Ready Capital Corp (RC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Sutherland Asset Management Corporation Fourth Quarter and Full Year 2017 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Rick Herbst, Chief Financial Officer. Please go ahead.

Thank you, Hepsie, and good morning everybody. Thanks for joining us today.

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 today, 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 statements prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 2017 earnings release and the supplemental information that is provided.

By now, I hope everybody has had access to our fourth quarter 2017 earnings release and the supplemental information. Both can be found in the Investors Section of the Sutherland website.

And with that behind us, I'll turn it over to Tom Capasse, our CEO.

Thanks, Rick. We are pleased this morning to discuss our financial results for the fourth quarter and full year 2017. We've now completed our first full year as a public company and have made significant progress in our business plan during this period. In 2017, we successfully executed our strategy to optimize financial leverage with the focus in 2018 on operating leverage.

Before turning it over to Rick to go through some of the financial results, I'd like to touch on a few of the highlights for the quarter and the full year.

Firstly, GAAP earnings for the quarter $0.38 per share compared to $0.37 last quarter, representing the third quarter in a row of EPS growth. On a core basis, our earnings were $0.37 per share in the fourth quarter. Off note, our ROE has been about 9% in the last 2 quarters, as we position the balance sheet to improve this metric in 2018.

Secondly, over the last 6 months, as the Fed has been raising rates, the values of mortgage REIT has been declining. For example, KBW's weekly indices of the residential mortgage and commercial mortgage REITs has declined by 18% and 8% over this period. We believe this is due to perception that most mortgage REITs are negatively impacting a rising rate environment. This is not the case with Sutherland. We believe Sutherland is well positioned in a scenario where evaluation is diverge between REITs that benefit from rising interest rates and those that are negatively exposed.

In a rising rate scenario, since our portfolio consists primarily of adjustable rate loans, we should realize and increase net interest margin from rising short rate on the portion of each asset funded with equity. Rick will provide additional detail on this in a moment, but we estimate a 100 basis point rise in LIBOR would increase pre-tax net interest margin per share by $0.12. On a related note, we also expect book value volatility -- expect less book value volatility is only 13% of our gross assets held for investment are subject to mark-to-market movements.

Thirdly, unlike many other loan strategies, facing an excess supplier over demand for credit at this stage of the economic cycle, investment capacity in our small balanced commercial mortgage space remain robust. This is evident in a record quarterly loan additions of $376 million, comprising 68% new originations and 32% small balance commercial acquisitions. This trend has continued so far this year, as we have acquired another $143 million of SBC assets and our loan origination pipeline remains strong.

Fourthly, we raised $255 million of recourse debt in the first 3 quarters of 2017, which was deployed throughout the second half of 2017 and into the early part of this year. These funds were primarily deployed in originations, which occurs sequentially versus the bulk issuance of debt. This resulted in some cash drag, which had an approximate 100 basis point in core ROE in the fourth quarter. At the end of January, we re-issued a tack offering of notes to capitalize on the SBC acquisition opportunities. Of note, this tranche price had at 6.5%, a full 100 basis point reduction from the first tranche price just one year. Throughout the year, we've seen interest costs, recourse to non-recourse debt facilities consistently decline, reflecting sequential tightening in all spread.

Fifthly, robust capital markets demand for our securitized products is evident in serial spread siting. For example, our $465 million ball bounce commercial fixed rate products securitization priced last week at a record high 6 basis points under AAA rated large commercial mortgage backed securities or CMBS versus 65 basis points over the AAA CMBS for our first offering in 2014. In the next few quarters, we expect to close a transitional loan CLO and a legacy asset CMBS transaction to avail ourselves in current favorable market conditions. We expect these securitizations will result in lower cost of funds, higher advance rate and the conversion of recourse debt to non-recourse match funded debt. Sutherland and its predecessor progress fund is an established issuer in the CMBS market having now completed 14 offerings totaling over $2 billion since 2011.

6, one note on credit. To review the Sutherland retains all servicing on originated loans with the servicing of delinquent loans executed by Sutherland and Waterfall Asset Managers. Credit metrics on all our originated and securitized loan book remain pristine.

As of year-end, total delinquencies in our small balanced commercial loan origination book totaled 1.4%, broken out with no delinquencies from our Freddie Mac portfolio, and transitional and fixed rate loans experiencing delinquencies of 1.6% and 1.4% respectively. The SBA origination business has delinquencies of less than 1%.

