Ready Capital Corp (RC) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Ready Capital Corporation's Second Quarter 2021 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Andrew Ahlborn, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, and thanks to those of you on the call for joining us this morning.

Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation to or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2021 earnings release and our supplemental information.

By now, everyone should have access to our second quarter 2021 earnings release and the supplemental information, both of which can be found in the Investors Section of the Ready Capital website.

In addition to Tom and myself, we are also joined by Adam Zausmer, our Chief Credit Officer; and John Moshier, President, SBA Lending, on today's call.

I will now turn it over to Chief Executive Officer, Tom Capasse.

Thanks, Andrew. Good morning, and thanks for joining our second quarter earnings call.

Before jumping into commentary, I would like to welcome John Moshier, President of Ready Capital's Small Business Administration, or SBA lending business, to today's call. Over subsequent quarters, we will introduce various leaders within the organization who will share their thoughts and expertise on their operating segments. Given the current performance of our SBA business, no better place to start than with John.

Ready Capital's differentiated investment strategy continues to produce quality earnings as all operating segments normalized post COVID. The quarterly results reflect post-COVID loan demand resurgence in our existing lending channels, expansion, into new and complementary markets, deployment of sale proceeds from substantially all Anworth assets, and lower funding costs from accretive capital markets transactions. The linear economic recovery supports sustainable loan demand in our core small balance commercial, or SBC, and small business markets well into 2022. Credit metrics also remained stable post expiration of COVID support measures.

Building off a record first quarter, our SBC Lending segment grew 17% quarter-over-quarter, originating a record $1.1 billion with increased volume across all loan products. This volume increase is indicative of Ready Capital's differentiated product offering as a leading nonbank capital provider for SBC property owners, life cycle financing from heavy transitional to stabilized agency and conventional products. Additionally, we remain focused on lower beta CRE sectors, evident in our second quarter production remaining concentrated in cash flow in multifamily, which accounted for 87% of volume.

All 4 SBC segments provided strong contributions. First, transitional loan origination posted a record $807 million across 47 loans. The segment is benefiting from post-COVID demand by strong sponsors looking to either acquire or reposition previously performing -- underperforming assets. Relevant metrics on the quarter's originations include an average loan size of $15 million, spread of LIBOR plus 375 and a LIBOR floor of 25 basis points. Given current CLO execution, we expect retained yields to be in the mid-teens. The current money-up pipeline for transitional loans is $355 million.

Second, our fixed-rate lending activities rebounded for the first time since COVID across both our structured fixed-rate loan and CMBS products. In total, we originated $53 million of fixed-rate products but have a growing pipeline that is currently $170 million money-up. Before the end of the year, we're contemplating a $250 million to $300 million CMBS transaction, which will generate additional gain on sale income. Relevant metrics include a weighted average coupon of 5% and LTV of 64%.

Third, in our Freddie Mac small balance loan program, demand for multifamily housing drove record originations of $240 million in the quarter. Increased demand was bolstered by attractive rates, which are 3% in top-tier markets, with Freddie being especially aggressive on our SBL product as it qualifies for the 50% FHFA affordability mandate. Based on our current expectations, we expect our annual Freddie Mac production to be 20% higher than 2020, and evident in our $118 million money-up pipeline.

Finally, on the acquisition side, we're starting to see opportunities and have a current pipeline of $1.3 billion and $192 million in closing. These acquisitions accelerate the redeployment of the inward capital have levered yields in the mid-teens and are immediately accretive to ROE.

With that, I'll turn it over to John to discuss our SBA business.

Thanks, Tom.

Pent-up post-COVID small business demand for capital and human capital and technology investments we have made in our SBA business paid dividends in the second quarter. Originations in the quarter were $146 million, a record for our business, and 190% growth from last quarter's volume. Volume was driven by increased demand from reopening small businesses and less conventional credit supply as bank senior loan officer survey showed lagging cyclical easing of credit guidelines. Based on our year-to-date 7(a) authorizations, we now rank as the #1 nonbank and #7 overall in the SBA lending industry nationwide.

In addition to record volumes, secondary market premiums for the guaranteed loan remained attractive and provided a premium of 13.15% net for the quarter. Elevated premiums were driven by high demand for guaranteed floating rate SBA pool, period returns to the other floating rate guaranteed investments and historic low prepayment fees.

