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Ready Capital Corporation (NYSE:RC)
Q4 2019 Earnings Call
Mar 12, 2020, 2:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings. Welcome to Ready Capital Corp.'s fourth-quarter 2019 earnings conference call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to Andrew Ahlborn, chief financial officer.

Thank you. You may begin.

Andrew Ahlborn -- Chief Financial Officer

Thank you, operator, and good morning. 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 risk, uncertainties that could cause actual results to differ materially from what we expect.

Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth-quarter 2019 earnings release and our supplemental information. By now, everyone should have access to our fourth-quarter 2019 earnings release and the supplemental information. Both can be found in the Investors section of the Ready Capital website. I will now turn it over to Tom Capasse, our CEO.

Tom Capasse -- Chief Executive Officer

Thanks, Andrew. Good morning, and thank you for joining our fourth-quarter earnings call. In addition to Andrew, we also have Tom Buttacavoli, our chief investment officer with us today. In light of the recent market volatility, I'll begin with some observations about our business.

First, in regards to our balance sheet, the company is well positioned in terms of both liquidity stress and purchasing power to take advantage of buying opportunities. Today, we have $130 million of cash available borrowing capacity, providing nine times the coverage of our liquidity stress test. The $105 million capital raise we executed in December was prescient in reducing our recourse leverage under two times, thereby improving liquidity risk in volatile markets. Further, as we always do, we continued to evaluate the value of share buybacks versus accretive investment opportunities.

Second, I want to underscore our limited interest rate exposure. The current portfolio is 56% floating rate. The majority of these loans are originated with LIBOR floors and with an average premium to current LIBOR of 80 basis points. In our fixed portfolio, we mitigated our pipeline risk by issuing letters of intent with rate floors equal to the current swap rates plus a spread, currently at 350 basis points.

During warehouse periods, we used interest rate swaps to mitigate significant changes in fixed rate loan fair values as we look to lock in cost of funds. Third, in terms of originations, the rate decline benefits our small balance commercial or SBC business across products. Freddie Mac multifamily rates have declined 75 to 100 basis points year-over-year and with rates as low as 3%, we can compete with banks that based effective floors on deposit funding rates. Our fixed rate pipeline is floored at 4.25%, and even after likely concessions, will now yield a high teens ROE.

With the ability to now offer rates below 4% on select assets, this product will also be more competitive with banks. On our bridge loan inventory targeted for the upcoming $600 million CRE collateralized loan obligation, a weighted average LIBOR floor of 2.2% and a spread of 3.4% will likely absorb any credit spread widening. The current pipeline of new originations has a weighted average LIBOR floor of 1.6%. In our small business administration or SBA segment, we've been monitoring the SBA's response to the coronavirus with a specific focus on supply chain disruption in small businesses.

Although, we have not yet heard any specifics of the plan, certain actions might include a disaster recovery loans to small businesses or additional incentives for lenders such as fee waivers or high loan guarantee percentages as occurred during the prior financial crisis. Regardless, the full faith in credit U.S. guarantee on the SBA 7(a) program assures continued access to the secondary market. The fourth-quarter 2019 acquisition of Knight Capital, which makes working capital advances to small businesses, not only adds incremental net interest margin but with its front-end technology provides a real time edge in assessing the credit performance of this sector.

We are receiving over 1,000 applications daily, which include current and past bank statement activity. Proprietary algorithms using this data enable us to assess changing default risk across the 400-plus small business sectors and geographies. Second, the daily pay nature of these products provide an early indicator of default risk. We currently have not identified material performance deterioration, but believe that this portfolio surveillance tool provides an edge in credit risk management in the current environment in terms of loss mitigation, loan pricing and exposure limits.

In our residential mortgage banking segment, with the decline in the 10-year U.S. treasury to approximately 50 basis points, we are entering unprecedented territory in terms of potential refinancing volume. While the mortgage servicing rights will be negatively impacted year to date through February, we recaptured 35% of refinancing borrowers. The potential increase in first quarter '20 origination volume is evident in a current lock pipeline of $520 million, nearly 50% over the prior record in 2019.

Further, average profit margins increased by 130 basis points in the last two weeks to an all-time high. So in terms of credit risk, we have low relative exposure to sectors impacted by the virus. Hospitality represents less than 7% and restaurants, malls and movie theaters, each represent less than 1% of our gross exposure. We also have no direct exposure to energy, and of our 13% allocation to office, less than 1% is in Houston.

Also in the current stress financing markets, one concerns maturity default on transitional loans, especially in the large balance space. We have held our ground in credit terms, focusing on acquisition financing with fresh equity versus so-called bridge-to-bridge financing and avoiding ground up construction. Most importantly, our underwriting emphasized stabilization of refinancing risk, evident in a stabilized portfolio debt yield of 10.7% and an LTV of 61%. Finally, approximately one-third of our bridge portfolio is multifamily, which benefits from the GSE safety net.

On the offense, our acquisition and special servicing capabilities provides the opportunity to purchase distressed portfolios of transitional loans for which there would be few bidders. Generally, our strategy as a leading senior lender in the SBC sector with a 0.8 correlation to home prices and a portfolio loan to value of 60% leaves Ready Capital defensively positioned for sustaining a strong relative dividend in adverse markets. Now turning to 2019. We ended the year with a strong financial results and are confident about the future, given our growing origination franchises and continued acceptance and progress of Ready Capital of the capital markets.

