Q4 2023 Ready Capital Corp Earnings Call
Participants
Andrew Ahlborn; Chief Financial Officer, Secretary; Ready Capital Corp
Crispin Elliot Love; Analyst; Piper Sandler & Co.
Stephen Albert Laws; Analyst; Raymond James & Associates, Inc.
Douglas Harter; Analyst; UBS Group AG
Jade Joseph Rahmani; Analyst; Keefe, Bruyette, & Woods, Inc.
Steven Delaney; Analyst; JMP Securities Inc.
Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc.
Sarah Barcomb; Analyst; BTIG, LLC,
Matt Howlett; Analyst; B. Riley Securities
Presentation
Operator
Greetings, and welcome to the Realty Capital Fourth Quarter 2023 earnings call. (Operator Instructions)
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Andrew Ahlborn. Thank you. You may begin.
Andrew Ahlborn
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 could differ materially from what we expect and 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. And a reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth-quarter 2023 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, we are ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom capacity.
Thanks, Andrew. Good morning and thank you for joining the call today. Despite broader headwinds, Ready Capital into 2024 with a resilient business model and a proven ability to navigate challenging periods.
As we look to 2024 and beyond. The key drivers that we will focus on to return to more historic level of earnings are less about current market conditions and the resulting credit pressures, but rather about our strategic capital redeployment from recent long-term value accretive M&A. While our prior acquisitions have led to short term earnings impacts over recent quarters, and we are cognizant, it will take time to work through the persisting pressures, we believe executing our plan will generate meaningful long-term accretion.
To begin a quick recap of 2023. Full year distributable return on average stockholders' equity was 8.6%. The shortfall versus our 10% target was primarily due to a 250-basis point drag on ROE from M&A and a 25 basis point drag from the underperformance of our residential mortgage banking business. Our expectation is that the sale of underperforming assets, re-levering equity from M&A and exiting our residential business will begin to provide material net interest margin accretion through reinvestment at the current levered ROEs exceeding 14%.
On the investment side, we remained active in both our lower middle market, CRE and small business lending segments. On the CRE side, despite a year-over-year 68% decline in CRE industry transaction volume, we originated $1.7 billion across all products, primarily comprising $1.3 billion of Freddie small-balance multifamily, affordable products and $333 million of bridge production.
On the small business lending side, we originated $494 million with contributions from both our legacy SBA business focused on large loans in our FinTech business focused on small loans. This dual large small loan strategy uniquely positions our small business lending segment to achieve its target of $1 billion and annual production in the next two to three years with only a 5% equity allocation, but an 18% full year distributable earnings contribution. The Small Business segment remains a material and we believe underappreciated aspect of our earnings profile as we enter the back end of this series market cycle.
Our two primary areas of focus are credit and earnings growth on the credit side, while not immune to the CRE macro-environment, we are differentiated from the broader sector in terms of our concentration in lower middle market, multifamily, more conservative vintage underwriting and avoidance of both overbuilt markets and high risk CRE sectors such as office as of December 31, 60 day-plus delinquencies in our originated and acquired CRE portfolios were 7.2% and 22.3% respectively.
My comments will focus on our originated portfolio, which represents 73% of total loans, the acquired portfolio concentrated in Mosaic, which closed in the first quarter of 2022 and Broadmark, which closed in the third quarter of 2023 featured combined purchase discounts for nonperforming assets of 28%.
We've liquidated 29% of the total acquired portfolio at prices above the combined purchase discounts. The main drivers of our 60 day delinquency are first multi-family, which is 78% of the loan portfolio at quarter end, multifamily 60 day-plus delinquency was 6.6% as certain properties experienced NOI reductions driven by flat rent growth and increases in operating and interest costs.
71% of the new delinquencies in the quarter were attributable to one large sponsor across four loans. As of February 25, 60 day-plus delinquencies have been reduced to 5.5% through payoffs or modifications, which in most cases require an equity infusion from the loan sponsor.
Second is office, which is only 5% of the CRE portfolio, but accounts for 21% of total delinquencies. Eight loans are delinquent with an average balance of $15 million and notably only to have a balance greater than $20 million. The largest loan is $44 million. Our office portfolio is granular across 165 assets with an average balance of $3 million, but 70% of the delinquencies are collateralized by larger CBD properties located in Chicago, Denver and New York.
Looking forward in the current higher for longer rate outlook, we are focused on refinancing our current maturity ladder, of which 45% or $2.8 billion of multifamily loans reached initial maturity in 2024 and 31% and $1.9 billion in the first half of 2025.
Historically, our corporate strategy is to underwrite to take up our Freddie SPL license and 25 strategic partnerships, which provide access to all GSE multifamily channels. For example, in 2023, 64% of our bridge loans paid off at maturity, primarily via agency take-up and 12% met the criteria for contractual extension for the 11% of the multifamily portfolio currently rated 4 or 5.
Our asset management teams are executing modifications and extensions where supported by the business plans. And we are prioritizing on-balance sheet liquidity for related capital solutions, notably with a mark-to-market LTV of less than 100% on this population, we do not expect any material erosion to book value from additional CECL reserves and modifications of 4% of the total originated portfolio remain comparatively low.
Now a few observations on our CRE CLOs like most in our peer group, we have historically used CLO financing is one of our secured financing options. Over the last eight years, we've issued $7 billion with $5 billion outstanding, ranking number four with top quartile triple- AAA spreads, largely a result of one of the most conservative and investor friendly CLO structures.