We are taking several measures to capture 7(a) market share, including the following. First, human capital. We continue to hire top SBA talent, adding 34 staff in the last 3 quarters. Moreover, with PPP flooring more banks into SBA lending, we feel it prudent to hire entry-level college students to train to take advantage of the expertise in the industry to build the future leaders in our organization.

Second, marketing. In the first quarter, we hired a senior-level marketing executive to develop custom programs specifically targeting various segments of the SBA 7(a) market, both broad-based and small business verticals, such as our FedEx program. Additionally, we hired an affinity executive to continue to build strategic alliances with larger referral partners to continue to build the pipeline and generate new relationships. We have originated $30 million year-to-date through our affinity channels with expectations to grow affinity volume to $100 million in 2021.

And third, technology. We have made enhancements to our front-end origination systems designed to enhance the client experience and build efficiencies in the process. Further, we continue to partner with our Fintech affiliate, Knight Capital, following up to successful Prepayment Protection Program, or PPP portal, with the rollout of a 7(a) small balance loan program. This program supplements our large loan 7(a) volume by targeting loans under $350,000 with expedited underwriting using credit score.

Through second quarter, we have originated $3 million of small loans with a target annual volume of $30 million for 2021 and target annual run rate of $100 million.

I want to say that as an organization, we are proud of our efforts in PPP through COVID. We concluded round 2 of the program by originating $2.2 billion in loans, which supported 72,000 businesses nationwide. Our focus on mom-and-pop businesses throughout the program aligns perfectly with our belief that small businesses are the backbone to our economy. The results of PPP have broadened industry participation in the SBA lending and future small business demand, particularly as it relates to Internet-enabled credit access.

The disruption with the pandemic with small businesses has proven that SBA lending will be a needed solution to help main street businesses obtain capital to expand and grow their businesses. Because Ready Capital is so quick to meet the needs directly coming out of the recent pandemic with PPP, we are well positioned to mine in lead generation a list of over 100,000 PPP borrowers and numerous potential affinity partners to grow our 7(a) volume.

We look forward to continuing relationships with these borrowers, and we'll continue to expand our capabilities to help small businesses finance their ambitions.

With that, I will turn it back to Tom.

Thanks, John.

In our residential mortgage business, originations remained elevated at $1.1 billion, but as expected, cyclical margin compression resulted in the quarterly margins declining 85 basis points, averaging 107 basis points. During the quarter, purchase volume reverted to historical run rates of 56% of total production. GMFS' focus on purchase origination channels will blunt the decline in refi volume, but the FHFA's recent removal of the 50 basis point adverse market fee will prolong the refi boom.

Additionally, a high retention rate of 28% aided the growth of our servicing asset to over $10 billion in balance with a low pool WACC of 3.5%. We expect volumes to remain around $1 billion for the third quarter with reductions in the fourth quarter due to seasonality of potential rate increases.

Now in terms of the portfolio, loans held for investment grew $680 million to $5.2 billion and remained highly diversified across 4,500 loans with an average loan balance of only $1.2 million. Unlike our peers, we have little single-asset concentration risk, with the largest loan representing under 2% of the gross portfolio. Performance in the portfolio, inclusive of our Freddie Mac loans, remained stable with 60-day-plus delinquencies under 2.5% and credit metrics continuing to be attractive with an average LTV of 66%.

Now turning to our corporate development in terms of bolt-on acquisition of the new products, we're making great strides in these efforts. We announced last week the acquisition of Red Stone Company to expand our multifamily agency origination business. We welcome the Red Stone team to the Ready Capital family as a natural addition to our existing agency channels.

Red Stone is a Freddie Mac-licensed multifamily servicer with over $4.2 billion of originations since its formation in 2002. Their primary focus is providing construction and permanent financing for the preservation and construction of affordable housing nationwide through the use of tax-exempt bonds. The business generates recurring revenue primarily through origination and servicing fees. We believe that under the Ready Capital umbrella, Red Stone is positioned to not only maintain its market leadership but expand its reach and position in the space. Red Stone will also further Ready Capital's ESG focus on affordable housing.