Finally, as announced yesterday, our board has authorized a $20 million stock repurchase program. While we're confident in our ability to continue to generate new high-yielding assets, we recognize the benefits of purchasing our stock, when its trading at a significant discount to book value. We intend to purchase sufficient stocks to fund existing equity compensation plan need and may purchase additional shares if sufficiently accretive to shareholders.

Now, a few comments on the continued strength in a small balanced commercial property market, which underpins our senior secured lending strategy. New small balance construction languished at 17 million square feet in the fourth quarter, 88% below pre-crisis levels. This is resulting in tight supply, very similar to what we are experiencing in the housing market. As a result, SBC rents attained pre-crisis levels in the fourth quarter and property prices increased nearly 5% year-over-year. With these rising rents, SBC credit remained strong with vacancies flattening at 4.5% across all sectors. As we've noted in the past, the SBC market beats to the drum of the housing market, less so the large balance commercial real estate market.

For example, while large balance commercial real estate investment sales fell 7% in 2017, small balance commercial was up 19%, supporting record loan originations of $240 billion in 2016 and $165 billion through the third quarter of 2017. Meanwhile, the SBA market also continues to be robust. Program-wide SBA loan authorizations are up 12% year-over-year for the first 5 months of the SBA fiscal year. Over the same period, the number of bank lenders has decreased by 6%, increasing the opportunities for the few non-bank lenders. The SBA's budgeted authorization for this year are up 7% and we expect another increase next year.

We continue to believe that small balance commercials correlation housing and the current 3-year lag in the credit cycle versus large balance commercial real estate with that settlement compelling diversification for investment portfolios focused on senior secured direct lending strategies.

I'm now going to hand off to Rick to discuss our financial results.

Thanks, Tom. I'm going to touch on a few of the highlights on some of the slides included in the supplemental information deck that you received. Slides 2 and 3 depict some summary highlights for the fourth quarter and the full year 2017. In particular, I note that we added new loans of $376 million for the quarter, which is representative of our ability to source new assets from both new loan originations as well as portfolio acquisitions. As for the full year, we originated $1 billion of new SBC loans in 2017, up 62% from the $616 million in 2016.

Slide 4, depicts the components of our return on equity. The individual line items are reasonably consistent with the prior quarter depending on whether you're looking at the GAAP or the core ROE. The modest drop in the gross ROE was offset by increased gains on sale.

While Slide 5, shows modestly lower new loan originations this quarter as compared to the third quarter, the longer-term trend shows consistent growth throughout the year. The efforts we have made to grow our origination platform is definitely paying off. And Slide 6 depicts this originations by product set. We revised the individual segment slides to include additional quarterly data to assist you in understanding some additional trends and metrics regarding our new loan production in each of these segments.

Slide 7 is the first of these slides and covers the SBC segment. The gross leverage yield declined client a bit this quarter, due to the allocation of our corporate debt offerings into our origination businesses, partially offset by increased gains from Freddie Mac loan sales.

Slide 8 summarizes our small business administration segment and includes the quarterly trend information I mentioned earlier. The gross leverage yields continues to be well above 20% in this business, although there was some decline this quarter. Similar to the SBC origination segment the allocation of our corporate debt offerings results in some decline in our gross leverage yield. And additionally, we experienced a modest reduction in gains from our guaranteed loan sales in this segment as well as a modest write-down to the MSR portfolio. Loan originations in the fourth quarter were at $38 million and we have already closed $31 million of new SBA loans in the first through today in 2018. Our pipeline continues to grow and we are now the third largest non-bank small business administration lender in the country.

Slide 9, shows some summary information for the acquired portfolio. Due to the nature of the assets in the acquired portfolio, the returns in this segment can be lumpy, and we saw some of that this quarter with some outsized returns on a few assets. Absent those, our net interest margin and lever yields on our legacy acquired SBC loan portfolio remained consistent quarter-over-quarter. We're particularly excited about acquiring over $121 million of new SBC loans in the fourth quarter, the most of any quarter since we became a public company. And as Tom mentioned earlier, we've already added as of today another $143 million of accretive loan acquisitions so far this year. As of today, we've deployed all the net proceeds from last year's offerings and a portion of the $40 million we raised in January and we have remaining buying power about $150 million. The pipeline here remains strong and we will selectively acquire more assets as liquidity permits.

Slide 10 summarizes our residential mortgage business. Our strategy has been to retain the servicing rights on loans sold, which increased in value in a rising interest rate environment. In fact a rise in the 10-year treasury in January resulted in an increase in the value of the servicing rights portfolio of over $5 million. While we do not include the fair market value changes in our core earnings, it is a simple fact that these assets have significant value which increased significantly in a rising rate environment.