Specifically, our over-collateralization test is set at 1% versus the 3% average for the peer group and our deals are static. Unlike managed deals, we eliminated our ability to swap collateral prevented from repurchasing collateral until after 60 day delinquencies reached and reliant upon the special servicer to manage decisions on asset resolution.
This has three impacts versus the peer group. First is that CRE CLOs, flip chip test sooner for example, our FL. five, nine, 10 and 12 deals have tripped their IC or OC test. Secondly, credit quality metrics will be skewed versus managed deals where the issuer can preemptively swap in performing loans before a loan is delinquent.
And finally, our path to asset resolution via repurchase. Our modification is longer due to both the 60-day trigger and need to obtain special servicer approval on our asset management decisions. As of the February 25 remittance date, there were 12 loans 60 day-plus delinquent inside of our CLOs. Of those, we expect 15% to pay off,57% qualify for modifications and 27%. Enter foreclosure.
Modifications will require new equity contributions, provide a bridge for properties to stabilize and reach agency take-up. Expected principal losses on these loans have been accounted for in our current CECL reserve. We expect as of the March remittance date that FL. five, nine and 12 will be above their IC and OC thresholds.
On the earnings side, once you lay out the bridge for increasing distributable, are we 250-basis points over the next two years from the 7.5% in the fourth quarter to our 10% trailing seven year average. First is reallocation of equity raise in the Broadmark merger into our core strategies.
Since the third quarter 2023 merger closed, 23% of the portfolio has liquidated, of which the remaining $788 million at quarter end is yielding approximately 2.1%, producing a current drag on our we have 170-basis points.
Currently, we have actionable liquidations for 36% of the remaining portfolio with a budget to monetize the balance over the next four quarters. The anticipated contribution margin to are we from full reinvestment of this equity into our current investment pipeline is 250-basis points. Second, leverage current leverage of 3.3 times and recourse leverage of 0.8 times are at historical lows below our target leverage of 4 times to 4.5 times.
We expect to raise incremental debt capital over the upcoming months for the resulting increase in leverage contributing 125 basis points to ROE through the exit of residential mortgage banking, which based on current planning, is targeted for full liquidation by the end of the second quarter due to current mortgage rates.
Distributable are we in this segment was laggard at 1.8%, and we expect reinvestment of that capital to increase our we 25-basis points for a growth of small business lending the SBA seven a. program continues to be the highest ROE segment where, given its capital-light nature, growth in production does not require significant capital resources. For those stated long-term 70 origination target of doubling our current production to $1 billion. Every $100 million increase in volume adds an incremental 15-basis points to our rate last cost structure as part of the merger, we realize synergies on the OpEx side, cutting $19 million of Broadmark expenses.
Given market conditions, we expect to continue to rightsize the cost structure and staffing levels with a target 40-basis points, ROE contribution probability weighting each of these actions with a total [455] basis points increase in our re alongside focused credit management over the next 12 to 18 months of the CRE cycle, we believe will provide significant upside to the company's current earnings profile. We appreciate the continued support, understand the work ahead of us and firmly believe that the platform is built to both withstand current market pressure and grow earnings as we move forward.
With that, I'll turn it over to Andrew.
Andrew Ahlborn
Thanks, Tom, and good morning, quarterly GAAP earnings and distributable earnings per share were $0.12 and $0.26, respectively. Distributable earnings and $48.5 million equates to a 7.5% distributable return on average stockholders' equity
2023 full year GAAP earnings and distributable earnings per share for $2.25 and $1.18, respectively, equating to an 8.6% distributable return on average stockholders' equity on the balance sheet and income statement, residential mortgage banking has been accounted for as a discontinued operation with assets and liabilities consolidated into held for sale line items and net income included in discontinued operations.
The main driver of the variance between our quarterly GAAP and distributable earnings were $3.2 million of the $6.7 million increase to our CECL reserve, a $20.7 million markdown of our residential MSRs, a one-time $5.5 million termination fee related to the refinance of a mosaic lending facility and a $3.7 million unrealized loss.
The increase in our CECL reserve was due to a $15.8 million increase in specific reserves, offset by a release of reserves on our performing loan portfolio and a 7.5% distributable return on equity continues to be pressured by the effects of a decline in the retained yield of the portfolio as well as lower leverage in the fourth quarter. De-lever portfolio yield was 11.5%, down 9% from the same period last year. The change is due to a 11% allocation into Broadmark asset margin compression on the backlog and increased REO from M&A. We expect levered yields to increase as the backlog moves into our securitization vehicles and the Broadmark assets are repositioned into market yields.
Net interest income declined $6.4 million quarter over quarter. The change was primarily due to a $5.5 million one-time charge upon the refinanced Mosaic lending facility, the migration of $258 million of loans to non-accrual and $2.6 million of interest expense related to the financing of nonperforming Broadmark assets. Realized gains were up quarter over quarter due to increased SBA seven a. production and sales with average premiums of 8.9% and $288 million of production in our Freddie Mac businesses.
Servicing income increased $1 million quarter-over-quarter due to the recovery of previously booked impairment of our SBA and Freddie Mac servicing assets. Other income increased $14.2 million due to the recognition of ERC income. To date, we have processed $62.9 million of ERC contracts, recognizing net income of $42.8 million. We expect this program to continue into 2024, albeit at a slower pace. The improvement in operating expenses was due to a reduction in staffing and related compensation expense, slightly lower servicing expenses as a result of lower advance reimbursements and lower transaction volume on the balance sheet liquidity to remain healthy with $139 million in total cash and over $1.5 billion in unencumbered assets.