In terms of new products in our acquisition segment, we continue to leverage the global investment sourcing of our external manager, Waterfall. New sector initiatives include $100 million allocation to a Waterfall lower middle market CRE equity funds on which Ready Capital shares in the GP promote, $75 million housing lot loans in the U.S., $50 million flow commitment for housing construction loans in the U.K. and a $25 million flow commitment for retail manufactured housing loans to park operators. These new sector allocations serve as beta sites for potential future program rollout to continue to diversify our core SBC investment strategy.

So in terms of the stability and outlook of earnings, as we move ahead, we continue to grow core earnings with a combination of net interest margin from post-COVID capital redeployment in our SBC CRE segment, supplemented by continued earnings strength in our government-sponsored gain-on-sale businesses. In addition to the earnings from these 2 core segments, increased acquisition activity and recognition of PPP income will drive attractive returns over the next few quarters.

We believe these collective tailwinds will more than offset a reduction in residential mortgage banking revenue as the industry normalizes. Our business model continues to demonstrate the competitive advantage of our embedded operating companies as well as the diversity of our entry points into small balance commercial lending.

With that, I'll turn it over to Andrew to discuss the financials.

Thank you, Tom, and good morning, everybody.

GAAP earnings and distributable earnings per share were $0.38 and $0.52, respectively, for the quarter. Distributable earnings of $41.4 million represents a 68% growth from the prior quarter. For the fifth consecutive quarter, distributable earnings have both exceeded our targeted 10% return and covered our dividend.

The earnings profile is reflective of the reemergence of our multifaceted business in the post-COVID economic climate, the growth in our loan and servicing portfolios, the recognition of PPP earnings and the redeployment of capital from the Anworth merger. Additionally, the revenue profile of the company continues to normalize, with 62% contribution from stable interest income and servicing revenue in the quarter.

Net income attributable to PPP totaled $9.8 million or $0.14 per share. The additional earnings from PPP were partially offset by 15% of the balance sheet allocated to assets from legacy mergers with lower yields than our core assets as well as increased investments in marketing, technology and human capital. The assets from legacy acquisitions are in the process of being repositioned, and the reinvestment of the capital is expected to be accretive to the current earnings profile.

Net interest income before the provision for loan losses increased 111% to $47.6 million in the quarter. The increase was driven by a 25% increase in the loan portfolio where the weighted average coupon remained stable at 5.1%, the inclusion of $17.6 million in PPP net interest and the reduction in average funding costs, 30 basis points to 3.3%. Additionally, increased production in our SBA, Freddie Mac and residential businesses resulted in servicing asset that grew to over $12.9 billion in service loans, resulting in a 23% increase in servicing revenue to $13.4 million.

Gain on sale revenue grew 121% to $23.7 million due to increased production in both the SBA and Freddie Mac SBL operations. In the quarter, we sold $102 million of SBA loans compared to $36 million in the first quarter at average premiums of 13%. Likewise, Freddie Mac SBL sales rose 8.5% to $181 million, with premiums averaging 169 basis points.

Revenue from residential mortgage banking was off 41% to $10.7 million. As anticipated, these changes were due to an 85 basis point decline in average margin, which normalized to 93 basis points at the end of the quarter. We expect production and margin levels to remain similar in the third quarter. In the quarter, net additions to the MSR were offset by a $4.7 million valuation decline due to movements in CPR assumptions. We believe the MSR to have significant embedded value due to the lower WACC and increased balance.

Additional income statement items of note include a $4.2 million increase in income from joint venture as our CRE equity investments moved through the execution of business plans and a $6.1 million increase in operating expenses due to increased employee compensation accruals, increased dollars allocated to marketing and technology efforts and a $3.7 million expense related to PPP production.

On the balance sheet, key items included efforts to reposition the Anworth assets, growth in our loan and servicing portfolios, several capital markets transactions and the inclusion of increased PPP assets. To start, we successfully liquidated $374 million of agency RMBS securities in the quarter which generated approximately $25 million in liquidity for reinvestment in our core businesses.

At quarter end, the remaining Anworth assets included $168 million of RMBS securities, $84 million of residential loans and $26 million of REO, all of which are expected to be liquidated over the next 2 quarters. These assets were supported by $171 million of debt and $106 million of equity at quarter end.

