Ready Capital Corporation (RC) Q4 2020 Earnings Call Transcript

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Ready Capital Corporation (RC 1.68%)
Q4 2020 Earnings Call
Mar 12, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Ready Capital Corporation Fourth Quarter and Full-Year 2020 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded.

At this time, I will now turn the conference over to Andrew Ahlborn, Chief Financial Officer. Mr. Ahlborn, you may now begin.

Andrew Ahlborn -- Chief Financial Officer

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 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 2020 earnings release and our supplemental information. By now, everyone should have access to our fourth quarter 2020 earnings release and the supplemental information. Both 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 Head of Credit on today's call. Before turning it over to Tom, I would like to point out that beginning this quarter we have changed our non-GAAP earnings measure from core earnings to distributable earnings. This change aligns us with our mortgage REIT peers and with recent SEC guidance. There has been no change in the methodology for calculating our non-GAAP earnings measure.

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

Thomas Capasse -- Chief Executive Officer

Thanks, Andrew. Good morning and thank you for joining our fourth quarter earnings call. 2020 marked the great COVID recession which shocked our commercial real estate debt market. Yet, Ready Capital delivered record results in a recession due to our diversified business model featuring four key aspects. First, earnings. Our resilient distributable earnings comprising stable net interest margin from our $4.2 billion portfolio of small balance commercial, or SBC loans, and our $11.7 billion servicing portfolio supplemented with income from highly profitable government-sponsored gain on sale operations, which have all-weather access to the capital markets. Second, investment strategy. Our dual [Technical Issues] strategy of direct lending and acquisitions enables us to allocate capital efficiently across the economic cycle.

Third, credit. The relative credit strength of our SBC niche versus our large balance peers overlaid with the deep asset management infrastructure is evident in our superior credit metrics at year-end versus our peer group.

Fourth, a conservative approach to leverage. Compared to peers who suffered COVID book value writedowns of 25% to 50% due to forced asset sales, our modest book value decline was limited to CECL reserves and MSR mark-to-market declines. At the height of the pandemic, margin called on our modest exposure to mark-to-market liabilities were met with available liquidity.

Let me highlight significant 2020 accomplishments. For the year, distributable earnings and ROE were $1.82 per share and 12.3%, surpassing our 10% target with a robust 1.4x dividend coverage. Despite the pandemic shut down for over half the year, we originated and acquired $910 million of SBC loans to be held on balance sheet. In our government-sponsored Small Business Administration, or SBA, residential and Freddie Mac gain on sale businesses, we originated $4.9 billion, up 83% year-over-year with additional originations of $2.7 billion of Payment Protection Plan loans, or PPP. We ranked number two among non-bank SBA lenders and climbed to number five in the Freddie Mac small balance loan league table. Despite difficult capital markets, we securitized over $609 million of loans, renewed six credit facilities and managed average recourse leverage to 2.1x. Finally, we continue to find accretive ways to expand and scale our business with the signing of the $350 million Anworth merger.

The foundation of our business is our $4.2 billion portfolio of first lien SBC loans. Unlike our peers, with average loan balances over $100 million, our portfolio is derisked with over 5,400 loans averaging only $800,000. This granularity provides numerous benefits. First, low single asset risk. With our largest loan only 1% of gross exposure. Second, our SBC focus avoids high beta COVID sectors, such as big box retail, large central business district office and hospitality.

Third, the portfolio is more correlated to residential housing than large balance commercial real estate, which benefits from the current strong housing fundamentals. Additionally, our strong credit culture, which emphasizes experienced sponsors, superior markets and low risk collateral types, has held 60-day plus delinquencies at 2.7% versus 6% in the large balance CMBS market. With a portfolio weighted average coupon of 5.4% and a duration of seven years, this is the core of our stable dividend.

The net interest margin from our loan portfolio is supplemented by a growing servicing fee revenue. At year-end, we serviced over $11.7 billion of loans across our residential SBA and Freddie Mac platform with a weighted average servicing fee of 34 basis points across these three products.