Recourse leverage in the business declined 2.8 times and mark-to-market debt equal to 17% of total debt. The Company's debt maturity ladder remains conservative with no material debt maturities until 2025 and the majority maturing past 2026.
On the leverage front, we continue to explore multiple avenues of raising corporate debt. Markets for new issues have improved since the beginning of the fourth quarter, and we are confident in our ability to access the markets in the upcoming months, incremental capital raise will be deployed into our origination and acquisition channels, which are witnessing opportunities in excess of current capital levels.
Book value per share was $14.10. The change is due to a $0.09 per share mark down of the residential MSRs, a $0.04 per share reduction in bargain purchase gain and $0.06 of nonrecurring items discussed previously. While we understand it will take time given current market conditions, we remain agile, creative and opportunistic to deliver differentiated credit solutions for our lower middle market customers. As we execute on our strategy, we expect the power of our earnings to cover the dividend consistently and returns to migrate to historical levels.
With that, we will open the line for questions.
Question and Answer Session
Operator
Thank you. We will now be conducting a question and answer session. (Operator Instructions)
Crispin Love, Piper Sandler.
Crispin Elliot Love
Please go ahead and Thanks, good morning. Can you talk a little bit about what recent credit trends could mean for potential losses, delinquencies have increased, but what kind of losses do you believe that could lead to just based on what current debt service coverage ratios are and LTVs in the book and then how you might plan to walk out some of the lower performing loans?
and do you want to touch on the loss reserves?
Andrew Ahlborn
Hey, good morning, Kristen.
Yes, the losses are we look at the bulk in two ways on the determined he saw there that a general overlay, which accounts for roughly 50% of the reserve. And then the asset management team is adding on specific reserves for those loans contained in our higher risk categories.
So we think the current CECL reserves account for the expected losses on those those assets in our higher risk buckets now based on sort of the detailed work, the asset management teams, current mark-to-market LTVs, et cetera, and then
Hey, it's Adam, you on the credit front, certainly seeing delinquencies, as you highlighted, increase quarter-over-quarter from.
We do feel that our basis is still healthy in the majority of our portfolio. We feel that, you know, if you look at the bridge delinquencies where there was a spike, you're certainly seeing and we think that the realized losses will be more at the equity level versus the debt level.
So as Andrew highlighted, we think that our reserves are certainly adequately sized on DSCR stress LTVs are generally below 100% on the majority of the portfolio and really don't anticipate material losses on, but some loans will certainly require some modifications or restructuring and certainly some time to resolve and kind of have I've seen time available for the market to rebound.
Crispin Elliot Love
Greg here, appreciate the color, Andrew and Adam.
And then just one on the disposition of the resi mortgage segment.
The new detail why now? And then are you able to provide any color on your confidence of that disposition being completed by June 30, which was in the presentation?
And I assume that would likely involve a sale and likely gain just following the loss on discontinued operations this quarter and just one market observation there and you can comment on the process, but right now that the majority of the equity in that business is in the MSRs of which two-thirds are agency. We believe that right now, MSR valuations have peaked and just from a timing perspective in terms of valuation, that's one driver. But Andrew, do you want to touch on the process?
Andrew Ahlborn
I mean, certainly we have a high degree of confidence of the transaction closing before the end of the second quarter on part of the criteria of moving a segment into held for sale and discontinued operations is having that complement some of the components of the process will be, as Tom mentioned, obviously, a sale of the MSRs, which comprise the majority of the equity as well as the assumption of the assets and the liabilities of the company and the consideration we'll most likely take the form of on some upfront payment and then an earn-out of sorts. So I think at this point in time, based on where we are in the process.
We do believe this will close before the end of the second quarter.
Thank you.
Crispin Elliot Love
Appreciate you taking the questions.
Operator
The next question we have is from Stephen Laws of Raymond James. Please go ahead.
Stephen Laws, Raymond James & Associates, Inc.
Stephen Albert Laws
Hi, good morning. I appreciate all the details in your prepared remarks, Tom, and if I got my notes down correctly, I think you said in the CLOs have defaulted loans about 57%, so roughly 60% you expect to modify on that. I believe you said you need the special servicer approval. Can you talk a little bit more about that process and how you work with that special service? What are those mods primarily look like? Is it is it capital in for more time. Are there other moving parts? Maybe 20 can be unique, but any general trends across those loans yet?
And can you comment on that? Yes, short. So in terms of the process and the mode. So borrowers, um, have submitted relief requests for modifications to their loans on those then are under review by the special servicer in the ordinary course and request for modification, what a borrower the special servicer would review approve and cure the delinquency on with certainly our approval is directing certificate holder in several cases, the modification is a contractual bridge to a short-term payoff.
So an example being a sponsor's refinancing the debt or selling the real estate and the modifications you don't can then be executed on in terms of what they look like. And certainly the preference is to have the sponsor bring a fresh with equity injection to the modification on a given that more time is certainly needed in this market. We feel that about yields anywhere from 12 to 18 months on the right amount of time to modify these loans, given the timing that's needed for the market to rebound from.
Additionally, this there's cash management, some controls that are put in place on these modifications. And in some cases, we're requiring a third party professional management to come in on behalf of the sponsors and kind of help maintain the at the asset utilized CapEx to really we will provide the necessary maintenance of the of the assets.
Stephen Albert Laws
Thanks, Andrew. Thinking about interest income, can you can you talk about the quality of interest income? How much is cash interest received? How much was accrued or maybe some type of PIC income, if there's any. Can you give us any color on interest income quality?