PPP assets grew to $2.3 billion and are financed through the PPPLF. The assets are held net of a $95 million discount, which represents unrecognized fees that will be accreted into income over the next few quarters. We also expect to receive 65 basis points on the gross value of the PPP loans, which is the difference between the 100 basis point rate on the loan and the 35 basis point cost of funds on the PPPLF. In addition, we booked R&D reserves of $3.7 million on PPP assets to account for the remaining uncertainty in the program.

On the right side of the balance sheet, we continue to focus on maintaining appropriate recourse leverage ratios and reducing our cost of funds. To start, we completed our tenth securitization of acquired loans. The deal securitized $233 million of assets, had an advance rate of 80% and a weighted average cost of funds of 160 basis points. Next, we closed a new $500 million warehouse facilities that support origination and acquisition activities across all CRE products. And finally, we successfully refinanced the Anworth preferred securities with a new $115 million offering at 6.5%, reducing cost 162 basis points.

Additionally, we expect to price our sixth CRE CLO this week at advance rates in the mid-80s and weighted average spreads of sold bonds 10 basis points inside our previous execution. Looking forward, we are pursuing means to refinance-out existing parts of the capital stack to lower costs and extend duration.

With that, I'll turn it back over to Tom.

Thanks, Andrew.

Ready Capital's differentiated strategy and diversified model continues to deliver superior returns for our investors. The continued efforts to increase our scale, capture market share and expand our entry points into the small balance commercial sector will serve shareholders well into the future.

With that, we'll open the line for questions.

(Operator Instructions) Our first question, from the line of Crispin Love with Piper Sandler.

The one acquisition pipeline looks to have roughly doubled sequentially and is -- that's definitely the highest that I've seen it. Can you speak to some of the loan acquisition opportunities you're seeing in the market? And then -- and what's driving that significantly higher pipeline?

Yes. There's really 2 factors. Well, one factor is -- it accounts for the majority of it, which is that as forbearance and eviction and other COVID measures are starting to roll off, we're starting to see a lot of banks address the problems directly in terms of their portfolios. And most of what we're seeing is scratch and dent, not GFC-type excess leverage. So we're definitely seeing a number of especially regional and community banks looking to offload CRE risk in targeting a ratio of under 250% of Tier 1 capital.

So that's the bulk of it. And then as we mentioned, we also are diversifying our portfolio into new assets -- new asset classes like the U.K. housing construction and the CRE equity. So that accounts for the balance of it.

Okay, great. That's helpful. And then just one on PPP. On the balance sheet, I think there's still about $2.2 billion of PPP loans. How many quarters do you estimate that it should take for those loans to run off the balance sheet? And then just a reminder, what's the additional PPP income that you expect to realize over the next several quarters?

Crispin, our best guess is that, that balance will run off over 2 to 4 quarters. If you look at our round 1 production, it took about a year for the majority of those loans to be forgiven. And then as you look at the income profile, there's still $95 million of unrecognized fee income that will flow through interest income over that time period, in addition to the carry of the asset, which is 65 basis points.

So the recognition in terms of quarter-over-quarter recognition is going to be a little choppy in that the recognition of that discount will be really based on velocity of forgiveness. But we do expect that to play out sometime over the next 2 to 4 quarters.

Our next question is from Christopher Nolan with Ladenburg Thalman.

Tom, is the $0.42 dividend the new base dividend going forward?

Andrew, do you want to touch on that?

I think the Board will continue to evaluate the increased earnings from our core businesses, absent PPP, in addition to the recognition of PPP income in setting that dividend. I don't want to speak for them, but I would expect, based on the current profile that the $0.42 dividend is stable in the near term.

Okay. And given that, that implies an 11% expected return. Is that the new baseline we should look at rather than the 10% target?

Yes. Certainly, over the next few quarters with PPP, I would say, 11% is a base. When you add in $95 million plus of income plus the carry on PPP loans, in addition to a core business that is certainly trending towards that $0.40 range, I would say that 11% is probably the baseline for the time being. And as PPP runs off, I think what you'll see is that runway really provides the path to the growth in our core businesses that we've been talking about.

Our next question is from the line of Tim Hayes with BTIG.

Congrats on a nice quarter.

My first question, just on capital transactions. You highlighted the sixth CRE CLO you're in the market with, potentially a CMBS transaction -- fixed-rate CMBS transaction at year-end. You also have $180 million of 7.5% senior notes coming due early next year.