To highlight a few of our accomplishments, annual origination and acquisition activity in our SBC and SBA loan products grew over 48% to $2.6 billion. Our residential mortgage banking segment experienced record annual origination volumes of $2.1 billion. Our 2019 core return on equity equaled 9.4%. We securitized $1.5 billion of SBC and SBA loans across five transactions and raised an additional $109 million in corporate debt, 30 basis points inside of previous issuances and at seven year, up to seven-year maturities.

Lastly, we continued our efforts to increase liquidity for our shares, ending the year with average daily trading volume three times prior levels and the inclusion of RC in the S&P SmallCap 600 index. Turning to fourth-quarter results. The quarter marked a record for combined SBC and SBA 7(a) originations. SBC originations totaled $526 million, a $60 million quarter-over-quarter growth and a 58% increase over the fourth quarter in 2018.

SBA 7(a) originations reached a record $70 million. Our residential mortgage banking segment originated $586 million of 58% year-over-year growth. Within the SBC origination segment, bridge originations hit a record $305 million, increasing $152 million quarter over quarter. Our fixed rate and Freddie Mac loan volumes were $116 million and $105 million, respectively.

Bridge and fixed-rate SBC loans had a weighted average coupon of 5.1% and a spread of 320 basis points. Additionally, credit metrics of newly originated loans remained sound with average LTVs of 70%, debt service coverage of 1.4 times and debt yield of 6.8%. Gross premiums on Freddie Mac loan sales averaged 2%. Our record SBA 7(a) origination volume represented 46% year-over-year growth and a $22 million increase from the prior quarter.

Average coupon remained stable at prime plus 2.05. Loan sale premiums decreased slightly to 9.8% due to an increase in the average loan size of loans sold in the quarter. We acquired $154 million of SBC loans over eight transactions. These loan pools have a weighted average coupon of 5.4%, a weighted average duration of four years and were priced to a 17% levered yield.

Of note was our entry into the European markets with the acquisition of a $50 million portfolio of transitional loans and our forward floor agreement with the originator located in Ireland. The collateral profile is similar to our existing bridge portfolio with a lack of 7.1%, debt yield of 11.6%, debt service coverage of 1.6 times and a loan to value of 66%. The projected ROE features a yield premium to our U.S. bridge portfolio, and we are actively evaluating further expansion in Europe.

Mortgage banking production decreased $70 million to $586 million in the quarter, primarily due to seasonality and a slight increase in treasuries. Production from our retail channel decreased slightly to 47% and purchase volume remained high at 55%. Turning to our balance sheet and funding strategy. Our focus remains on building a diversified portfolio contributing a growing percentage of stable net interest income.

79% of the quarter's activity was in the form of portfolio loans and increased our total portfolio to $4.1 billion. As we have discussed on prior calls, we look to maintain a well-balanced capital structure with the appropriate mix of recourse and nonrecourse debt. Consistent with this approach, during the quarter, we completed four capital markets transactions. We completed our six fixed-rate transactions stabilize investment loans.

The securitization had a UPB of $430 million, an advance rate of 88% and the AAAs priced at 2.8%. We completed our second securitization of SBA 7 (a) on guaranteed loans. The securitization had a UPB of $131 million, an advance rate of 84% and senior pricing of LIBOR plus 250. In November, we added $52 million to our July issuance of seven-year baby bonds, the issuance priced at 6.1% yield, marking the continued reduction in our corporate funding cost.

Lastly, we successfully raised $105 million in equity capital. Tactically, the secondary achieved the following objectives: it funded our record origination volumes; reduced recourse leverage ratios; increased the liquidity of our shares and expanded our retail shareholder base. I'll now hand it over to Andrew to discuss our financials.

Andrew Ahlborn -- Chief Financial Officer

Thanks, Tom. GAAP and core earnings were $0.43 per share, marking a $0.03 per share increase over Q3. GAAP and core return on stockholders' equity were 10.9%, exceeding our targeted return of 10%. The $2.7 million quarter-over-quarter increase in core earnings was attributable to an increase in reoccurring revenue from net interest income and servicing of $3.9 million, the addition of $2.4 million in revenue from our Knight Capital funding subsidiary and a $700,000 increase in gain on sale revenue.

Additionally, derivatives not designated for hedge accounting had incremental gains of $1.6 million. Offsetting increased revenue was a $4.5 million decline in net mortgage banking activity and a $2.7 million increase in operating expenses, partially due to the inclusion of the Knight Capital operations. Key balance sheet items include the net addition of $280 million in portfolio loans, the addition of $43 million of purchase future receivables from the consolidation of Knight Capital and the securitization of $586 million of SBC and SBA loans. Additionally, the balance sheet reflects the aforementioned issuance of baby bonds and common equity.

With the completion of the SBA's securitization, we are required to include $485 million of guaranteed 7(a) loans previously sold on both the asset side and the liability side of the balance sheet. This gross up does not affect bottom line net income. Recourse leverage decreased from 2.3 times to 1.9 times as a result of two securitizations and the equity issuance. The anticipated completion of our fourth CLO is expected to further reduce recourse leverage by 0.5 times.