Andrew Ahlborn
Yes, the majority of the interest income is cash-paying. There is a small segment of loans that are accruing based on expected recovery on the loan, but not paying, but it is a very small portion of the book.
Stephen Albert Laws
Great.And then finally, if I may, return capital to shareholders. So you closed, I believe with with the comment on the dividend that you think earnings can cover that some.
How do you think about the on the glide path of earnings coverage for the dividend as we move through the year and you execute these challenges, these are efforts to expand our OE and any consideration around stock repurchases given the current valuation, as you may unpack that to
As Andrew, maybe just comment on the there's five measures we delineated and obviously some of them are immediate like OpEx and some are longer term like the re-levering of the Broadmark equity. So maybe comment on that. And then the prioritization of cash on repurchase versus capital solutions for the for the existing portfolio?.
Andrew Ahlborn
As Tom mentioned in his remarks, we believe the totality of all of the options ahead of us is at least roughly over a 400 basis point increase in earnings from their current level. That'll certainly be incremental over the next on a quarter six quarters.
As Tom mentioned, things like OpEx savings, which we anticipate will add 40 basis points on will be more immediate. And the effect of leverage will be somewhat dependent upon on the times in which we choose to access the market. I mean the redeployment of that capital and then the effect of the portfolio turnover will sort of be felt every quarter. I think Adam can elaborate on that. The plan for and the timing of Walmart liquidations, but that will certainly bleed into earnings. So I think you will see and sort of a glide path over the next four to six quarters in terms of capital allocation, including the share repurchase program. We said we have today $80 million in capacity on our current program for share repurchases. I do believe we will be active in the repurchase program while also balancing and the need to add net interest margin into the income statement in a market where yields are very attractive and putting long-term earnings into the income statement is important.
So I think we will balance both of those given where the stock was trading, certainly on the return provided share repurchases by powerful. So I do anticipate we'll be active in the upcoming months?
Stephen Albert Laws
Is that the level and then share annual share repurchase strategy?
Andrew Ahlborn
Yes.
No, that's sort of the time.
That's what I just commented on seeing.
Operator
Douglas Harter, UBS.
Douglas Harter
Thanks. Wondering if you could talk about the expected pace of putting new capital to work, how you see the opportunity set developing both in order to redeploy capital, but also to increase leverage?
Yes, just to make a comment on the current investment opportunity pipeline in our ways. And Andrew, maybe comment again on the our Brett Adam, on the liquidation of the Broadmark as well as the forward liquidity. But the at the current market in terms of we kind of look at it in three, three areas. Our silos one is our core bridge lending where for lower middle market, you're getting retained yields on really strong vintage underwriting in the area of 13.5% to 15.5%. That's up, maybe call it 300 basis point, 400 basis points since spread before the rate rise. That's sale one silo two, which is which is cyclical, is the capital solutions where we provide capital to opportunistic equity entry, mostly the multifamily space. And then we'll provide senior mez, et cetera, in the context of restructuring, that's probably more in the call it, 15.5% to 18.5%. And it and that's a that's the other area.
The third area is the acquisitions on and there we're seeing we're starting to see and this is from the external manager, a growing pipeline of sales by banks, which are not, I guess, not unexpected. Those are more in the upper teens, low 20s and with average retained yields. So in short, you're seeing blended returns available to us well into the mid to upper 10s which is about a four or 400 basis point, 500 basis point increase versus where we were prior to the turn in the interest rates. So that's the opportunity set 300 maybe just comment again on that liquidity forward liquidity a
Andrew Ahlborn
Deployment and certainly outside of the portfolio runoff, as specifically in Broadmark, there are a handful of larger liquidity items. We expect to come through the balance in the upcoming weeks and months here. Obviously, the sale of the residential mortgage banking platform is expected to bring in on a net basis, approximately $100 million. We are in the process of financing some of our retained positions from our CLOs that's expected to bring in $130 million in them. I do believe we have line of sight into some corporate issuances. So yes, outside of portfolio runoff, we expect there in the upcoming weeks and months to be roughly $300 million of additional liquidity coming in from Adam, you may just provide some commentary on the timing of the Broadmark liquidations and expected proceeds just to get a complete pictureYes.
So we expect to have about 50% of the Broadmark assets paid off within our base is by year end 2024, I think, is a conservative estimate on this, and this excludes current loans where several we expect will pay off during this period.
And then secondly, there's more opportunity to liquidate other assets in the portfolio that aren't currently flagged for a payoff on just the kind of the velocity of these payoffs. I just kind of give the historical perspective since the merger closed. So about 50 loans paid off for about $250 million to about 23% of the portfolio we have pending payoffs have about 30 assets, and those are the ones that I mentioned would pay off by the end of the year. That's about another, call it about $250 million. So that's another 20% of the portfolio on.
So all in all, we should be out of about $500 million by year end. The liquidity on a from a UPB perspective would have would be about $250 million of UPB. Obviously, some of that is levered today on and then yields, certainly a slew of other on payoffs. We're expecting that more and more portfolio that we're currently working through via loan sales on the sponsors that are giving indications that they're working on refinances and sale of assets.
So just In sum, I think you've what special increases versus the peer group to some extent is apart from that, that focus the concentration and lower middle market, multifamily, which has less credit volatility. We do have because of the delevering from Broadmark. We have this path to a step function in growing liquidity towards the back end of this year, which will result in deployment at these spreads, which, you know, we don't believe this is a 2020 flashing pandemic flash in the pan snapback. So we see the name accretion being very significant over the especially to the back half of this year into 2025.