Just curious -- kind of maybe a 2-part question here. Just when you think you'll look to address those notes and how you might do so and if you feel the need to hold on to some excess liquidity to address -- or just hold on to it until those notes are addressed. And then if there's any other transactions that you might be entertaining, I would love to hear your thoughts.

Yes. In terms of the senior secured, we are exploring all options to sort of take advantage of what is an attractive market for issuers. What that looks like, I think we're still exploring, but it could be using securities we have in the past, such as baby bonds, maybe a refinance of the senior secured. But also potentially looking at newer avenues for us, like a term loan or a high-yield deal. So that is something I would expect to see from us sooner rather than later.

And then in terms of broader capital markets activities, as I said, we are pricing the sixth CRE CLO this week. Before year-end, I do expect we'll do a seventh deal, plus the CMBS deal Tom described, and then potentially also doing an acquired deal depending on the pipeline. So I think we'll be busy over the remaining 4 months or so of the year.

Yes, it sounds like it. Okay. That's helpful. And then you mentioned -- I think Tom mentioned on this call, but you spent some time on the last call talking about the opportunity in Europe and doing some more lending there. Can you just talk about the resources you have there, the offices and what they've been -- do you have boots on the ground there originating loans already?

I'm just trying to get a feel for the kind of the infrastructure and the resources you have to source small balance commercial loans in Europe right now and what that opportunity looks like for you.

Yes. The external manager has about 25, 30 staff in offices in London, Dublin and Spain. There's about over $1 billion of net assets, probably a couple of billion of gross assets in loans and structured credit. So that team has deeply -- has the ability to source a number of flow programs with bridge and small balance lenders in those markets.

Most recently, we committed to housing construction loans in the U.K. Previously, we had a deal and currently have a flow program in Ireland with a company called Origin. And so we're going to look to continue to expand those relationships. But we do have boots on the ground, asset managers, originators that source these -- and document these transactions. And also, they're fully hedged in the spot market.

Okay. So how does the gross ROE on the -- I guess, those flow program loans compare to what you're originating here?

On an ROE basis is about 150 basis points higher ROE after the swap cost. It's just -- it's a lot less competitive there. There's a lot of money in Europe that's been chasing since the GFC NPLs. There's not a lot of money doing reperforming or providing liquidity for the sponsors to buy these properties that are coming out of workouts. So that -- we see a niche there, and we're going to look to continue to capitalize on that.

Got it. Okay, that's helpful. And then just my last question. Just on the Red Stone acquisition, can you maybe just give us more of a feel for how meaningful this is for you. I understand wanting to go more affordable. That's probably the right thing to do given the new administration change at the FHFA and what their agenda might look like.

But how meaningful is this for you from like an equity and from an earnings standpoint? Does it meaningfully accelerate your originations in kind of the agency multifamily space? I'm just trying to get a feel for what this means for you.

Yes. Maybe there's 2 answers to that question. Adam, briefly, maybe you can just discuss the business strategy in terms of how it fits with our existing Freddie and the LIHTC. And then Andrew, just touch on the earnings contribution.

Yes, sure. This is Adam Zausmer. Yes, I mean, so Red Stone, they're certainly a very strong LIHTC originator, right? They've been around since 2002. They're a market leader in the space. We've spent substantial time with the team and they're highly experienced in the space, right? They're a Freddie Mac-licensed servicer, so that syncs up very well with our product line. They also have very strong JV partners.

From a collateral perspective at Ready Capital, right, multifamily is definitely a space that we're extremely focused on, given evolving environment. There's significant pent-up demand for affordable housing right across the United States, and properties that Red Stone's involved in often have lengthy wait lists. And there's also a nominal impact from events, such as the pandemic, as a majority of the rent are subsidized and cash flow stable.

This is certainly a new low-risk product for Ready Capital that enhances the diversification from a credit perspective and income stream. And this team is going to continue to operate as is with a strong pipeline and significant government support for facilitating affordable housing projects. So again, it syncs up extremely well with our investment strategy.

And then in terms of the balance sheet, roughly $70 million in equity upfront with some earn-out components over time. And in terms of pretax net income expectation, roughly $10 million in '22 with growth from there.

Our next question is from Stephen Laws with Raymond James.