Turning to the earnings deck. Slide 3 sets forth key items and the metrics for the quarter. Of note is the dividend coverage, core ROE above 10% and record combined SBC and SBA origination volumes. Adjusted net book value per share dropped $0.04 to $16.12.

Slide 4 provides summary highlights for the year, including a core return on equity of 9.4%, a 50% year-over-year increase in SBC and SBA originations and acquisition activity, and $385 million solid growth in enterprise value. Slide 5 details the composition of RC's return on equity. Core ROE of 10.9% exceeded our target return of 10%. Top line levered returns declined 270 basis points due to the effects of a decrease in leverage and reduced income from mortgage banking activities.

This decline was offset by an increase in realized gains on the sale of SBA and Freddie Mac loans, a recovery in the value of certain derivative positions and a reduction in operating expense ratios. We expect to continue to leverage increased scale to drive top line returns without a substantial increase in fixed operating costs. Slide 6 shows trends in origination volumes quarter over quarter. Details on fourth-quarter originations are included on Slide 7.

Through the end of February, we have originated $290 million in SBC portfolio loans and $70 million in SBC and SBA loans held for sale, both outpacing prior year levels. Our SBC origination segment is summarized on Slide 8. Levered yields in the portfolio remained stable at 12%. This segment, which accounts for 59% of our invested equity, continues to experience low delinquencies and a strong credit profile with average LTVs of 60%.

The current money up pipeline of $493 million will add to the $328 million of closed loans. Slide 9 covers our SBA segment. The increased gross levered yield is due to a $1.8 million increase in loan sale volumes and an increase in leverage due to the completion of our second SBA securitization and a reduction in funding costs. Loan sale premiums declined to 9.8% due to increased loan balances, and delinquencies fell to 3.1%.

Slide 10 shows summary information for the acquired portfolio. Levered yields in the portfolio remained above 12%, while returns from our joint venture investments declined 110 basis points. Our residential mortgage banking segment is highlighted on Slide 11. Production decreased $71 million from Q3 record levels.

Margins also decreased in both channels with a 35 basis point decline in third-party originations and a 10 basis point decline in the retail channel. We saw marginal growth in the servicing portfolio as increased payoffs were offset by retention rates in excess of 30%. Slide 12 is new and shows the composition of our investments by segment and earning asset income contribution by product type. The remaining slides discuss RC's portfolio composition, capital structure, leverage and warehouse facilities.

I would like to touch on the expected effects of CECL on our consolidated financial statements. We expect the initial credit loss reserve to be between 19 and 26 basis points on the outstanding balance of our performing loans. This equates to additional reserves between $7.8 billion and $10.5 million. The CECL reserve will fluctuate quarter over quarter depending on the composition of our portfolio, economic conditions and portfolio growth.

Now I'll turn it over to Tom for some final thoughts before we take questions.

Tom Capasse -- Chief Executive Officer

Thank you, Andrew. We had a record year in many key areas of the business in 2019. We believe the quarterly results and full year demonstrate Ready Capital's ability to effectively originate and deploy capital in an accretive manner across our diverse platform. The current environment notwithstanding and understanding it will have an impact in 2020, we remain confident that we will continue to build on the progress we have made in the past few years to create value for our stakeholders.

With our diversification in terms of both business lines and portfolio risk focused on the defensive niche in the commercial real estate market, we believe we are positioned better than many of our large balance commercial brethren facing a higher beta to a stressed economic environment. We do recognize that at least in the near term, we are in a fluid and uncertain market environment. Given the uncertainty surrounding the coronavirus situation, there are many unknowns as we sit here today. But we do want to provide a couple of thoughts as you work to model our current year results.

In addition to the typical seasonality inherent in our business, there are other factors that could influence our results near term, both headwinds and tailwinds. The headwinds include the risk of the coronavirus tipping the U.S. into a recession with the resulting increase in portfolio defaults for which our portfolio diversification and focus on the SBC sector are risk mitigants. Our related headwind is delayed ability to access the capital markets for and higher incremental cost of securitized and recourse debt, though we note unusual resiliency in the former in the current market.

As for tailwinds, the recent treasury rally favors our gain on sale businesses and the ongoing repricing of risk, a higher incremental ROE on new investments. Finally, the current market underscores the all-weather nature of Ready Cap's business model, lending in bull markets and buying distressed assets in fair markets. We entered 2020 with tremendous competitive momentum and liquidity, which will carry us through this market and beyond. We're excited to build on our success, and we thank you for your time and continued support.

So with that, operator, we'll now open it up for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question is from Tim Hayes with B. Riley FBR. Please proceed with your question.

Tim Hayes -- B. Riley FBR -- Analyst

Hey. Good morning, guys. Congrats on a great quarter and thanks for taking my questions. My first one, Tom, I appreciate the introductory comments on credit.

But if we can just circle back to retail and hospitality exposure in the portfolio. Retail accounts for 17% of total SBC, not including the exposure in the SBA portfolio, where nearly a quarter of that seems pretty vulnerable with restaurants and lodging. How do you see these loans performing over the next several months? I assume there's been no indicators over the past few weeks in such a short time frame, but just a little bit more on expected performance there in a stressed scenario where the outbreak continues to spread throughout the country. And then if you could just maybe touch on the LTVs or any other covenant protection you have that gives you confidence in your basis.