Slide 11 is a new one and summarizes the securitizations we've done within Sutherland. As our platform as evolved, we've enjoyed greater secondary market acceptance across our product lines, enabling us to match fund our assets with non-recourse debt. As Tom mentioned, we closed another -- we priced another fixed rate securitization last week in very tight spreads and it will close today and that will further enhance our bottom line. We believe this is indicative of the outstanding credit performance of the loans within these securitizations. The fixed, floating and Freddie Mac securitizations include loans that we have originated, while the SBA and acquired loan securitizations represent assets acquired, many of which were in some state of distress at the time of acquisition. As you can see in the newly originated product has adversely no delinquencies.

Interest rates continue to be on the minds of some investors, and Slide 12 has been added to provide additional information about the interest rate sensitivity of our portfolio. As you can see on the lower left-hand chart, rising interest rates have a positive impact on our net interest income. The numbers here reflect the impact of rising rates on net interest margin, based on our portfolio as of year-end. This does not include the positive valuation adjustments on the servicing portfolio, as I mentioned a minute ago nor any potential impacts on new loan originations.

Slide 13 reflects the diversity of our loan pool, similar to the presentation in previous quarters, but our portfolio continues to show diversification of our first lien SBC loans across geographic and collateral types.

Slide 14 is another new one, showing the funding mix of our capital structure. You note the warehouse lines were lower in the last 2 quarters, as proceeds from the note offerings were used to pay down those facilities until such funds could be fully reinvested. These long-term debt facilities have significantly improved our liquidity profile by placing less reliance on our mark-to-market warehouse and re-purpose facilities.

Slide 15 summarizes our leverage ratios and we've concluded the actual calculations for your convenience. The leverage ratios remained within our target range. Slide 16. It's kind of a year to review slide which charts our progress against the objectives we laid out for investors last year. While we're not done yet, we are pleased with the progress we made in 2017.

Now, I'll turn it back over to Tom for some final thoughts before we open up for questions.

Thanks, Rick. In 2017, we successfully executed our business plan to use recourse debt capacity to both fund the accretive growth in our loan origination franchise with a record $1 billion in new loan originations and also reenter alone acquisition market. While we are pleased with the progress we made this year, particularly in portfolio construction, we realize there is more work to be done.

As we move forward, our focus will continue to be on efficiencies in our loan origination process through the application of technology, marketing to Ready Cap platform and expanding our brand awareness across all product lines. At the same time, we will deploy our capital as efficiently as possible and optimize our operations in order to generate high returns for our shareholders. We look forward to continued growth in our franchise and we thank you once again for your confidence in our company and for your continued support.

So operator, we would like to now open it up for questions.

Thank you. (Operator Instructions) We'll take our first question from Jade Rahmani with KBW Capital.

In terms of strategic objectives to expand the platform, can you give any more color on what you're thinking about? Is that contemplating M&A transactions, adding additional product lines, or is that just ramping the volume of originations?

I say the existing -- it's the latter. It's really more of a focus on taking the existing products and continuing to expand via hiring new loan officers, building the other aspect of affinity programs. That's one area where we've hired specific people for that. So that's basically the objectives to grow the core business. In addition to that, we are considering in the context of affinity, a small balance commercial program, which is conduit base, i.e. using the same methodology that then underwriting that's used in the CMBS market and buying those loans from bank channels. That will provide us with another product up the food chain, with respect to small balance commercial.

And just to be clear on that, we define a conduit small balance commercial between $5 million and $35 million and it's packaging through traditional CMBS conduit. So those are our primary focus is this quarter and the next quarter in terms of the strategic objectives.

In terms of the company's overall structure and efficiency generating gross ROEs in the 15% to 16% range, which seems pretty strong and yet the net ROEs are quite significantly lower, do you see that as a function of the company's scale and is it possible within the existing capital base to drive the necessary operating leverage that will drive those net ROEs significantly higher?

I think it's possible Jade, without raising capital. We have 400 employees between ReadyCap and GMFS subsidiaries. So there is a certain operating expense component to that. Our focus this year has been to add assets with a little bit of leverage. So the focus, I think it's more likely you'll see the top line growth a little bit over time. We are making a big investment in technology, and then in some of the operating things. Over time, that should come down a bit, but I would say the real growth is going to come on the topline.

