debt yield, designed to rebuild the core portfolio and facilitate our return to the CLO market in early 2026. Current lending margins of SOFR plus 275 to 300 and a CLO triple-A market spread under 150 basis points support projected retained yields of 13% to 15%.

Speaker 3

Additionally, we continue to leverage our external manager, Waterfall's infrastructure, to also allocate capital to more liquid CRE debt securities. In our non-core portfolio, we have met 78% of our second quarter disposition targets, of which 3% settled in the quarter, with the remaining 97% closing post-quarter end. In the second quarter, $9.6 million of loans were liquidated at a 105% premium to our mark, generating $3.8 million of liquidity. Post-settlement of the bulk sale, the non-core portfolio was reduced by an additional 52% to $333 million of carrying value, consisting of 39 loans with an average price of $79. The quarterly yield on the non-core portfolio was negative 10.7%, resulting in a cost of $5.3 million or negative $0.03 per share. However, the continued liquidation of the non-core portfolio will minimize its financial drag.

Speaker 3

As of today, the combined non-core and REO portfolios total 12% of the company's investments, down approximately 25% from the beginning of the year. In our SBA business, as anticipated from the prior quarter's earnings call, quarterly origination volume decreased to $216 million due solely to capital constraints, as we awaited an approval of increased warehouse capacity from the SBA. In addition to the approvals received to date, we anticipate an additional $100 million in warehouse capacity currently pending SBA approval. A planned future securitization of retained 7A unguaranteed interest would provide additional liquidity to fully fund the business. In 2024, we originated $1.1 billion of SBA 7A loans, and the platform has continued to carry the infrastructure and costs to originate more. Our current SBA pipeline in closing totals $173 million.

Speaker 3

Now, in terms of the outlook, there are three primary items that we expect to contribute to earnings improvement. First, the increase in new originations with capital generated from the continued liquidation of the non-core portfolio and other lower yielding assets to further growth in net interest margin. Second, stabilization of the Portland mixed-use asset, important for both reducing the current negative financial drag and to facilitate liquidation of the hospitality office and residential components. Third, a return of SBA 7A lending volumes to over $325 million per quarter and the long-awaited entry of Ready Capital to the USDA market at scale. We expect modest earnings growth in the back half of 2025 from these initiatives relative to the first and second quarter results. Assuming no significant deterioration in the macro environment, we expect to maintain our current dividend level until our earnings profile warrants an increase.

Speaker 3

With that, I'll turn it over to Andrew to go through quarterly results.

Speaker 2

Thanks, Tom. For the second quarter, we reported a GAAP loss from continuing operations of $0.31 per common share. Distributable earnings were a loss of $0.14 per common share and $0.10 per common share, excluding realized losses on asset sales. Several key factors impacted our quarterly results. First, net interest income increased to $17 million in the quarter. The improvement was due to a full quarter of interest income from the UDF transaction and lower interest expense from lower leverage and a five basis point reduction in borrowing costs, which averaged 6.8% for the quarter. In the core portfolio, the interest yield was 8.1% and the cash yield was 6.1%. The interest yield in the non-core portfolio was 2.4%. Second, gain on sale income net of variable costs increased $2.5 million to $22.7 million.

Speaker 2

The change was the result of higher USDA and FREDI affordable volume offset by lower SBA 7A volumes due to the pending approval of warehouse line increases with the SBA. The income was driven by the sale of $121.2 million of guaranteed SBA 7A loans at average premiums of 9.9%, the sale of $151 million of FREDI MAC loans at premiums of 265 basis points, and the sale of $41.9 million of USDA production at premiums averaging 9.7%. Realized gains from normal operations were offset by $8.9 million of realized losses from the sale of assets, all of which were adequately reserved for in previous quarters. Third, operating costs from normal operations were $58 million, representing a 5% increase from the previous quarter. Fourth, the combined provision for loan loss and valuation allowance increased $48.4 million.