Tom Capasse -- Chief Executive Officer

A good question, Tim. Obviously, given the current market conditions. So just to drill down, if you look at your first question was on the SBA small business loan portfolio. So if you look at Page 13, you'll see that, in the lower right, you'll see that lodging hotels and restaurants is about 20% of the total SBA portfolio.

Secondly, the other thing I'll point out is that the net equity invested in the business, which you could see on Page 5, in terms of the equity allocation to the business is 8%. So the at-risk capital is 1/5 of eight or about, call it, that's about 2%. So that just I want to clarify that upfront. Secondly, No.

2, the President announced last night, a $50 billion SBA package. And to clarify, we're still trying to figure out exactly what all that is. But one thing we are clear, we talked to our trade association this morning. And the large majority of that is for basically making disaster loans at 0% to 3% interest rates to just these types of businesses, lodging, hotel and what have you, that would be directly affected by what we all hope is a temporary disruption in their revenues.

And so these are loans to allow them to pay their operating expenses into essentially a bridge over troubled waters. So those are two mitigants that it's a 2% exposure. And No. 2, there's significant coverage in the industry.

Then, I'm sorry, in terms of the government safety net. So that's the SBA. Your second question, I think, relates to our SBC or small balance commercial portfolio. And in there, that's retailed for just the SBA.

Andrew, so you want to add?

Andrew Ahlborn -- Chief Financial Officer

So Tim, just to clarify what you're asking about the 17% exposure in our portfolio relates to retail in SBC collateral, correct?

Tim Hayes -- B. Riley FBR -- Analyst

Correct.

Andrew Ahlborn -- Chief Financial Officer

OK. And that's on Page 13. So as we've reiterated in the past, our retail is not malls, right? It's the larger ABC class mall. What our retail is exponential small strip stores that I think the average balance is around $1.7 million.

Typical mall, average mall, commercial real estate loan is around $25 million. So these are in small strip locations, which we feel will not be as impacted by the obvious decline in economic activity because they're going to be in that kind of neighborhood. The neighborhood story you go to get the pharmacy or pick up a pizza. So yes, so we have limited big box exposure.

And therefore, we think the impact on our retail will be substantially less than what you'll see obviously in the mall space.

Tom Capasse -- Chief Executive Officer

Yes. The only thing I'll add there is a lot of these loans have GI reserves in them. So there is some cushion embedded in the properties and so.

Tim Hayes -- B. Riley FBR -- Analyst

OK. Good to know. And then if you guys — that's helpful. I appreciate those comments.

And then but if you could maybe give us an overview of the resources you have at waterfall to work out troubled credits or bring, take over the keys, if need be, if defaults materially increase?

Tom Capasse -- Chief Executive Officer

Yes. I think that's defensively, that's one of the benefits that we, as an externally managed REIT by one of the largest structured credit managers globally with a focus on buying distressed assets, in particular, real estate secured assets have. So we have during the last credit crisis, we bought $5 billion of small balance commercial loans. We worked out 6,000 small business and small balance commercial defaulted assets.

So we have in place a system, we call, Wam Cam, Waterfall-controlled Asset Management. It's a wrap technology that enables us to plug and play with special servicers, not just here in the U.S., but in Europe as well. And we have staff in our asset management team, leveraging that technology of about 30 to 35 people to bring to bear. And so we actually, besides just the defensive side of managing the credit risk in our portfolio, we have an enterprise risk management, where we have surveillance across our entire book of business.

Waterfall's gross assets are roughly $13 billion, of which we are $4 billion of that large pie. So I think both in terms of the ability to detect early defaults and then put the appropriate resources with our special servicers onto the potential workout and utilization of that technology, defensively, we're probably better positioned than most of the real estate lenders in our space. And finally, on the offense, we do this as an opportunity to obviously buy other people's problems, the way we did in the last credit crisis.

Tim Hayes -- B. Riley FBR -- Analyst

Right. That makes sense. And I guess, just on that comment there, how has supply been of new SBC loans? When I say new, not new vintage, but just with supply been for SBC loans over the past few weeks, are you seeing more distressed selling? Are you able to pick up these loans at greater discounts? And where is it coming from?

Tom Capasse -- Chief Executive Officer

Well, right now, obviously, before I arguably, the credit cycle is turning. Before the credit cycle turn, most of what we were buying was performing legacy loans out of securitizations or sales of noncore assets by banks. So I think the supply, we had a pretty good year on acquisitions. It was told this year, the past year, it was roughly $700 million.

Andrew Ahlborn -- Chief Financial Officer

But to answer your question, no, I don't think we've begun to see any opportunities to move up to buy distressed loan portfolio.

Tom Capasse -- Chief Executive Officer

Yes. This obviously all happened. We're 30 days into this. So you're going to see, generally speaking, in terms of if you look at the prior credit cycles, it will take about a quarter to two quarters before you see the real distress in the portfolios.

Tim Hayes -- B. Riley FBR -- Analyst

OK. Got it. And then just one more for me, and I'll hop back in the queue. You mentioned highlighting or that you're evaluating buybacks.