And in terms of the G&A, is there any opportunity to rationalize it or reduce it? And is there any possibility to revise the management agreement at all to help bolster the net ROEs?

On the first part, there are opportunities to rationalize and that's what I referred to with technology. There is an investment in the technology. We've hired a new chief technology person as well as, as you know the COO earlier in the year. So it will probably take a little while to realize some of those benefits, but that's obviously our objective. So we can do more volume with the same or lower cost structure, but that doesn't happen overnight.

As for the management agreement, I mean that's something that the independent board might consider. That hasn't really come up as initially the management agreement we struck when we initially raised capital in 2013 privately and confirm when we did the merger, the reverse merger with ZAIS. So I think, we have, as part of ZAIS mergers, I think you know, part of the initial capital raise our fee restructure is 1% over $500 million of equity, which is where we are now and I think that's favorable to most of the comes out there in terms of the other commercial mortgage rates. Our incentive compensation structure is only a 15% over rate hurdles, most of the comps are at 20% over rate, and we have committed to take at least half of that in stock, with one at a time. I think -- does that answer your question?

Yes. It does, I mean I think that the issue from my perspective is the capital base, which needs to grow. The overall originations volume, the amount of assets on the balance sheet, all need to grow in order to absorb those G&A costs that seem outsized relative to the company size. Just wanted to see if you could comment on yield trends, any spread compression pressures in the market, any changes in borrower appetite given recent interest rate volatility?

Yes, that's a good question, and it highlights the fact that we're not a one-trick pony, right. We have basically 3 silos the investor, products, which are the Freddie Mac, fixed and the fixed rate small balanced product, and then the transitional loan business. And of course, we're going to acquire non-performing or re-performing loans. So in terms of what's happened with the interest rates, it's great, because it highlights the fact that, in any rate environment, we tend to be able to reallocate capital into origination sectors where we have the highest ROE and there is the highest volume.

So in this market, what's happened as we've seen, with the 10-year rising now almost to 150 basis points above it's summer 2016 lows, we see the fixed rate product volumes increasing significantly and the reason for that is we compete at the margin with more aggressive banks and they fund our deposit, so they tend to have -- the conduit CMBS spreads tend to compete more favorably with depositories in a rising rate environments. So that volumes increase.

The Freddie Mac that also has increased because of increased investment sales and new construction in the multifamily industry and some of that is due to sponsors investing in or buying new multifamily properties before rates rise significantly beyond where they are today. The one area, I would say there is competition in spread compression is the transitional loan business. There is a lot of private lenders entering that, but we tend to be able to focus on differentiated sectors and asset classes, which some of the newbies are not as familiar with. So we have had some spread compression in that business. The SBA business is just, it's floating rate new business, GDP growth in terms of small businesses is projected to be, I think it's 5%, 6% versus 3% for the overall economy. So that market is driven, it's less interest rate sensitive. So that's what we're seeing in terms of the impact of interest rates on our book.

And just lastly on credit trends. Can you comment on what drove the sequential uptick in SBC delinquencies, as well as SBA delinquencies? Was that seasonality related or anything underlying that?

Along the SBC, we've had 3 loans that went delinquent as of December 31. 2 of those 3, which is about half of the bucket, you see there, have since return to performing status, the other one we're still working with. So again it's free loans, not a trend. On the SBA side, there it's 2,000 loans in the portfolio, there is about 100 loans that are delinquent. And there was a slight uptick there. We don't really see it as a seasonal trend. I think it's just kind of statistical log of numbers, they tend to go up and down over time, but we don't really see any significant trend there.

Yes. And I'll just comment, some of that is the CIT legacy loans, which are seasoned I think it's 7 years plus and they tend to have much higher delinquencies, given the tail aspect of that portfolio. But overall just add on to what Rick saying, you're going to see for a brand new book of business, you're going to see expected ramp in delinquencies to a projected stabilized level because we underwrite the fixed-rate products and transitional loans in the SBA to add expected loss that kind of ranges between 2% and 3.5% depending upon the product, but because of the newness of the vintage, you're going to see a ramp in delinquencies, probably to a stabilized level of around 2% and 2.5% over a 3-year period.

Thanks very much for taking my questions.

And we'll take our next question from Steve Delaney with JMP Securities.

Good morning and congratulations on a strong first year. You guys did write at $1 billion in your core SBC and SBA loans in 2017. I'm curious if you've set a goal that you could share with us for 2018 and which product line do you think has the most growth potential for you this year? Thanks.