Operator
Jade Rahmani, KPW.
Jade Joseph Rahmani
Thank you very much. Just on the credit side with Broadmark and Mosaic, you said 28% purchase discount, do you believe that that's sufficient to absorb losses and therefore, from those two portfolios, they would have no further deterioration on book value and you want to comment?
Andrew Ahlborn
It's mainly or break it down into two components on the Mosaic side, that deal is structured with a contingent equity rights. We that was as follows approximately $90 million. We do not expect to exceed that contingent equity revenue.
On the Broadmark side, as we mentioned in the remarks, the discount applied to the NPLs, we still continue to believe is enough to cover some expected principal losses. I think what you will see over the next few quarters is movements. I would call them immaterial movements around the bargain purchase gain in both directions as sort of values get finalized. But yes, we do believe the purchase discount and both of those mergers will prevent future principal losses.
Jade Joseph Rahmani
And then on the multifamily side, in the bridge portfolio, Tom, you mentioned 70% of the delinquencies due to one borrower. Some do you believe that we're at peak delinquencies or do you expect it to be lumpy and there will be further deterioration. I mean, I personally don't see why we would now be at peak delinquencies considering the staggering of maturities and the 2021, 2022 vintage originations I think that there probably will still be some deterioration. Do you agree with that?
Andrew Ahlborn
I think we do agree with that from a broad market perspective, in particular, large balance or upper middle market I'm sorry, upper Block two, the larger sponsors in the Sunbelt markets, for example, where there's significant negative absorption that has to be a period of negative absorption as new supply hits over the next year, year and a half, but our portfolio is very differentiated. So I mean, we look at this in terms of roll rates and negative migration. So it and maybe, Mick, could you comment on how you're looking at the our bridge portfolio versus, you know, in terms of its lower middle market focus and what you're seeing with those sponsors?
Yes, it is specific to our multi-family Bridge Portfolio. Tom, you mentioned that the largest asset, um, had defaulted on. So in sum, I mean, our two largest sponsors have actually already defaulted. And we are working through asset solutions, modifications, bridge to bridge finances, et cetera, on either through the special servicers on entry loans that we hold today on the majority of our small middle market sponsors, we feel have greater liquidity and funding on the temporary cover the interest shortfalls. And we think that one may see a spike as we execute on some of the modifications and bridge to bridge strategy on our existing wind delinquency. But we expect really negative migration on to peak. We call it Q1 or Q2 and which is really due to the granular granularity of our Arm remaining portfolio.
Jade Joseph Rahmani
And geographically, how would you describe the concentration? Is it largely Sunbelt, but just touched on.
But just to add, as I said, Adam, to give you a comment on it. But if you recall, Jade, one of the kind of one of our credit Bibles is our geo tier model, which uses regression analysis from GFC, ends on lower middle market, mostly multifamily. So we are we basically in that model, we look at forward negative absorption as one of the big drivers as a result of that markets like Boston, San Francisco, et cetera. And in particular, some of the that in the heat map of the Sunbelt where there's a lot of supply coming. We've avoided that.
But given that overlay, Adam, what have you seen in terms of the our concentrations in those markets?
Yes, new markets such as the Carolinas and Texas. Now where we have heavy concentration on these markets have positive net migration and strong demos on. And as you know, our focus is really on workforce housing and we still expect that there's tremendous demand for these units on specifically for good quality, affordable housing. And given the on really given the positive net migration, we feel that where our assets are located on will remain strong, strong markets on our top our top MSAs in our in our Bridge Portfolio, your Dallas, Dallas, Texas, being the largest, which represents about 25% of the overall portfolio of Atlanta comes in second at about 15%. And then the Phoenix markets about 13%, Charlotte, Houston and Chicago kind of rounds out the remaining of where our big exposure.
Jade Joseph Rahmani
Thank you.
On the office, can you talk to the character of the collateral because there's huge differentiation in the market between skyscrapers and CBD versus suburban office parks versus owner occupied, where say a law firm owns the building and they sublease two floors. So how would you characterize the office? Because I'm surprised that there's no delinquencies in small loans, you know, sub $15 million type loans.
So your offices, as Tom highlighted in his opening remarks, right. So it's about 5% of the total portfolio on our average balance on our office portfolio is about $3 million on about 160 individual assets. The small-balance nature of these office assets and a lot of it is focused on stable like medical office type properties and really just smaller assets, which again, it's a lot easier on to lease up on a lot of this is on short term leases.
But given the amount of space that needs to be leased up in the small and the small projects on Well, the ability of our sponsors to do that is and isn't as challenging as you highlight when you have these larger these larger office buildings and CBDs. And that's really where the majority of our office delinquencies are our located, which is in the CBD, specifically in Chicago, New York and where those delinquencies are, they now also Los Angeles.
So I think Daniel, just given that that granularity, we feel that we're certainly insulated from a lot of the headlines around the office sector. And it's also it's also from us from a liquidation asset management perspective, also more efficient to work through and liquidate these the smaller assets?
Andrew Ahlborn
Yes, just at a high level, it's 70% of our 5% office is the is the large balance and they account for 70% tenant delinquency. So it's a handful of small CBD properties in a handful of cities we have to originate, but for which we have, we believe a very strong seasonal reserves. So I think the if you well, the tail risk in our book versus the sector is very, very limited to CBD office.