I'm just wondering how do you think about the ROE on that investment here versus your core business with the stock trading at a near 30% discount to book and a 13.7% dividend yield?

Andrew Ahlborn -- Chief Financial Officer

Tim, the current plan we have in place at those levels, we think the total accretion of book value is around 100 basis points. So it's a matter of balancing, making sure we have enough liquidity on the balance sheet to sort of weather the uncertainty that we've been experiencing over the last week or two, making sure that we're able to fund, what I'll call, more selective origination opportunities and the obvious accretion of buybacks. So we are going to continue to evaluate that on a daily basis in the context of our pipeline as well as sort of some of the risk management procedures of making sure there's ample liquidity. So it's something we're discussing daily.

And so actually, add one footnote to the prior question on the asset of special servicing. We did hire four asset management specialists in the REIT last quarter to in source some of that or supplement the services provided by the external manager, in particular, with a particular focus on our bridge portfolio.

Tim Hayes -- B. Riley FBR -- Analyst

Thank you.

Operator

Our next question is from Jade Rahmani with KBW. Please proceed.

Jade Rahmani -- KBW -- Analyst

Thank you very much. Just a high-level question. How are you thinking about earnings per share for the coming year? Looking at the consensus, it's, I think, about $1.69, we're estimating $1.59, and we are factoring in the full share count, which will impact the first quarter. So the last few quarters have ranged from $0.37 to as high as $0.43, but that was on a lower share count.

So thinking about the pipeline that you have under way, prospective returns and what's in place, is there some kind of a range or directionally, any guidance you could provide?

Andrew Ahlborn -- Chief Financial Officer

Jade, our goal is our dividend coverage for 2020. I think there's a lot of moving pieces here. Obviously, the current market is causing us to be a little bit more cautious in deploying capital at some of the rates we were over the last few months. With that being said, those businesses of ours that require very little capital, mainly our Freddie Mac product or residential business as well as our SBA platform are all seeing sort of record origination volume.

So you're going to have a lot of, especially in the first quarter, you're going to have a lot of gain on sale revenue offset by what may end up being through March, more tampered originations in terms of balance sheet loans. I also think there is seasonality in the business. If you look historically at how our business has performed, especially in the SBA space, we've seen Q4 be much stronger quarters than Q1 has historically been. So we do believe there's going to be a ramp just based on seasonality.

And I also believe that with the additional equity, which is providing a lot of safety in the balance sheet today, it's also going to take time to deploy that in a prudent manner. So our goal is dividend coverage for the year. We're certainly hopeful that if the opportunities to continue out these growth rates exist and I think we have the capabilities to do that, but that's our goal.

Tom Capasse -- Chief Executive Officer

The only thing I'd add to that, Jade, is, obviously, most companies across the board are pulling guidance. And I will just say a couple one point on our business mix, which will inevitably change depending upon we're at the path of this from an economic standpoint. But in the event that our base case is this tips us into a minor to '92 type recession. And if that happens, in the third and fourth quarter, we're going to be buying more.

We're going to be allocating more of our equity capital to buying stressed assets. We're already seeing one way or concern we have is not so much into our portfolio, but the larger balance bridge, there was a lot of thought in that market, which is now going to come to the surface. And so we've already tightened pricing and pulled back on certain sectors. So the ROEs on incremental loans being made in this environment are going to be probably another 300, 400 basis points higher, but volumes will be lower.

So I think just my point I'm trying to make is, depending upon where we had in terms of the second, third and fourth quarter this year in terms of a recession or no recession, a V recover or U recovery, we're well positioned to reallocate our capital to either buying distressed assets or making loans on a more conservative basis.

Jade Rahmani -- KBW -- Analyst

In terms of the pipeline, I appreciate the numbers you gave in the release about what you've funded so far and what's on hand. But what's the gestation period for that pipeline? And in terms of current market conditions, meaning today, is there a stall in the pipeline, is our deals being pulled from the market or any deals being canceled? I'm starting to hear about CMBS loans that the originators are not sure they could securitize so a few of those have fallen out. What could you say about current market conditions?

Tom Capasse -- Chief Executive Officer

Well, that's a good question. You have to answer that, i.e. by segment, right? Because again, our platforms are unique and that we're in a number of different verticals. So No.

1, in terms of the small balance commercial focusing on the bridge, those deals will more or likely they're now closed but with tighter covenants. And because the competition will be less, ones that we have some concerns on in terms of to step back in that space, you look at the ability for refinancing, both the execution of the business plan and the refinancing. And with respect to that, we're probably tightened up on debt yields, which I'd point out already at 10 point on our existing portfolio are nearly 11% as well as stabilized LTV. So you might have some falls there because of credit tightening, but I think we'll be, most of that will close.

In the Freddie business, it's obviously a boom because of the fact that it's government-sponsored financing. And a lot of these properties are existing assets, less for acquisitions at this point. So that pipeline will increase, and you'll see the same pull-through rate. The fixed-rate portfolio, there will be a follow-up in that pipeline more than the others because of the fact, as you pointed out, that the CMBS market has stalled.

Although, I'd point out, I will make one editorial comment on that. Securitized debt lead us into the last hellhole, it's actually the angel in this current market because deals are still getting done, albeit at significantly wider spreads. But one of the areas that has been affected has been the CMBS market. So there may be some fallout in that pipeline.