Speaker 2

The additional $39.7 million valuation allowance was due to pricing adjustments on the trade Tom mentioned, which settled this week. The $173 million cumulative valuation allowance related to this trade will flip to a realized loss in the third quarter and be included in distributable earnings. The $8.6 million provision for loan loss was due to a net increase in the general provision of $800,000 and $7.8 million of specific reserves on assets which experienced deterioration in the quarter. Last, other items of significance included a $14.4 million reduction in the bargain purchase gain related to the closing of the UDF/4 merger, $6.5 million of non-cash impairment of the SBA and USDA servicing assets related to movements in the discount rate, and a $41.6 million tax benefit from losses associated with a loan pool sale.

Speaker 2

Income from normal operations net of tax, which can be found on page 11 of the financial supplement, decreased $6.7 million to a $7.33 million loss in the quarter. Recurring revenue increases of $809,000 due to higher net interest income and higher gain on sale revenue were offset by a $7.5 million increase in operating costs due to higher accruals and a $4.8 million reduction in the tax benefit. On the balance sheet, a few key items to highlight. First, we completed the sale of a residential mortgage banking business, GMFS. Proceeds from the sale included cash equal to the adjusted book value of the business and an earnout over the next 30 months. The transaction resulted in a cumulative loss and disposition of $3 million. Second, we continued to reduce our short to medium-term debt maturities.

Speaker 2

In the quarter, we retired $50 million of corporate debt using proceeds raised from the upsize of our initial Q1 $220 million senior secured issuance. As of today, we have a total of $650 million of corporate debt maturing through 2026, including current maturities of $132 million. We are focused on extending those maturities over the upcoming quarters. Book value per share was $10.44 at quarter end, down $0.17 from March 31. The decline was primarily due to the dividend and coverage shortfall, partially offset by the repurchase of 8.5 million shares at an average price of $4.41, which offset the reduction in book value per share by $0.31 per share. Liquidity remains strong with unrestricted cash at over $150 million and just under $1 billion of total unencumbered assets. With that, we will open the line for questions.

Speaker 3

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. The first question is from the line of Crispin Love with Piper Sandler. Please proceed with your questions.

Speaker 1

Thank you. Good morning, everyone. First, Tom, you mentioned that you're reentering the origination market in the third quarter, and you said you expect modest earnings growth. I was wondering if you could just put a little bit of a finer point on that. Does that mean that you still expect distributable earnings losses in the near term, and then when do you think you can get to profitability and then closer to dividend coverage?

Speaker 2

Yeah, I'll let Andrew touch on that, but with one adjunct comment, which is the origination team is gearing up to target, if you will, the new vintage multifamily bridge. It's probably about a 5% lower attachment point and higher debt yields than in the peak of this last cycle. That'll take some, the pathway for that is probably like 120 days. However, in the interim, we have access to the external manager's significant CMBS trading capabilities. We would look to deploy cash immediately into those instruments to provide some, kind of, if you will, the first leg of the rebuild in the NIM. Andrew, maybe with that backdrop, maybe touch on Christian's question regarding the ramp in the earnings.

Speaker 1

Yep. Good morning, Christian. If you start from what I'll call normalized earnings in the quarter, which were a loss of $0.04, and the difference between that and distributable being mainly things like MSR impairment, there are a couple of items that Tom mentioned in his prepared remarks that are already baked. The first is that JV sale, where the negative carry will increase, the reduction in negative carry will increase EPS by $0.05 a quarter. We anticipate that the reinvestment of that equity, which will occur over the third and fourth quarters, to generate another $0.02. That will bridge the gap into positive, what I'll call normalized earnings. There are a couple of other items that happened in the third quarter. One, we paid off a $75 million repo on the retained interest of one of our CLOs. That's going to generate a penny.

Speaker 1

You move into production increases in our small business lending segments. Our expectation is once the USDA platform gets to a normalized ramp of roughly $300 million annually, that'll increase earnings $0.02 a share. The return of SBA volume to where we were running at the back half of 2024 is expected to increase earnings another $0.03 to $0.05. Some of that is going to be offset by, obviously, the need to refinance the corporate debt, where if you just take the delta between where the cost and the debt today and where we priced our last deal, we expect it to decrease earnings $0.03 to $0.05. Those are the most immediate term ramps. Growth from there is going to come from turnover of the portfolios Tom mentioned. Perfect. Thanks, Andrew. I appreciate you laying all that out.