Jade Joseph Rahmani
Thank you for taking the questions.
Okay.
Operator
Steven Delaney, JMP Securities.
Steven Delaney
Good morning, everyone, and thanks for taking the question. Andrew, if I could start with you. You mentioned leverage on some opportunities looking forward. Should we assume that would be a new CLO and under your existing shelf? And could we see that as soon as 2Q or 3Q of this year?
Thanks.
Andrew Ahlborn
Yes, it's certainly continuing to use our solids as a core financing strategy will be important, and I do expect us to issue in the CLO market this year and most likely a Q3 event. I think when you look at increasing leverage across the business, it's certainly that is one component. But adding on additional corporate debt on for reinvestment and will be a key part of that as well and
Steven Delaney
Usually tried to target about a $300 million offering under your program.
Andrew Ahlborn
Typically, our CLOs are between $750 million and $1 billion. So they're a little larger in size, yes, some of our other shell of them are smaller, such as our SPA shell for acquisitions of potential, but our CLO offerings tend to be larger in size.
Steven Delaney
Thank you to them for you.
Andrew Ahlborn
Just to add to that, just since the inception of the market where we were the fourth largest overall issuer have issued $7.5 billion is outstanding, so that we do larger new-issue sizes and you have just one single one point on that our spreads on the triple AAA historically are on top of even the put the best names in the sector. And a big part of that is our structures are the most investor friendly in terms of I see over-collateralization triggers, which are one versus the industry at three and the deals being static.
So that does add an annual.
Yes.
So that does present versus the peer group, a skewness in our delinquency metrics and the time we take for us to buy loans out of the trust or what have you. So just wanted to highlight that on and that that does give us access to the market even in times when there's a yes, like liquidities constraints in the primary ABS market,
Steven Delaney
that's good color. Thank you.
And either one of you, I guess or maybe Adam, on 12, I made a note 12 loans that were 60 days delinquent and then you laid out how many payoffs, mods or foreclosure?
I didn't get the total of those 12 loans. I didn't get the total UPB and how much specific reserve may be against those 12 loans Thank you.
So those 12 loans is roughly five, $500 million on there. The there's no specific reserve against them beyond Cecil on. And I think the other highlights are I think you have about 15% of that. We expect to pay off in the next two quarters of 60% under the deal pending modification, where we're strategically working with the sponsors Alm and then about 30% of them will likely go through a foreclosure process.
Steven Delaney
Yes, that 30% would then get fair value at the time it goes to REO, correct?
That's right.
Yes.
Steven Delaney
Okay, great. And just one final thing, Tom, I guess I'll throw this out to you. I know you're busy running your own company, but you probably have heard about the short-sellers out there on CLO issuers. They've obviously had Arbor, they fit. Blackstone is well, you never mentioned in terms of what you look at and how you look at it, you know, the performance of the loans I didn't hear you mentioned trustee, 10 day late payment data as being of an early warning signal. I guess you know which borrowers are making payments and which are not, but just your thoughts about I know it's a market question and not an RC specific, but you nobody you're not mentioning that data. You mentioned your 30-day and 60-day D Q.s. And I'm just curious what your thoughts are about any value in that trustee data?
Are the you're referencing these special servicers reports on the.
Steven Delaney
Yes, the PayNet, the payment data that you use, USB and others put out the C at the CLO special servicers, correct, kind of across the reporting.
And the only other point that I think because we just view the and I know that's a differentiator about from our perspective is we do have we do work with a external special servicer, but our Adam and his team are managing all of the actual disposition strategy, asset management strategies. And we do have an early warning indicators that is embedded in our four to five model, our folks, our risk rating system.
So Adam, maybe just comment on that in the context of the broader market of linkage between looking at CRE CLO reporting Cressier reporting versus how we've managed it in terms of let's just looking at it as on-balance sheet.
Thanks, Tom. Yes, I think you've given where DCH on our deals come, we have a fair amount of upside.
Adam PTCA.'s define that.
Yes, the direct answer to your certificate holder digits in oh five, we were the first loss holder on our on our on our CLOs. So given our position, right? So we have our asset management team that works closely with the special servicers on this a portfolio management team. First off, that was really act as a liaison between the sponsor and the special servicers in terms of the draw process, updates on asset level updates. And so we're in constant connection with the sponsors and the and the special servicers to work through solutions on the special servicer are certainly working closely with the sponsors and then they're making recommendations to us on. And I think the our real debt, robust team with the overlay of the special servicer, I think, provides us a unique strategic advantage in the market on that, that answer your question.
Steven Delaney
That's helpful. Thank you.
Operator
Christopher Nolan, Ladenburg Thalmann.
Christopher Nolan
And I guess on rents stable excuse me, multifamily is a do you have any rent stabilization, apartment exposure in New York City?
We have about I think we have about $175 million of multifamily exposure in New York City. The vast majority of it is on unregulated. So it's so the answer is no, it is very, very low.
Christopher Nolan
Okay, great.
And Tom, in past calls, you indicated Broadmark is expected to be EPS accretive by fourth quarter of 2024, as I still hold
under the context of the what the bridge relate I'd maybe comment on that.
Andrew Ahlborn
Yes, we do expect by the fourth quarter the transaction certainly to be accretive to current EPS. We expect to drive from your earnings past our current dividend levels. And as we move into 2025, we expect the full impact of the various items that Tom laid out, including broad market sort of reach their totality and the ultimate earnings accretion based on where we are running in the few quarters, leading up to above are probably happens in the late stages of messages at 2025.