And finally, in the SBA pipeline, we expect maybe a 10%, 20% fall out there, mostly in the sectors that are most affected by the virus, which is the lodging, hospitality and what have you. So overall, there'll be a small fallout in those sectors offset by some, I'm sorry, finally, the residential mortgage banking. Obviously, we're in unprecedented territory. Our pipeline there, our lock demand was 5 20.

Yes. 5 20. 50% above our prior peak in the last rate rally in 2019. So I think on balance, the elasticity of fallout for our business in relation to others that are, for example, that a CMBS conduit business with large balance loans, we're hearing they're are pulling about over 50% of the pipeline.

So sorry, it was a long-winded answer, but I just wanted to highlight that by segment.

Jade Rahmani -- KBW -- Analyst

No. That's helpful. And I appreciate the diversity of the business. It's also helpful to see Slide 12 that shows the earnings pickup because I think that it's something that investors have been grappling with.

Just turning to the repo market, are you seeing any margin calls or any changes in how repo lenders are behaving currently?

Tom Capasse -- Chief Executive Officer

Jade, no, we haven't been seeing large margin calls on any of our retained bonds. We did take the steps of extending short-term repo out six months. So any short of repo rolling in the next month, we did extend without a real change in the weighted average cost of those repos. So obviously, a change compared to different terms.

But so we have extended short-term repos out, but no, to answer your question, we have not seen significant margin calls in that book.

Jade Rahmani -- KBW -- Analyst

Thanks very much for taking the questions.

Operator

Our next question is from Stephen Laws with Raymond James. Please proceed.

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning. Can you give us the details on the buyback? What is the remaining authorization in place? I was looking through some filings earlier but couldn't find that.

Andrew Ahlborn -- Chief Financial Officer

Yes. We haven't used it yet. It's $25 million. Now as a follow up...

Stephen Laws -- Raymond James -- Analyst

OK. Go ahead.

Andrew Ahlborn -- Chief Financial Officer

No. Sorry, after you.

Stephen Laws -- Raymond James -- Analyst

No. I was just going to say that to follow-up on the pipeline question that Jade covered, can you maybe talk a little more about the hotel? Or how do you view those loans currently in the pipeline now? You mentioned some better protection or covenants, but are you significantly increasing pricing? Or is it more a draconian rate where you're simply not looking to add exposure in that capacity in the current environment?

Tom Capasse -- Chief Executive Officer

What we've done, our pricing, our chief credit officer and the individual that our President of that business have worked together to essentially implement a plan where we're essentially pulling hotel deals and not quoting them currently in our bridge business in a very limited way on the fixed component. So that's what we're focusing on essentially risk-based pricing by both reducing or eliminating, for the time being, this sector is most exposed to the virus with, if you will, the highest beta to the decline in economic activity. And we're also in our SBA business, where we're limiting restaurant in some of the other asset classes. But as of today, we have 7% in hotels.

I think the average balance of that exposure was around $2 million. So we're very much better positioned, obviously, than some of the large balance REITs, which might have a $150 million bridge financing outstanding to an urban hotel. It's going to be significantly affected by the current market conditions.

Stephen Laws -- Raymond James -- Analyst

Great. Appreciate the color there. And then thinking about the operating expense and I guess, the due diligence side, but travel is being restricted. I realize not domestically, but some companies have limited travel.

How do you guys handle the underwriting process as far as site visits or site checks? Can you do it online or will you — expenses go down with less travel, will expenses go up because you'll have to use third-party people. Can you talk a little bit about how the current environment is going to impact the expense side and the due diligence process?

Tom Capasse -- Chief Executive Officer

It's segment by segment, but where the greatest expense for underwriting is in the small balance commercial space, both with respect to bridge and the fixed and the Freddie. And there, we've developed economies in terms of using third-party firms where appropriate, it's probably about 1/3 of our total underwriting, not on the bridge space on the Freddie Mac and the fixed. So we have those resources available. And then just, again, the practical aspect is that we use local appraisers for these assets.

We have a network of established appraisals, which we track on how their appraisals there in terms of subsequent defaults and loss severity. And we have — recall that we have a staff, we have office in Dallas and New Jersey, but most of our staff is — a lot of it is they work out of their homes or smaller offices. And finally, the only two things I'll add is you could use things like Google Street View, it'll have you to supplement all of it. But at the end of the day, the issue around travel and most of what we do is local.

The people that are appraising the properties around the areas are local. They get in the car, they look at the building, and they're not in communal areas. So I think that's really that's not going to be a major impact on our business, either cost or turn times.

Stephen Laws -- Raymond James -- Analyst

Appreciate the details on that and thank you for taking my questions.

Operator

Our next question is from Crispin Love with Piper Sandler. Please proceed.

Crispin Love -- Piper Sandler -- Analyst

Hi. Thanks for taking my question. So following up on the expense question but I'll ask just a little bit differently. As 2020 is pressured by headwinds related to the coronavirus, which I think we could see over the next couple of quarters.

Are there expense levers that you think you could pull in the next couple of quarters to kind of make up for any shortfall if there is any?