Yes. I hesitate to be too specific with the numbers, other than we expect fairly strong growth. There's not going to be 60% year-over-year as it was last year, but maybe a longer range, half of that growth percentage. We see across the Board, on the SBA side, it will grow a lot more, because we are starting from a lower base. Recall, we really started -- restarted the origination network back in the fourth quarter of 2016 and we did $40 some million that year. $120 million, $130 million this year, and it will be north of $200 million, we expect for the 2018.

On the SBC side, slow growth in that, but certainly growth over the 2017 levels of $869 million. It should be well north of $1 billion. And then within that, we will see where it goes between -- Freddie makes up the largest component of that and then the rest between the bridge and the fixed-rate product.

Okay, that's helpful, Rick. Thank you. I noticed you did a joint venture on a loan pool that you acquired. Can you talk a little bit about how that transaction came together? And is it possible that the party that you worked with, is there future opportunities to work together?

Yes, this is debt transaction. Basically all of the small balance commercial acquisitions are managed through the waterfall trading desk. We bought I think it's roughly $5 billion, total SBC assets top 3 in the US. So we're pretty well connected, if you will, to the FDIC, the market, the community banks. We work with various brokerage firms that have us practice in working with depositories and on M&A context. So in short, this was a bank failure, one of the rare few that have occurred in the last couple of years, that we worked on with another private-equity fund. We've bid together, utilizing the same special service area, we both did split up the due diligence and we're successfully -- successful bidder on the pool, it's located in the Midwest.

And we bid that to roughly 14% expected ROE. At ROE, we've already experienced some liquidations there that are more favorable than what we had budgeted. But that's a very a typical bid. And yes, we would likely continue to work with that private-equity partner to source other similar opportunities.

So, Tom, I take it the FDIC was the seller?

Correct. This was a...

Okay. Alright, great, thank you. That's good color. And then lastly, one -- just -- go ahead.

I was going to -- a little more color. We have about 25% ownership piece of that pool.

Got it. So your $54 million is 25%?

Correct.

Okay, got it. Thank you, Rick. And just one final thing, I just noticed in your Freddie Mac loan sales that it looks like the gain on sale margin was up to 4.5% in the fourth quarter. Could you just comment on why it was above average and where you might expect it to be on average going forward in 2018? That will be my last question. Thanks.

That gain percentage, that's based on the equity in that segment, not the loan sales.

I see, I'm sorry.

The loan sales -- they've remained fairly stable. And that was a more of a volume on loan sales, but on average they're running about 1.5% or so.

Got it. Okay, yes. I didn't understand that that was the margin on the equity, not on the actual UPP of the loans. Thank you for your comments.

And we'll take our next question from Scott Valentin with Compass Point Research.

Good morning, everyone. Thanks for taking my question. Just regard to dividend. I know you declared the first quarter of $0.37. And I guess I was just wondering how to think about the dividend going forward, if we think about 10% ROE target, which I know you guys are just over I think 9%, yet a 100 basis point negative carry on the corporate debt, so that would put you over 10% call and you still have asset sensitivity, which you'll benefit from rising rates. And then lower tax rate going forward, I think you guys should benefit a little bit there.

So if we assume 10% kind of ROE for 2018 and your book value finished at -- you guys have adjusted book, I think $16.69 is what you put out there, but $16.75 is GAAP book. I mean is it fair to assume kind of a $1.68 kind of earnings power for the portfolio? And then on top of that, if that's the right way to think about it, how should we think about the dividend payout? And you guys in the past had said about 100% payout ratio. I'm just wondering how to reconcile the ROE with the dividend with the earnings? Thanks.

Yes, thanks Scott. I'll let you do your own -- you need to redo your own math on what the EPS might be for 2018. But as it turns to the -- as it relates to the dividends, last quarter we paid out a little bit more depending on whether it was core net income $0.05 to $0.10 more than our EPS was. And so I think we did discuss at the Board level, I think it'll be a quarter-to-quarter decision. I think, maybe a little gun shy about raising the dividend this quarter. We're going to see how the first quarter goes, and probably revisit the topic, I would say.

Our goal, as you say is to payout close to 100% of certainly of core earnings and taxable earnings. So as we see how the quarter evolves and as these strategies play out, I think there is an opportunity there, but just didn't want to do at this particular quarter.

Okay, fair enough. And then just on the 10% ROE targeted, is that still kind of the target going forward? Or was that changed at all in light of changes in market conditions?

That's still our goal.