Now, as compared to monoline commercial REITs, Ready Capital is truly unique, and that it also owns three government-sponsored lending platforms providing a supplemental gain on sale revenue stream. Each of these businesses owned by the REIT in a taxable REIT subsidiary have unique barriers to entry, command current market values significantly in excess of carrying value and have access to liquidity in stress capital markets. This was evident in 2020 with record earnings across each business.

Our most significant and differentiated platform is our SBA 7(a) lending subsidiary, one of only 14 non-bank small business lending companies licensed by the SBA. Acquired in 2014 from CIT, this business has originated $820 million since inception, including $83 million and $65 million in the third and fourth quarters of 2020, respectively. We continue to grow market share in 2020 rising from 14th to 9th largest 7(a) lender and second non-bank lender. Throughout the pandemic, bilateral support in D.C. for the SBA is evident in three stimulus programs. Two rounds of the Paycheck Protection Program, or PPP, principal and interest support on 7(a) loans and the increase in government guarantee from 75% to 90%. Integration of our Miami-based FinTech unsecured lender with the SBA business provided PPP leadership and rollout of 7(a) small loan program.

PPP originations totaled $2.7 billion in 2020 and totaled in excess of $1 billion in 2021 as of last Friday. The increase to a 90% guarantee through September 30 will add to 2021 7(a) volume with current secondary market premiums averaging 12%. Further, over the last six months, we have added seven Business Development Officers, expanded our capabilities in small loan lending and formed new affinity relationships.

We also continue to expand our Freddie Mac SBL and broader GSE lending operations originating $545 million in 2020. Demand for this product continues to grow due to low rates relative to banks and stable fundamentals in the SBC property market, as rent growth and collections have held up through the pandemic. Additionally, we entered into two agency correspondent agreements in 2020, which allows us to offer a full suite of GSE products. We expect volume to these new programs to experience modest growth as we build out the necessary infrastructure to achieve scale.

It was historic year in residential mortgage originations and GMFS experienced record volume and profitability. In 2020, GMFS originated $4.2 billion at margins averaging 285 basis points, up 100% and 2x versus 2019, respectively. Additionally, we increased the mortgage servicing portfolio balance 17% to $9.5 billion, while lowering the weighted average coupon 9% to 368 basis points. The trend in elevated performance has continued in the new year with over $750 million originated year-to-date.

In 2021, we look to target distributable earnings at or above pre-COVID levels through a number of means. First, the restart of our SBC lending and acquisition activities, which began at the end of the third quarter and reached normalized levels in the first quarter. Through the end of February, we have originated and acquired $600 million, which is 1.5x the volume over the comparable period in 2020. Importantly, as typically occurs on the recessionary upcycle, we have tightened credit metrics focusing on stronger sponsors and lower risk sectors, including multifamily and industrial.

Second, we will continue to expand the earnings contribution of our SBA 7(a) subsidiary from a combination of increased 7(a) volume in conjunction with capitalization on the six-month window for the benefit from this 90% 7(a) guarantee and higher profits in the second round of the PPP program. Through the end of February, we originated $26 million of 7(a) loans. The modest start to the year is primarily driven by our decision to wait on updated 7(a) guidance on the 90% guarantee from the SBA, which became effective February 1. We believe the plan of expanding our BDO and affinity network targeting industry verticals and developing a robust small loan infrastructure will result in increased volume going forward. Meanwhile, we funded over $1 billion of PPP loans through last Friday with the prospects for growth enhanced by the House Small Business Committee yesterday passing a resolution extending PPP through May 31.

Lastly, we expect to continue to scale our business to benefit from operating leverage created over the previous years. This begins with the closing of the Anworth merger. The merger is expected to grow stockholders' equity to $1.1 billion, providing incremental liquidity of $380 million, increased float in our shares by 30% and reduced day one operating expense ratio by approximately 200 basis points. Unlike past mergers, the liquid nature of the Anworth balance sheet provides more flexibility in turning over the portfolio into our core strategies. We expect to do this in a prudent manner best suited for creating value for our shareholders.