Tom Capasse -- Chief Executive Officer

I mean, certainly, we're going to manage the expense load of the business for both current and expected growth. To be honest, it's hard for us to provide specifics on what that might be, given that just the uncertainty is pretty pronounced. But yes, I think we are always going to manage the business on the expense side for not only current activity, but we need to staff up where our activity is going to be in three, six months. So we'll manage to those expectations as we see the pipeline move around.

Andrew Ahlborn -- Chief Financial Officer

Yes, because it's a variable cost factor in the origination business. To the extent we have distressed assets, we're going to step up on the problem asset, special servicing side, less in origination and in flip-flop if originations pick up. So there is a variable cost component to our operating expenses within the lending and acquisition businesses that we are able to rely on to provide a buffer for a decline in, for example, decline origination volume and a pickup in distressed asset acquisitions.

Crispin Love -- Piper Sandler -- Analyst

OK. And then for the fourth quarter, I think residential mortgage originations saw an 11% sequential decrease, and that's following the record third quarter you guys have. Can you talk about what drove that? Is part of that having to do with you guys are mostly focused on purchase? Or is there any other factors that play there that caused the kind of sequential decrease rather than kind of the overall market?

Andrew Ahlborn -- Chief Financial Officer

I think it was probably mainly driven by rate.

Tom Capasse -- Chief Executive Officer

It was rates driven. Yes.

Crispin Love -- Piper Sandler -- Analyst

OK. We end our...

Tom Capasse -- Chief Executive Officer

Yes. sorry, go ahead.

Crispin Love -- Piper Sandler -- Analyst

No. You go ahead.

Andrew Ahlborn -- Chief Financial Officer

I was just going to say that, historically, our mortgage banking, residential mortgage banking segment and one of — I think one of the most efficient in the industry based on benchmarking that we've done with some consultants. But they tend to follow the 10-year treasury and with a lot less volatility around that because of the fact that they have a bigger focus on purchase than most other than the industry average as a whole.

Crispin Love -- Piper Sandler -- Analyst

OK. And then just one last one for me. So looking at the percent dividend I'm just kind of curious how you're thinking about the $0.40 dividend right now. And if you're confident about covering it in the next quarters.

And I understand there could be a lot of volatility near term. But say if you weren't able to cover for a quarter or two, do you think there could be a risk to cut it even if you feel better longer term?

Tom Capasse -- Chief Executive Officer

That's obviously an interesting question in this environment. I think our board is currently committed to maintaining the current dividend. And we see, again, the ability to pivot from if lending volumes go down, then we can pivot to asset acquisition at probably historically higher yields. If you look across the credit cycle, the ROE is on distressed SBC.

We're in the upper teens, low 20s of the last cycle. So I think that there's no crystal ball, but I think our diversified business model enables us, gives us more confidence in the sustainability of the dividend in a stressed economic environment.

Crispin Love -- Piper Sandler -- Analyst

Guys, thanks for taking my questions.

Operator

Our next question is from Steve Delaney with JMP Securities. Please proceed.

Steve Delaney -- JMP Securities -- Analyst

Thanks for taking the question. Congrats on a strong close to 2019. Tom, you've been around the securitization markets for over 30 years. I think we all expect, not only see spread widening, but possibly even the markets to be frozen for a short period of time.

What are you hearing? What has been or what is your expectation from how your warehouse lenders are going to behave? And how much flexibility do you think they will afford you for the slowdown in loans moving through the pipeline into securitization? Thank you.

Tom Capasse -- Chief Executive Officer

Steve, and yes, we've been around track a couple of times in these months. But this, essentially, this time, because of all of the rules that have been put in place, everything from the bankruptcy code to the capital charges by banks to the way that to the more — since the vocal is more of a service orientation by the larger counterparties on The Street, we see The Street acting incredibly responsible in the current economic environment in terms of margin calls and how they assign marked assets. The securitized debt markets themselves are holding up much more strongly as measured by credit spread widening. I think everybody, in particular, be it the housing market and the safe payment or risk assets in this current sort of sell off.

So on balance as it effects our specific business, given that more benign or comm in the storm in our markets as compared to other markets, in terms of the impact on our business with funding, the fixed-rate product would probably be held in warehouse. And we have long-term warehouse lines for that portion of that vertical in our business. The second one is the bridge portfolio, which relies on the so-called CRE collateralized loan market that...

Steve Delaney -- JMP Securities -- Analyst

CLOs.

Tom Capasse -- Chief Executive Officer

I think last year, that was around $15 billion or so. Obviously, it's going to be a little bit less this year. So that actually double line it was in the market as of today, I'm sorry, yesterday. And we have a deal pending.

And it looks like that deals can get done, but at much wider spreads, but I will point out that we've been doing some analysis on our bridge portfolio, the floors, which currently average around 2%, our LIBOR floor is such that even if we did a deal at wider spreads, and let's say, we just sold the high investment-grade tranches, our ROE is still higher than it was before this market sell off. So in that segment, however, if we decide not to print a deal at wider spreads, we have also have long-term financing in place for that bridge portfolio. And as far as the other asset classes, they are less dependent, right? SBA 7(a), as government guaranteed, we can resell those every, literally every month. And then Freddie Mac, that's warehouse on balance sheet by Freddie.