Okay, and then just on the tax rate, I know you guys, it was much lower this quarter. I think in the past, you've been about 9% effective tax rate payer, and with the new corporate tax reform, we're using about a 5.5% rate going forward. Is that still -- is that a fair way to look at it or is it -- it can be different number going forward?

Yes, I think that's reasonable. It's probably going to be within a band there around that level. We've done a lot of financial restructuring to reduce that tax rate and did it I think pretty effectively. And then obviously with the tax reform, that cut down the bill as well. So I think you're in the range.

Okay, thanks. And one final question. I know you did $40 million of corporate debt issuance in January, just wondering how much capacity you guys think you have left, and then what the leverage goal is. I think you're at 2.7% in the slide, just wondering what you could see that going up to?

In terms of capacity, cash is spongeable, so you can't really track every dollar-in and dollar-out. We've spent a portion of the $40 million. One thing I'd point out is we did see some drag in the third and fourth quarter. Recall that we raised $180 million last summer between end of June and middle of August. Just the nature of our business, as Tom alluded to earlier, it goes out gradually with originations or acquisitions, it's tough to deploy that all in one slug. We have now deployed all of that. So the $40 million, while we haven't deployed it all yet, we have deployed some of it. That's a much lower on a percentage basis of kind of available liquidity, that's a much smaller piece, and that would be our goal going forward to raise capital in smaller slugs unless obviously, if we can raise equity, that's a different story. But in terms on the debt side, we would raise it in smaller slugs and therefore be less dilutive on an ongoing basis. What was the second part of your question, Scott?

Just on the total, you guys I think have issued -- was it $255 million? I'm just wondering, in terms of total corporate debt outstanding, how much capacity is left? I know you mentioned smaller chunks of it, $50 million of capacity left and then following that question was the leverage, target leverage.

Yes. In terms of buying power, the remaining capacity we're going to have was probably support about $150 million of acquisitions. Not to say we're going to do all that tomorrow, but that gives us the capacity going forward. On the leverage target, we're up -- the total we tried to keep our recourse leverage around 1.5 to 1, and you can see on the chart on 15, we've been pretty good at that so far. That's probably going to creep up a little bit, now that we've added this $300 million or so of recourse debt. But never, I don't think it would ever go over 2 to 1 unless we're just -- depends on where we are on the securitization cycle. Like if securitization is closing today, we had $165 million of loans, we sold bonds of $150 million, so generated cash of about $12 million to $13 million versus where we were on our warehouse lines, but that will convert $150 million recourse debt to non-recourse debt, and the match funded and the interest rates sensitivity and all that. So that's always going to be our model.

So depending on, I mean might the recourse go up higher than 2 to 1, if we have 3 securitizations coming in the next month, it could, but on average, it should be in this range. The total recourse, little bit different because as we do these securitizations that adds to that total recourse numbers. So certainly sometime this year, we're going to be at 3 to 1. I don't think we would have won this year, but keep in mind that as long as we keep our views to keep the recourse part around 1.5 to 1, we are okay with the match funded leverage, because that's just our model.

Obviously, if and when we raise capital, that will bring those numbers down a bit, but at this point, we're comfortable with the ranges that we have now.

And we'll take our next question from Tim Hayes with B. Riley FBR.

Hey guys, congrats on capping off a really strong year. Obviously, growth seems to be in focus for 2018. Do you just, you talked about hiring some loan officers to support that growth. And do you have any expectations of how expenses will trend this year compared to last?

I'll just on the comment on the loan officers. The business putting aside the Baton Rouge, GMFS, the residential lending business because they have 20-year-plus history, is very efficient in terms of operating ratio. Turning to the two businesses that we have, the very -- when we add loan officers, we look at how much their volume is and the NIM acquisition, the additional NIM that they will generate in our financial model. And right now, we could probably with the existing infrastructure in terms of closing, underwriting in the case of the SBA business to loan servicing, we could probably increase our volume by 35% to 40% without a significant increase in OpEx. So that's what Rick's point about topline. Ideally, you'll see a reduction -- sequential reduction in the OpEx ratio as we add, new loan officers to the existing fixed costs support base in terms of underwriting and closing.

A good example of that is the SBA business in New Jersey. If you recall, that was the purchase of CIT's business portfolio which -- and the servicing staff, which because they had shut down in 2010, their originations. So we rehired in 2016, in '17 we rehired, put it place a very strong production oriented senior management team and they are now executing the business plan. But basically that's a good example of where you will see a reduction in the OpEx ratio based on the fact that you have a lot of support and servicing staff with no origination.