Christopher Nolan
Okay.
So it's fair to say that the EPS should be there accretion to distributable ROE that you guys are outlining earlier is going to be backloaded in the second half of 2024, and we're really not going to see the full effect of it 2025, correct.
Andrew Ahlborn
I think that's a fair statement.
Christopher Nolan
And so for 2024, we should see probably a distribution ROE somewhere below your 10% target.
Is that fair?
Andrew Ahlborn
Yes, I think that's where we expect that the cumulative earnings of the Company over the full year to cover the dividend. So at Newell, what we are expecting is a ramp up from where we're at today, something towards the back half of the year. That is that is covering the current 30% and then the near the growth in earnings from that, that level into our historical return targets to happen in as we move into 2025.
Christopher Nolan
That's it for me. Thank you very much.
Operator
Next question we have is from Sarah Buncombe of BTIG. Please go ahead, everyone.
Sarah Barcomb
Thanks for taking the question. And you just gave some dividend coverage commentary. Thanks for that on. Just quickly a follow-up on the topic of CLO performance. It sounds like we should see stronger IC and OC coverage come March, but could we expect to see some further downside to the year on the residual income side of the interest income equation from Q4 levels? Can you give any guidance on the potential Q1 earnings impact there before those loans are resolved as inherently?
Andrew Ahlborn
There's a there's a couple of impacts of tripping. You said on the first one as you mentioned, is cash flow gets diverted away from our reserves on this, or is it other than delever the seniors the way it'll work in the financials, as you'll see to the extent loans in nonaccrual status, you'll see interest compression there and you'll see some of the effects of the delevering of these securities on. So won't because of how we consolidate.
It's not going to show up in the bonds themselves. The total cash flow sort of diverted over this period where the test of Interep has been roughly $8.5 million. And the other financial impact on is during this period where the tests are trapped, the funding accounts that sit inside the deals are diverted away from repurchasing logs. We have funded on balance sheet and diverted through the waterfall of the structure. And so you have a component of loans, roughly $80 million today that are sitting on balance sheet on unlevered.
So you'll have some yield compression there. Those loads eventually will get repurchased into the deals at these. These right-size it for that period of time. You have what I'll call marginal yield compression. So those would be the what are the main effects.
Sarah Barcomb
Okay. Thanks for the color there. And then I think you mentioned that 27% of the delinquencies are likely to foreclose? And will those remain in the CLOs as real estate owned?
Adam, you want to comment, but yes, I think those were historically as loans have become REO that we have had in securitizations. We have purchased them out on. So that's certainly something we will we will consider on as we work through these, but to date, there's been very limited REOs that we have within our within our CLOs. So today, it's not material, but as we kind of work through these assets on some something that that will certainly values.
Sarah Barcomb
Okay.
And then just really quickly on sorry if I missed this at the beginning, but can you remind me if you gave us a target for your volumes in the Freddie Mac and SBA verticals this year?
Andrew Ahlborn
Yes, you want to kind of ballpark of the on the SBA front, we've been running at about five a little under $500 million over the last three years. And we back around second quarter of last year, we our fintech implemented a <>, our small loan and micro loan strategy. Just to recap, SBA has five three tiers, three, [$355 million] is large loan, mostly real estate secured. And below that, there's a small and micro, which are two different tiers
I think below 50,000 Micro. And those are those are loans that are the SBA allows a credit score methodology, which obviously is a very adaptive to what we've been developing with our fintech in Florida, which was one of the leading providers in the PPP program. So we've retrofitted that tack to a <unk>, and that's a strategy whereby we're using that to originate small loans.
I think we are running, Andrew, what about $33 million less the clinical $30 million, $40 million run rate of looking out over the next couple of months and ramping. So and then as part of the initiative of the Biden administration to promote in loans too minority women-owned businesses of which the tier that lower tier is a big chunk of that.
So I'm So with that, the combination of the large loan continued growth there, we've been pushing a lot of it of this. I'm seeing opportunity to take on loan officers that are exiting work from banks that are exiting the SBA business. And this fintech that odd that leads us to a target of $500 million to $750 million for this year and $1 billion over the next couple of years, which is very accretive given the premiums that you have on these loans and which, you know, are usually north of 10 points in the secondary market and the fact that it uses utilizes very limited capital. So I think, again, that's something that is a differentiation in the peer group. That's a little bit underappreciated. So that's the SBA.
And Adam, you want to just to comment on how you're positioning the business from the standpoint of the OEM the core bridge and the other related to construction and other products?
Yes, I think I just answered. I think the question was around the Capio, our capital, a Freddie businesses on the multifamily side, I think the volumes they're expecting about we're targeting $1 billion for 2024 for PAM. And those capitalized multifamily programs are split are split between our small balance loan program where we have the license through Freddie Mac And then separately, our affordable multifamily business, which is the tax-exempt business, some of which makes up the $1 billion target for 2024.
Sarah Barcomb
Great. Thanks for all the detail there.
Appreciate it.
Thanks, sir.
Operator
Next question we have is from Matt Howlett of B. Riley Securities. Please go ahead over the pressure.
Matt Howlett
Taking my question a ton, you mentioned I think you said high 10s to low 20% yield on the potentially on the acquired channel with some of the banks are those unlevered as the first question?
Two, could you just walk me through some of the economics of those?
Andrew Ahlborn
I mean, were you were you buying at whatever discounts that the paper it is yes, these are from lower middle market, usually stabilized loans that are on are usually it ended up criticized. They're not in default or what we call scratch and dent.