Speaker 1

On the bulk sale of legacy bridge loans, can you first describe the type of buyer here broadly and then how much is left to sell? I think you might have said that that's all from the 2021 vintage. Also, if you can just dig into a little bit of the pricing of that sale versus initial originated values and then pricing prior to those two-queue final marks.

Speaker 2

Yeah, I'll let maybe Adam, you could tackle this, but just as a preparatory comment, Christian, in the private funds market and the external manager, you know, we see this firsthand, but there's been a lot of money raised in real estate private equity, which is targeting the multifamily sector, which is viewed as fundamentally solid in terms of the supply-demand dynamics and basically in 2025 and 2026, the oversupply from the boom years of 2021 through 2023 are now working its way through the market. You're starting to see firmness in rent. It's a long-winded way of saying that there's probably been at least $300-400 billion of opportunity capital that is looking for these assets. What they'll do is they'll look to undertake to purchase the debt to, you know, essentially to own and operate the properties. With that backdrop, Adam, maybe just provide some additional color.

Speaker 1

Yeah, sure. Good morning, Christian. The partners here are a multifamily operator with a few thousand units and a fund partner that has AUM of about $1.5 billion. They came together and are the buyer of this portfolio. From a price perspective, the price is around $77 of the UPB. I think it's important to highlight here that this portfolio had a sponsor concentration of specifically two syndicators, GVA and Tides. We are virtually removing 100% of exposure to those two sponsors. I think as Tom highlighted in his remarks, about 40% of that portfolio was 60+ days delinquent. Non-core, 31% core, sorry, 31% of the 60+ was in non-core. There was REO in here as well of about $31 million in this portfolio. I don't know, Chris, if you have other questions or I answered you here.

Operator

Yeah, just one last kind of quick follow-up. Is there anything left from the 2021 vintage in your portfolio, either core or non-core?

Speaker 1

Yes, there certainly is in the core portfolio.

Operator

Great. Thank you. I appreciate taking my question.

Speaker 1

Sure.

Speaker 3

The next questions are from the line of Douglas Harter with UBS. Please proceed with your questions.

Speaker 3

Thanks, and good morning. You talked about, you know, kind of SBA volumes picking up. Can you talk about what is going to be the driver of that and your confidence as to the timing as to when you're going to start to see that?

Speaker 2

If you look at the industry volume, when the new administration came in, there was an industry-wide decline in volume. I think it was, Andrew, like 10%, 15% metric. I'm referring to the SBA 7A program, which typically runs $25 to $30 billion per year based on annual approval by authorization by Congress. That was mainly due to changes in some of the Biden-era rules, called the Standard Operating Procedure regarding small loans in particular. The industry has undergone those changes and has rebooted credit guidelines, which are incrementally more conservative. I'll point out that we preemptively in our small loan program actually implemented those guidelines about three months ahead of the SBA's changes. We feel comfortable there. We're going to see a ramp in demand for, we're just seeing demand for small business loans, especially M&A or business acquisitions remains strong.

Speaker 2

Of course, we're a leader in the small loan program via our fintech-eyed business. The main constraint we have faced has been the approval of warehouse lines by the SBA. There were some constraints with the turnover in the government throughout the government agencies adapting. We now see a path forward to sequentially increase the lines. The next line limit is slated for around $7.5 billion. From an industry perspective and from our own specific perspective, that is what's accounted for the drop in this quarter's SBA 7A originations. Bolted onto that, however, is the ramp in our USDA business, which is a top three lender historically. That will add an incremental increase in the P&L in our small business segment. Andrew, I don't know if you would add to that.

Speaker 1

Yeah, I think you will see volumes in the third quarter remain somewhat consistent with where they are in the second quarter. As Tom mentioned, the pending approval of that third warehouse line with the SBA will certainly open up capacity. The full ramp back to, you know, what it targeted, $1.2 to $1.5 billion in annual originations, is really going to come from, you know, clearing the existing warehouse lines through some capital markets transaction, as Tom mentioned. Whether that be a normal way securitization of 7A loans, which we've done a handful of, or participation sales, that will be the driver to really increase the capital needed to get back to those levels. I would expect, you know, a ramp back there to happen more towards the back half of the second half of the year.