And so yes, but we're very, very cognizant of managing our OpEx ratio. And our new COO is working with Rick and financial team to rationalize that, as we ramp the origination business. But yes, this definitely where we think of it as, if you're a loan officer in for example the SBA business, you should be at least doing $5 million to $10 million a year in SBA originations, which obviously generates significant net interest margin and that business gains on sale in the secondary markets.

Got it. That's helpful. Thank you. And then as it relates to the buyback program, how do you prioritize buybacks versus asset growth with your stock currently trading at 90% of book value, right now, especially as kind of valuation has improved decent bit since just over the course of a week, which is probably when the Board looked to approve the program?

Okay. Yes. When we talked about it a week or two ago at the Board meeting, the stock was trading about a dollars or less than where it is now. So frankly there is probably more of an appetite to repurchase stock at those levels, because they're more accretive obviously. We do have some equity compensation plans that we need to fund. They won't be paid out for a couple of years, but we will purchase stock in the open market to satisfy those, because we're a believer that the stock will go up over time. So it's a good buy now for us. And we're working with our advisers on the timing of those purchases. Just in general, I can't give away the parameters, but just in general we'll be more aggressive when the stock is more of a discount obviously. And it's a fine line between retaining -- we're somewhat capital constrained, but we do realize the benefit of supporting the stock price and purchasing shares, but it is a kind of a double-edged sword between preserving that capital for growth going forward and supporting the stock price in the short term.

We'll take our next question from Raj Patel with Farallon.

Hi guys, few questions. One question on just the turn over of assets. If you think about the whole long-term assets or the gross assets, how much of that gets retained each year, and then you redeploy just thinking about if interest rates are at least 10-year up 150 basis points from mid-16 to now? And I'm trying to translate that into where that 10% ROE target should move just naturally as the book turns over.

I'll explain one comment on the duration of the assets, and let Rick comment on the impact of ROE, but if you look at our book of assets they are relatively long duration. The SBA, new really rigid SBA loans have a duration of 5 years, 5.5 years. The Freddie Mac has a duration of probably 4.5 years or 5 years. SBC small balance commercial fixed product is probably in that same range 4 years or 5 years. The shorter duration assets that require reinvestment are the asset acquired loans. Those have a duration of about maybe 2 years, and this is the one I think that people may look at Sutherland and our rate capitalization businesses. One of our silos, which is important to us is our transitional loan business. That business turns over very quickly. The duration there is about a year and a half. And if you have -- most of the larger REITs are focused almost exclusively on that obviously a much larger balanced market. So that has, there you see in that business right now, lot of repayments and spread compression. So, longer way of saying that if you think of it as the duration of our equity based on the weighting of the net equity invested in each of those silos, since about maybe 25%, 30% is in the short duration, the transitional loan in the acquisition business, we tend to have -- don't have the issue of having a significant redeployment of capital. I mean, on a gross basis, we have roughly, I think it's 2 point, $2.2 billion. So if I had to assign a constant prepayment rate or the amortization rates, so that probably in the area of around 15% per year.

Okay. So 15% of that, so maybe half of the equity gets turned over. And naturally, if rates go up, maybe half of that flows through, if spreads stay the same?

Yes. That's correct. But I think you're reinvesting in higher rates, but I think the more important point in terms of looking at the impact of rising short rates by that we mean LIBOR or Prime. The SBA loans are based off of Prime rates. The most of the small balance commercial loans that are floating, transitional based off LIBOR. But short rates rise, then more of the impact is really on the amount of equity funding the current book as opposed to reinvestment.

Got it. Okay. And then you mentioned, I might have missed this, you've 2 upcoming securitizations in addition to the one that's already priced that's closing today. Is that right?

That's right. We do.

Okay. And what is your expectation of the benefit, if you get, what you expect on spreads versus the warehouse, or the warehouses?

We've been running kind of between 50 basis point and 100 basis points cheaper in general. And then generally, a little bit higher advance rate as well.

Yes, maybe 5 point to 8 point on the advance rate.

Okay, so that's good, that's in addition to kind of what we get from having less drag from the cash, just more efficient financing in the short term?

More efficient, obviously non-recourse.

Okay. And then can you comment just specifically, I think I might have been confused from the last quarter call. How much drag do you actually expect from all the fund raisings? I know you've spent the money from last year and have spent some of the $40 million. But the comment on drag of 100 bps in Q4, what's your expectation of that kind a number in Q1?