Andrew as a follow-up to an earlier question on the EAP income, I think $95 million we expect, I guess, over that balance runs off 2 to 4 years -- sorry, 2 to 4 quarters. Is there any deferred costs that we net out of that? Or how do we think about how much of that drops to the bottom line?

Yes. The majority of that will drop to the bottom of the line. The upfront costs to produce the PPP loans are embedded in that discount and have been captured already. With that being said, there will be some ancillary variable costs related to forgiveness processing over the period, but pretty minimal.

Right. So very high margins there. I appreciate that.

I wanted to ask for a little more color on the residential banking. Margins, looks like the deck 107 for the quarter but leveled off at 93 at quarter end. And in the prepared remarks, I think you guys said you expect them to be largely flat. But wondering if you could give some color around margins in correspondent retail versus wholesale. Where -- which ones have those experienced the most pressure, and kind of what have you seen in July?

Andrew, do you want to touch on that?

Yes. Certainly, when you look at sort of the trends over the last month in our wholesale and correspondent channels, the compression has been much more pronounced. So at quarter -- and you're seeing margins in the retail channels around 130 basis points compared to something more like 50 basis points in those other 2 channels. So I would expect that to be fairly similar going forward.

Great. And then along that business line, do you guys think you're staffed appropriately or as you look out into a slowing refi environment? How do you intend to manage expenses? Or is everything really variable there, so it will take care of itself?

GMFS, they've been doing this since 1999, and they rank in terms of cost per loan in terms of OpEx, top quartile, being the lowest, the best. And the way they do that is through a significant reliance on qualified outsourced underwriters and closers. So I think we have a relatively higher variable cost structure than other lenders with, obviously, a higher purchase and retail percentage, which provides for a little bit more earnings stability across the rate cycle.

(Operator Instructions) Our next question is from Matthew Howlett with B. Riley.

The balance sheet is growing nice, and I know that net interest income is going to be moving up over the next few quarters. I just want to focus on the margin -- the gains on margins on the multifamily. I think you said the 169 in the Freddie, and the SBA net sale premiums were 13%. Are those normalized levels? Are they running above historical averages? How do we think about the sustainability of those margins longer term?

Yes. Certainly, in the 7(a) space, historically, they've run 10% to 11%, so they're a little elevated. The other thing I will add, as you look at the earnings profile going forward is we have started to sell some percentage of our 7(a) production at lower premiums in an effort to build a higher servicing strip.

And -- so when you look ahead, in general, we've decided for a portion of the assets to sell closer to that historical norm, or that 10% premium, which results higher servicing strip so there is no gain on sale income due to the excess servicing there.

And then in the Freddie Mac space, they've been running right around that 150 basis point mark for quite some time. So maybe a little bit higher in the quarter, but pretty normalized.

So what you're saying is you gave up some of the gain on sale on the SBA this quarter from higher retention of the servicing strip?

Starting in the third quarter.

Starting in the third quarter. Got it. Okay. That will effectively spread out more of those earnings on that segment as it grows?

It will increase the size and the duration of the servicing strip.

Got you. Okay. Good. Okay, and then with the PPP income coming in and you outlined some of the acquisitions and investments you made in the company, the technology, can you just sort of go over -- it looks like you're going to have sort of the boost earnings, at least in the next 4 to 6 quarters.

I mean, what -- how can you allocate -- in terms of raising the dividend, buying back stock or making these investments, what can you tell us in terms of how you think about excess earnings and how that will be allocated or returned to shareholders?

Andrew, do you want to touch on that?

Yes. So as we said in the first quarter, the Board has sort of outlined that the recognition of PPP income will be considered as part of the normalized dividend. What I'll say, though, is the PPP income sits down at our TRS entities, right? So there is the ability to retain some of those earnings in the form of book value appreciation over time.

And so depending upon how taxable income at the end of the year, which is highly dependent on the distribution of those PPP revenue streams up from the TRS, so how that taxable income at the end of the year compares to our dividends paid, there may be a need for a special dividend. But I would say the Board is really considering that income as part of our sort of stable dividend strategy going forward.

Yes. And just to add to what Andrew is saying, one of the flexibilities of our business model -- sorry, our financial structure is as an origination REIT, we have -- the TRS is we have the ability to take excess capital on either in this case, retain and grow book value, or as Andrew said, look at increasing the dividend. It's unlikely, since we're trading at book or higher, that we would buy back shares because that would not be accretive.