Speaker 2

Yeah, just one last comment on SBA. We are fully supportive of the regulatory changes since under the new administration. There is a bill before Congress to increase the guarantee cap from $5 million to $10 million for manufacturing facilities. We're targeting to the extent that we support that legislation. To that extent, if it's approved, we're developing targeted origination strategies around that. There is some upside in terms of going into the fourth quarter and early 2026.

Speaker 2

Great. Appreciate that. On the unsecured issuance, can you just talk about your plans there, given the higher costs you're seeing there now? Does that market still make sense financially, or is it an important part of the capital structure that you want to continue even though the costs are elevated today?

Speaker 1

If you look at the $650 million we have coming due, around $300 million of that is unsecured, some of that being $25 par deals. We think that market will play a part in the refinance of a portion of that $650 million. I do believe that the majority of that pending debt, though, will probably get placed through a secured issuance, whether it be utilizing the $100 million still available on our Q1 issuance or a new security. When you look at unencumbered assets and even excess coverage in existing deals, there's a significant amount of what I'll call clean performing product to support those issues. We remain confident in the ability to refile those out, but certainly acknowledge that the increased cost of that debt will put pressure on the earnings, as I described earlier.

Speaker 1

Great. Appreciate it. Thank you.

Speaker 1

Thanks, Tom.

Speaker 3

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

Speaker 2

Thank you very much. There is so much to go through here, but I'll try to be somewhat brief. Just on Portland, will the asset be held on the balance sheet at $432 million, and did the $5.3 million carrying costs you cited reflect a full quarter impact? What's the three-queue estimate? Yeah. I can answer the first question, Jade, and then I'll let Adam talk about the operations. Yeah, the initial valuation will be put on at that $425 million and then evaluated, you know, for impairment going forward from there.

Speaker 1

Okay. The quarterly carrying cost estimate? Yeah. Jade, I'm sorry, your question is what on the $530 million? Yeah. Is that a full quarter estimate for the carrying cost?

Speaker 2

Yes, that was the full quarter impact.

Speaker 1

That affected the second quarter?

Speaker 2

Correct. That was $5.3 million in the second quarter.

Speaker 1

You foreclosed in July?

Speaker 2

Yeah, we were holding it as a non-performing loan in the second quarter. That's the net expense.

Speaker 1

Now that you own it, what will the carrying cost be?

Speaker 2

Yeah, I think that's a fairly good estimate going forward. There are a couple of things that we are working on to help reduce that. One is to lower the financing costs associated with that asset. Obviously, as the loan stabilizes, whether it be leasing of the office or a reduction in the amount of unsold condos, that number will come down.

Speaker 1

Yeah, I think, Jade, the material operating costs would be what we've called like good news money, where we get an office tenant and we're required to put up tenant improvements to get that tenant into the office space and improve their space. I think the material costs would be where the asset is improving significantly and we're putting in good news, good news investment. How much capital will need to be put in across the three categories? I mean, look, it depends on the type of... How much sales spending? I'm sorry, I missed that last comment. How much capital will need to be put in, including marketing and sales spending? We got the asset about two weeks ago. Our partner, Lincoln, who is partnering with us on the asset management, is putting together a budget.

Speaker 1

As of right now, the material spends are on marketing the condo units, which we're putting together a budget for. That will be a driver. The tenant improvements, it depends on the type of tenant that comes in. We're looking at, from a tenant improvement cost, probably around $150 a square foot to $200 a square foot for TIs for the office tenants. We've got approximately 66% remaining to lease up. There are other costs associated with the HOA on the condo and other aspects of marketing this property.

Speaker 2

I think just as one comment, Adam, correct me if I'm wrong, but in relation to, say, for example, office and that you look at the future projected CapEx in relation to our basis, over 50% is a Ritz-Carlton that opened up in October of 2023, which is on its way to stabilization, trailing 12 red par with a little over $200. That per se doesn't require significant CapEx. The CapEx on the office, it's how many square feet of the 66% that's left, Adam?

Speaker 1

Yeah, it's about $70,000.