It should be dramatically less. Through the first quarter -- earlier, in the first quarter we spent all of the last year's offerings. And now as I mentioned just, it is a much smaller increment. I would think it should be less than 50 basis points in terms of drag. And on top of that, we will be deploy, kind of get the benefit from the earnings stream from the funds that we redeployed earlier in the year.

Does it actually -- so you're saying less than 50 bps on the new fund raise, with the old fund raise should be accretive at this point, not a drag?

Correct.

Okay. Alright, great. Thank you guys very much. Look forward to you guys getting to your target.

And we'll take our next question from [Robert Mast], private investor.

Hi Tom and Rick, as you know, I've been an investor in Sutherland I guess from before you even began, and I've observed a transition where I think and I want to just get confirmation of my statement. I think you began as a trading firm dealing with the secondary market. And then your morphed into a mortgage company, which you focused as you were trying to go public. And from what I hear and what I see, you seem now do have actually gone back into the secondary market, at least initially? Is that correct?

Yes, I think that's a fair characterization. Our view is as a public company, the company has more franchise value with a captive originator and adaptive of deal flows opposed to a trading company. We did step back from the acquisition business really just due to lack of capital and our desire to grow that origination franchise. So 2 things has happened. One, the franchise now has grown to the point we are kind of stand-alone and is producing real good volumes for us. And we've been able to raise some debt capital to allow us to take advantage of those acquisition opportunities.

We've seen those opportunities throughout the time, we just didn't have the capital to take advantage of those. And recently we have by virtue of being a public company. One of the I guess the benefits that we thought would happen as a public company, but I think it's exceeding our expectations is our ability to raise debt capital at reasonable rates as compared to where we were as a private company. So the benefit of that is we have been able to step back into the acquisition side of the business. I think originations will still be our focus and our primary source of assets, but with the additional capital, we're able to take advantage of both sources.

Robert, we appreciate your continued support over all time. The one thing I would point out is the way to think about your question on more macro basis. You got to take where we are in the credit cycle. When we started out obviously, the community banks were -- they're failing and we were buying assets, just like we did back in the RTC days, Resolution Trust Corporation days in the '80s and '90s. So where we are, we're now 8 years, 9 years into the cycle, and there is only a handful of non-banks in our space, non-bank finance companies that are direct lenders. So it's just natural that we would start to reallocate equity to the origination opportunity, because there is less of the acquisitions available.

That being said, if the economy turns, then we would start to focus more on acquiring loans, private and originating loans, because that's where we have the highest ROE. The key point is that with our capital base in our franchise, we have the flexibility to pivot and reallocate capital based on where we are in the credit cycle. That's how -- you've watch the evolution over the last -- since the crisis of the strategy.

Yes, Tom, I think it's great. At this point in time, you've established what I consider to be a major foundation in the SBC market and the ability to service it. And from what I've seen in the past, when you were able to acquire in the secondary market, you are able to get ROIs that were much better than the origination market. So I am happy to see that you're back into it. Am I correct on that?

If that's the case, looking forward, it's amazing to me that a stock that is backed by such a broad portfolio of relatively small loans is yielding 10% currently and that's based on just acquisition business. And going forward I would think that would be get a higher ROI if we have a foundation that's 10% and were acquiring other mortgages like 13% to 14%. When do you expect the dividend not only to be secure, but to have a good growth potential?

Well, that is certainly our plan.

I mean, from an investor's point of view, it seems like the stock is way undervalued, which of course, is why you would want to buy some of this, especially when it gets down in the $13 range. Am I missing something with regards to the security of the dividend going forward? What risk are we dealing with here?

No, I don't think you're missing anything. I think you're on point. $13, we agree, well undervalued. And that's why we put in the buyback program that we did. We are taking advantage of opportunities, both on the originations and the acquisitions. Our whole goal is to get our ROE up to double-digits. We believe, time will tell, assuming we get there, we believe if we're at a double-digit ROE, where our peer group is around 8.5% or 9% ROE, that we should trade in line or above the peer group. Right? Now we're trading a little bit below, we're still relatively new company. We still only got like 4 quarters as a public company, showing a track record. Next quarter, we will be having two months from now, so we'll see how it goes. But we agree with your thesis.

Well, as a final comment, thank you for all your help and keep up the good work. And I'm looking forward to the ROI improving as you buy more in the acquisition market and hopefully that market hasn't dried up.

Those opportunities are there. It's really just the question of having the capital to support them.

It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

We appreciate everybody's continued support and look forward to our next quarter's earnings call.

And that concludes today's conference. Thank you for your participation, you may now disconnect.