I'll now turn it over to Andrew to discuss financial results.

Andrew Ahlborn -- Chief Financial Officer

Thank you, Tom, and good morning, everyone. We closed out a record 2020 with our third consecutive quarter significantly above target returns, with GAAP earnings per share of $0.49 and distributable earnings per share of $0.51. Our distributable earnings for the quarter equate to a 13.3% return on average equity. Distributable earnings for the year were $101.4 million, or 12.3% return on average equity.

As Tom mentioned earlier, our business is structured to provide stable earnings from our loan and servicing portfolios with upside from our gain on sale operating segments. The current quarter's earnings profile continues to highlight these benefits. Net interest income before loss provisions increased 36% quarter-over-quarter to $23.5 million. This increase was driven by the redeployment of $160 million of net capital on $367 million of originations and acquisitions into the loan portfolio, as well as the realization of discounts on pay-offs.

Our total CECL reserve remained at Q3 levels, although there were shifts in the composition of that balance. In the quarter, we released $2.3 million of reserves on loans with clean pay history over the last 12 months. This release was offset by additional reserves of $0.4 million on delinquent loans and $1.9 million of reserves on newly originated loans. Reserves on delinquent loans have been included in our calculation of distributable earnings.

Net mortgage banking revenue continue to provide strong earnings despite a $11.7 million decline in quarter-over-quarter revenue. In the quarter, residential volume remained relatively flat at $1.2 billion but average margins declined 25 basis points to 275 basis points.

Net realized gains from our SBA and Freddie Mac SBL businesses increased 41% to $11.3 million. This increase was driven by a 84% quarter-over-quarter increase in SBA guarantee sales and a 25% increase in Freddie Mac production. SBA CL premiums continue to be high and averaged 12% in the quarter. Given the recent update to a 90% guarantee, we expect the return profile of the SBA business to improve considerably.

Earnings contributions from our servicing portfolio increased $1.3 million to $11.4 million. The increase is due to the addition of $557 million into the servicing asset during the quarter.

Our balance sheet is reflective of both the reemergence of our core lending strategies and the continued focus on maintaining adequate liquidity and leverage levels. In the quarter, our core loan portfolio increased to $4.2 billion, marking a return to portfolio growth after two consecutive quarters of portfolio declines. Performance in the portfolio remained stable with 60-plus-day delinquencies remaining below 2.7%. Forbearance remains low at 2% in the CRE portfolio and deferments in the SBA portfolio remained low at 6.8%. We believe the diversity of this portfolio will continue to deliver superior performance to large balance CRE assets.

We remain focused on liquidity and mark-to-market debt. We currently have $172 million in cash and liquidity and average recourse leverage in the fourth quarter was 2.1 times. Included in our total recourse debt of $1.8 billion at year-end, was $370 million to support our agency lending activities and $450 million of corporate debt. Recently, we priced a $200 million senior unsecured note offering. The five-year note has a coupon of 5.75%, 45 basis points inside of our previous best execution. Additionally, we plan to come to market with the $625 million CLO at the end of the first quarter and are in the final stages of negotiating two new warehouse facilities to fund our investment pipeline. Our future efforts will focus on lowering cost of funds and reducing reliance on mark-to-market leverage.

As we have previously done, we have provided a supplemental earnings deck, which includes summary information on the Company's earnings profile, various operating segments and key financial metrics. Of note is our Company update on Slide 3. The strength of the earnings profile on Slide 6. And the investment activities on Slide 7. We have also included a summary of the Anworth transaction on Slide 20.

I will now turn it over to Tom for closing remarks.