Speaker 2

It is 70,000 square feet. It is de minimis in relation to true office property. That is, Jade, where you might have some CapEx. Again, that along with maybe the marketing strategies around the residences, the branded residences will incrementally have some CapEx, but nothing in relation, much less than what you would have with, for example, other property sectors like the office space.

Speaker 1

Okay. Secondly, just on the dividend, conveying some sentiment from institutional investors that I've been in touch with. The company has a very large deferred tax asset, so plenty of shield to avoid having to pay a dividend. Based on current management expectations, why not eliminate the dividend and reallocate that capital toward, number one, debt repayment because there's significant maturities at a very high cost that was referred to. Number two, once you feel really comfortable, you could allocate that toward the buybacks, which are continuing, which would stabilize book value and protect the company's equity base. Right now, the dividend is still quite costly. It would seem to make more sense to suspend it and then recommence once we're kind of out of the woods in this period of stress.

Speaker 2

Yeah, that's a fair question. A lot of it has to do with our repositioning strategy. Right now, for example, in this quarter, we achieved, with a month or two delay, the goal to eliminate half of our non-core portfolio and the significant drag there. You saw the bridge to covering the dividend. Maybe, Andrew, if you could just discuss in that context some thoughts around Jade's question.

Speaker 1

Yeah, I think it's a good question. As I mentioned earlier to Christian's question, there is a bridge to an earnings profile, assuming no further deterioration in the core portfolio that gets close to that coverage. It's going to take some time, as I mentioned, but I think the board will continue to evaluate the performance of the core portfolio as well as the progress on that walk I made earlier in evaluating the dividend. Thanks very much.

Speaker 2

Thanks, Jade.

Speaker 3

The next question is from the line of Randy Benner with B. Riley Securities. Please proceed with your questions.

Speaker 3

Hey, thanks. I think I just kind of have follow-ups to some of the questions. I guess the first one, excuse me, is on just Andrew, going back to your walk, the EPS walk to dividend coverage. Did that, I think at the end you said there was some negative for higher anticipated interest expenses, you know, kind of deal with the debt maturity for 2026. Was the drag from the Portland property also contemplated in that EPS walk?

Speaker 2

Yeah, so the current debt EPS walk assumes, as I mentioned to Jade, that the Q2 negative carry of that stays somewhat consistent. To the extent there, as I mentioned, good news money that goes out, that may weigh, but then results in higher revenue. The drag is already included in that upfront number.

Speaker 2

It would, I mean, it's at least two quarters, if not three quarters, the way I'm putting these numbers together before you'd be at $0.12.

Speaker 2

I think that's right.

Speaker 2

Okay. The dividend question was covered. Just going back, I think Crispin asked about this, but I just wanted to make sure I'm crystal clear on this. The $85 million of net proceeds from the loan sale, I think in the answer, it was held at 77% of UPB. I don't know if I heard that correctly, but I'm just trying to understand, was it a, you know, you sold $494 million worth and $85 million was all the proceeds, or that was the net proceeds after kind of other offsets? I just wanted to make sure I was clear on that.

Speaker 2

Yeah, all of these assets were financed, whether that be on warehouse or inside our CLOs. Roughly $308 million went to pay off our warehouse lenders, and then there was another $128 million that went to repurchase those loans out of the CLOs, which is how we get to the net $85 million of cash.

Speaker 2

Got it. Just on the, you did issue the $50 million and you have the $85 million proceeds there. Andrew, I heard you referred to the $650 million maturity wall coming up for 2026, but is it kind of on a, when we talk to investors and think about it pro forma of these raises, is it really more like $600 million or even lower? Would we assume that the $50 million issued and then these proceeds would kind of pay down debt, or is it, is that going to other purposes and the $650 million stands on its own and would be refined independently, if that makes sense? I'm trying to handicap what the right 2026 maturity number is, net of everything we've discussed on this call.