Got you. And assuming you're still looking at these Red Stone-type acquisitions, bolt-on acquisitions, is there an update on the pipeline? And I know you mentioned a few of these other programs that you're starting to look at, but anything in terms of a bolt-on acquisition?

Yes. We're continuing to look at a number of opportunities in the -- squarely in the whole SBC space. Some of it is -- could be a migration into -- for example, the housing market is pretty hot right now. And we think that there's a long pathway to at least single-digit HPI in the U.S. and select European markets. So we're looking at the commercial aspects of that, as evidenced by the lot loan transactions we've done in Texas and the housing construction in the U.K.

Our next question is from Jade Rahmani with KBW.

This is Sarah Obaidi on for Jade. My first question is, do you view distributable EPS sustainable at current levels? Or should we expect a moderation in the back half of '21 and in '22?

Yes. I think as you look at the earnings profile in the current quarter, what you see is our core businesses producing income levels at pre-COVID norms, right? And that includes a pretty substantial reduction from our residential sector. And so when you take those levels and you add on the need to flow through $95 million plus of PPP income over that 2 to 4 quarter period, I think it gives you an idea of what that earnings profile looks like.

And my second question is could you please provide an update on credit, what percentage of loans in the CRE portfolio are nonaccrual, and how does that compare with last quarter? And what percentage are 60-day delinquent?

Yes. Sure. This is Adam. On CRE portfolio performance, 60-day delinquencies is 2.8% versus about 1%, pre-pandemic. We feel sub 3% 60 plus is a healthy target in this environment. Certainly seeing stabilization trends across the portfolio, 30-day delinquencies, less than 1%. Less than 1% of the portfolio is under earn today. 85% of expired forbearances remain current. We continue to upgrade our risk scores, including loans that are performing for 3 consecutive months post forbearance.

The nonaccruals today, Andrew, that's the 3%, correct, versus about 2.8% last quarter.

Yes.

And then in comparison on the CRE portfolio, CMBS kind of once had 60-plus delinquency levels, about twice of what Ready Capital is, at around 5%. So our performance remains extremely healthy. And to date, portfolio has experienced 0 loss through the pandemic.

Our next question is from Chris Muller with JMP Securities.

Just a quick one for me. So on the transitional loans, can you just talk about was there a deliberate shift from you guys over the last 2 quarters to originate higher volumes of that? Or was it a shift in the market that, I guess, the demand came to you? And then where do you expect that quarterly origination rate to normalize that? It looks like the pipeline is dropping a little bit but still pretty strong.

Yes. I'll refer to Adam, who's heavily involved on the production side. But as far as the overall bridge market and demand for the bridge product, there's definitely a COVID effect we're seeing, which we think has legs into early 2022. And that's basically the sponsors that have minor increases in vacancy due to the COVID like multifamily -- workforce, multifamily, what have you.

They're electing to do bridge instead of permanent financing to spend on deferred CapEx or planned CapEx that they were going to do anyways to upgrade the property. So there's that, plus there's higher transaction volume with weak sponsors selling the strong sponsors.

But with that, Adam, would you -- what would you comment on in terms of the pipeline, what we're seeing there?

Yes. I mean, Tom, still seeing tremendous activity from our bridge platform. Certainly, the focus, from a credit perspective, is on cleaner deals with high degree of confidence in the business plans. Our sweet spot has really been good cash flow in multifamily and industrial, in attractive markets with limited credit story.

The strategy is mostly due to the stressed environment. As Tom mentioned, selectively executing larger. You see the average balance of our portfolio is going up a bit, so we're selectively executing larger multifamily loans. We're in the market now with a CLO about 90% plus of that portfolio is in the multifamily space. That continues to be an asset class that we like and again, especially in this environment.

Great. And congrats on another strong quarter.

Thanks.

Thank you.

And speakers, we have no further questions at this time. I'll return the call back to you for your closing remarks.

Everybody, we appreciate your time again for this quarter, and look forward to the next quarter's call.

And that does conclude the conference call for today. We thank you all for your participation, and kindly ask that you please disconnect your lines. Have a great day, everyone.