And so I think given, so I think in short, we're very well-funded across the board, even our relatively small Irish portfolio is funded little under a long-term facility with a large European bank. So I think as far as our approach to these markets, we're very conservative on leverage and we go into this crisis much better positioned, I would say, than some of some of the other mortgage REITs out there that are more dependent on market-sensitive liabilities.

Steve Delaney -- JMP Securities -- Analyst

Great. That's very helpful color. Thank you, Tom. And one final one, just if you will indulge me as a former public company CFO.

The question about the dividend. One of the strongest comments to me that you made in this call was the increasing opportunities from a somewhat distressed market and you want to be able to be in a position to be liquid, be able to play offense. Just the thought, as that evolves, and I know we've got to watch it. But on the dividend that you've already commented on, would it make sense at some point to convert part of your dividend to a stock dividend instead of cash, which meets the REIT distribution rules that allows you to retain cash to go after 15% to 20% ROE-type opportunities in the short term and then communicating to the shareholders that we think we can do a better job with your money here and this unique opportunity.

Just a final thought there.

Tom Capasse -- Chief Executive Officer

See, that's very, very astute, and we have considered that. Obviously, with the sell-off across the board in the ETF REIT indices, we're no exception, obviously. The one that does enable us to grow book value to reinvest at cyclically high ROEs. Again, in the last cycle, we bought $5 billion with realized IRRs in the upper teens, low 20s.

So the one caveat, the one offset to that is the obvious solution that occurs by issuing shares below book at the margin. But that is something that we would consider in terms at a point in the cycle where the ROEs in the business are highest, that's a very accretive way to boost book value and reinvest it much higher ROEs.

Steve Delaney -- JMP Securities -- Analyst

Thanks for the comments. Thank you.

Operator

Our next question is from Christopher Nolan with Ladenburg Thalmann. Please proceed.

Chris Nolan -- Ladenburg Thalmann -- Analyst

Tom, how are you thinking about leverage, higher, lower or same 2.0 level going forward?

Tom Capasse -- Chief Executive Officer

So current leverage is right around that to a level, we think the CLO, depending on when that gets done, we'll reduce that by half a turn. But it's going to be a sort of the continuous cycle of levering and delevering on a recourse basis to that 2.0 number. I don't think we're really comfortable going much higher than that 2.0 number. And that's part of the reason for the additional capital we raised in December.

Chris Nolan -- Ladenburg Thalmann -- Analyst

Great. And in the use of capital, where do you put buybacks as opposed to making acquisitions relative to use of capital?

Tom Capasse -- Chief Executive Officer

Well, currently, mean that question has to be repriced in every risk, every market in terms of credit spreads and lending margins and reinvestment rates on, let's say, third-party acquisitions. So I'd say, obviously, the hurdle, ROE hurdle has gone up in the current environment versus looking at the accretion from buybacks and the impact, the knock-on impact on liquidity, right? You won't have the — it's a two-edged sword because obviously, buying back at today's distressed price has an immediate impact. It reduces your share count and your equity base. On the flip side, as Steve was referring to previously, have the ability to grow book value and reinvest in the current environment has a long-term impact.

So we tend to view buybacks, in short, to answer your question. We're modeling out a higher ROE and a reinvestment period of probably three years in terms of looking at when we might have. That is something we actively that's in our waterfall of opportunities definitely near the top of the list.

Chris Nolan -- Ladenburg Thalmann -- Analyst

Great. And Tom, finally, in the past, you guys have been guiding for 10% to 11% core ROEs. Given the changing market conditions, how has that changed?

Tom Capasse -- Chief Executive Officer

It's really hard to say as of today. I mean if you told me, we're going into a recession, there's a lot of distressed assets, I would say the other point, the other important thing in these cycles with permanent capital vehicle, the mortgage REITS, in particular, is the availability of capital. Recourse debt and what have you, which is, obviously, would be more constrained in that environment. So it's hard to — if we had incremental availability of capital, and we have a lot of distressed assets, I would say, the ROE would be more in the 11% range.

But on a downside scenario, we have this kind of U recession with limited availability of capital, it would be more in the upper singles to 10% range. So that's how we tend to think about that. The one thing I will add just on where we have the cycle. You're going to see having seen four of these cycles over the last 30 years, what you're going to see with a number of these mortgage REITS, even with the CECL is a lot of credit reserving and knock-on impacts on reducing the dividend because of the typical impact in a cycle.

And I think we are really well positioned versus the other peers because of the diversity of our assets, because of the nature of our sector, the small balance commercial being more akin to housing and the diversification of our asset base.

Chris Nolan -- Ladenburg Thalmann -- Analyst

Great. Thanks for that.

Operator

We have reached the end of the question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Tom Capasse -- Chief Executive Officer

Thank you, everybody. We appreciate your taking the time today in tough markets, and we think we're pretty well positioned to capitalize on it. And we look forward to the next quarterly earnings call.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Andrew Ahlborn -- Chief Financial Officer

Tom Capasse -- Chief Executive Officer

Tim Hayes -- B. Riley FBR -- Analyst

Jade Rahmani -- KBW -- Analyst

Stephen Laws -- Raymond James -- Analyst

Crispin Love -- Piper Sandler -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Chris Nolan -- Ladenburg Thalmann -- Analyst

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