Speaker 2

Yeah, no, understood. I do think that a portion of that $650 million will come from, you know, just natural paydowns or repurchases in the market by the company. I don't anticipate dealing with that maturity ladder fully through the issuance of new debt. With that being said, not 100% of the cash flow coming off the portfolio is going to go towards delevering for the simple fact that rebuilding the net interest income, as Tom mentioned, is really important to getting the earnings profile going in the right direction. We have confidence in that just based on a lot of the work we've done over the last few months on the accessibility of the markets to help deal with that $650 million.

Speaker 2

To your point, I don't anticipate 100% of that being refined, something that's going to come from us using the organic liquidity of the company to lower that amount.

Speaker 2

Okay, great. That's all I had. Thank you.

Speaker 3

The next question is from the line of Christopher Nolan of Ladenburg Thalmann. Please just stay with your questions.

Speaker 3

Hey guys, was the Portland asset acquired or was that a legacy asset of Ready Capital?

Speaker 1

That was an asset that was acquired through the Mosaic merger.

Speaker 1

Okay, I guess looking back on all the Fast and Furious mergers that you guys did over the past years, and many of them seemed, you know, at least to the outsider, more as a financing vehicle. Going forward, what's your M&A strategy? Has it changed, you know, when you come back to that, or is it still looking to capitalize on cheap under-levered balance sheets?

Speaker 2

I mean, we, beyond the M&A transactions, the history of Ready Capital and the external managers has been since the GFC acquiring portfolios of distressed assets. I think that was a strategy leading into the rate rise and the turn in the credit cycle. Obviously, we have had less reliance on that since 2023, albeit we did have a very accretive acquisition of the UDF lot loan business where we would look, at some point down the road, to deploy additional capital because it's a very high ROE business with a lot less exposure to the CRE market, more broadly speaking. I would say we'd have less of a reliance in the near term on M&A unless it's highly accretive. I don't know, Adam, Andrew, if you'd comment on that as well.

Speaker 1

Yeah, nothing to add.

Speaker 1

Tom, on that small business comment, should we look for the equity allocation to small business to increase in coming quarters?

Speaker 2

Yeah, we would look to continue to allocate equity to that business. As we've said in the past, it has a lot of inherent leverage, given that you sell off 75% of the SBA 7A loans on a participation basis, and then you can, under the SBA rules, borrow against, I think it's 60% of that. To support, it's a very high ROE business, very, you know, barriers to entry with the limit on non-bank licenses. Of course, there's the growth of the USDA business, which support loans. What is it, Andrew, up to $50 million or $25 million? I can't remember the exact number. The long way to answer your question is, yes, we would look to continue to allocate capital to that business to support growth in the volume.

Speaker 2

Great. Final question. I think Adam commented earlier about private equity entering in for multifamily. Should we look at that as sort of being opportunistic money given the large wall of maturing commercial real estate paper out there and that private equity is trying to get into the asset class on the cheap? Is it a cyclical play by private equity playing into multifamily?

Speaker 2

Yeah, it's unequivocally a cyclical play to bucket it as opportunistic CRE in the pension fund world. As a result of that, we've, and Adam could comment on this, but we get constant reverse inquiries from the acquisition specialists at these DRE equity shops, given the fact that we have a significant, you know, rather than them buying onesies, twosies, in the broker market, there's very few opportunities for bulk sales like we just executed today. As a result of that, and it was part of the commentary in our prepared remarks, one of the things we do in both, obviously, the core, which is papers accelerated liquidation, but also the non-core, our asset managers will always have an overlay evaluation of looking at sale in the secondary market to the extent that the on-balance sheet asset management strategies create a lower yield.

Speaker 2

Given the focus on rebuilding the net interest margin, if we can sell at a discount and then use that net proceeds to rapidly recover that discount versus on-balance sheet, we would look to undertake bulk sales. The reason that that opportunity exists is the cyclical influx of capital into targeting the multifamily space. Obviously, we have a large legacy book that can benefit from that.

Speaker 2

Okay. Thank you very much. Take my questions.

Speaker 2

Thank you.

Speaker 3

We've reached the end of the question and answer session, and I'll turn the call back over to management for closing remarks.

Speaker 2

We appreciate everybody's time and look forward to the third quarter call.

Speaker 3

This will conclude today's conference. We'll disconnect your lines at this time. We thank you for your participation. Have a wonderful day.

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