But from a bank regulatory standpoint, the they get criticized usually due to response because of DIDSCRB. approaching that kind of below one zero threshold. And that's great from our perspective because we like we utilize in our asset management strategies for acquired portfolios. We were one of the larger buyers of the smaller balance loans. After the GFC, we bought nearly $5 billion and we worked out 5,000 loans.
So we have a track record on. And so in short to answer your question the scratch-and-dent portfolios trade probably low 90's to low 80's to unlevered yields, Adam, we're looking what high single, low double. They many times come with staple financing or we can we have more. What I find interesting is we have more offers for credit on a secured lending basis term lending with limited mark-to-market from the banks, given the Basel three changes, which favor loan on loan real estate being a lot better than making direct loans. So anyways that with that, either the staple financing from the seller and or the third party financing from banks that gets us to levered IRRs on that high-single, low double to that kind of upper 10s area loss-adjusted?
Yes, we've also done since inception, we've done 11 stand-alone securitization of this strategy. So that's just another layer in terms of getting higher returns on that portfolio?
Andrew Ahlborn
Yes, that's important point, a good point. And so we do have access to our RCMT. shelf, is that right?
Adam,
It's ASSCMD. safety, sorry, SENTEL, so that
Andrew Ahlborn
that's where we have historically utilized purchase of these portfolios in the secondary market, which is a little bit differentiated, again, a differentiator from us in the peer group to buy these pools from banks rated securitization trusts to then finance them in the ABS market. But again, right now, what's very unique versus the last credit cycle. Gfc is the availability of bank financing on it longer term secured basis with limited mark-to-market such as deep
Matt Howlett
On the bigger packages you see from the community bank corporately, would you get to go through a waterfall and bid on those?
Andrew Ahlborn
Or is it something that's when they're ready, it looks at well, you know, we need to external manager has a significant trading desk and sources these deals. And so we definitely look as part of our acquisition silo and the services provided by the external manager to bid jointly and allocate our equity accordingly.
Yes, we've done that in a number of ways. Number of transactions over the last decade.
Matt Howlett
Great. And just final question I'll get on the buyback. What do you feel like the 14 order book is pretty good. What I'm saying, what would be your sense of urgency given the what will be an improvement in the ROE and probably the dividend over time, you feel like to act sooner with the buyback than later, where does that stack up and the list of priorities for us from that.
Andrew Ahlborn
And yes, certainly where the shares are trading and I think it will be a priority for us coming out of earnings. Again, there is that you need to balance using the liquidity on the balance sheet today and for that purpose versus taking advantage of new investment that will provide sort of longer-term earnings power for the Company?
I will say, given some of the liquidity events we laid out earlier in the call, I think those items will provide a lot more flexibility to be more aggressive in the share repurchase program should shares hang around these levels.
Great, thank you.
Operator
Jade Rahmani of KBW. Please go ahead.
Jade Joseph Rahmani
Thank you very much. Yes, on the questions about share buybacks, pretty interesting at this point in the cycle where there's clearly very high delinquencies in the portfolio and a lot of credit uncertainty in the outlook, it seems to me a better use of capital would be defensive. So I just wanted to ask about the corporate debt issuance, what kind of issuances being complex contemplated? Do you have an a range of sizes you're thinking about and what the cost might be?
Andrew Ahlborn
So I think there are a variety of options.
I think you may see some it's a combination or private placement and potentially some of the retail channels that have been opened across a couple of deals. Since the Q4 be an option for us in terms of sizing, I would expect them to be more measured anywhere from $75 million to $150 million. I think the cost for those issuances today is somewhere in the range of 9% to 10% on yield well.
Jade Joseph Rahmani
And so what's the use of proceeds you're going to lever that capital rather than pay off capital elsewhere. Is any of this used to care deficiencies or to pay off secured debt secured leverage elsewhere?
Andrew Ahlborn
Yes, certainly. And the combination of all the liquidity will be used for a variety of the things you just mentioned. Some of it will be to manage some of the problem areas in the portfolio, whether it be refi repurchasing from CLOs, et cetera.
And a large majority of that will be used for reinvestment in our origination channels and acquisitions on those. And then some of that liquidity will be used in the share repurchase program. We certainly agree with you that having ample amount of liquidity on the balance sheet to manage uncertainty across the cycle and continues to be the priority and certainly balancing those other areas of capital uses, including the repurchase and new investments, we'll be done so with our top priority in mind.
So we do agree with you that carrying NAM increased liquidity amounts, lower leverage throughout the cycle is important and will continue to lead the way we manage the business.
Yes, just to from a more macro perspective to add on what it is. And Jade, we're looking at the wall of liquidity we have coming in in the back end of kind of phased in through this calendar year are you clearly prioritizing defensive? Have you split in assets management strategies like strategic refis? Because we fully strongly believe that our lower middle market sponsors, the big guys have crossed the vintage of have already experienced stress are in workout, but we have a lot of lower middle market sponsors with more workforce housing that are covering some of the stress in DSCR and there is a bridge to agency take-up just like some of our larger, some of the other retailers are focused in the multifamily small balance space.
And we believe strongly believe that looking at the forward curve and rent growth over the next 24 months, that that will provide a better use of capital. And then let's say, immediate repurchases of shares over the over the next 18 months.
Operator
Thank you. And with that, I would like to turn the floor back over to Tom capacity for closing remarks.
Yes. We appreciate everybody's time today and look forward to the next quarter's earning call.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect.