Thomas Capasse -- Chief Executive Officer

Thanks, Andrew. In the four years since we went public via our merger with ZAIS Financial, much has been accomplished. With the pending close of the Anworth merger, we will have doubled the equity base of the Company, originated or acquired over $20 billion of assets, completed 17 securitizations and developed a leading platform in the small balance commercial market. Over this period, our model has delivered 45% total return for our shareholders, which compares favorably to the 26% return from iShares Mortgage Real Estate Capped ETF. We are committed to providing superior returns and looking ahead to 2021 and beyond. And we will continue to benefit from steady revenue stream from the loan and servicing portfolios and alpha [Phonetic] from the opportunities embedded in our government-sponsored lending segments.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. And our first question is coming from the line of Crispin Love with Piper Sandler. Please proceed with your questions.

Crispin Love -- Piper Sandler -- Analyst

Thanks. Good morning. Tom and Andrew, gain on sale margins were under some pressure in the quarter. I think in the presentation you commented around 275 bps. I was wondering can you speak to how margins are trending in the first quarter. And what you would expect in the near- to medium-term with respect to margins? And that's on the resi side.

Thomas Capasse -- Chief Executive Officer

You're talking about the residential mortgage banking segment, correct?

Crispin Love -- Piper Sandler -- Analyst

Exactly, yeah.

Thomas Capasse -- Chief Executive Officer

Yeah. So, I think -- and Andrew, maybe you could comment on the actual quarter-to-date. But generally speaking, with the 50, 60 basis point upward move in the 10-year, we expect, stating the obvious, refi to decline up to 75% this year in the industry, that will be more -- that will be partly offset, though, versus prior cycles by significant purchase demand. So, I think we expect origination volume to decline up to 30% to 40% versus the elevated 2020 levels.

As far as margins, given that decline, you're continuing to see the typical cycle with refi burn out and more availability of staff. So, you'll see a lot more competition on rates. And as a result of that, we expect margins to normalize to more of that 75 basis point to 150 basis point level, you've seen historically by the third quarter of this year. With that said, our GMFS, it tends to be in its own ecosystem and it tends to lag, both in terms of prepays and some of the more competitive price elastic markets.

So, Andrew, I don't know what -- with that kind of macro backdrop, what are you seeing in the trends in the quarter?

Andrew Ahlborn -- Chief Financial Officer

Yeah. I mean, thus far margins have come down probably 25 basis points where they were at year-end. So, certainly, some compression there. I think when we look at the effects of rates in GMFS, it's important to note that the MSR has lost close to $40 million in value over the last, call it, eight quarters. And during that time we've added close to $2 billion into that portfolio. So, I certainly think there is going to be those rates move, some recovery in the value of that asset as well.

Thomas Capasse -- Chief Executive Officer

Yeah. And that's important an differentiating factor, Crispin, some mortgage bankers sell MSRs, don't retain it. We retain MSRs as a hedge against production. And when you have a whipsaw like this in the 10-year, you would expect that to be reflected, as Andrew saying, in this quarter and subsequent quarters in an improved valuation for the MSR book.

Crispin Love -- Piper Sandler -- Analyst

Okay, great. Thank you. That's all helpful. One more from me. So, how should we be thinking about PPP fees? I guess, first, what's remaining from round one that needs to be recognized? And then what would you expect for round two for net fees, does kind of in the ballpark of around $15 million makes sense? And then kind of what -- and over what time frame would you expect those to be realized?

Thomas Capasse -- Chief Executive Officer

Yeah. I'll let Andrew comment on the net income. Just, Andrew, one backdrop, the -- a couple of days ago the House Small Business Committee extended -- or voted to extend 60 days. So that could give us a longer -- the Senate has to approve it, but that will give us a longer -- another two months of potential revenues associated with the program in the round two.

I'm sorry, Andrew, go ahead.

Andrew Ahlborn -- Chief Financial Officer

Yeah. So, Crispin, in terms of round one production there is $10 million left to be recognized. I expect all that to be recognized in the current year. Profitability on round two is going to be, at least on a percentage basis, significantly higher than where we were in round one. And so, my expectation is that, round two revenue is going to be either at or 1.5x where we were in round one. There'll be some differences in how we treat that income because we are carrying those loans on balance sheet through the -- through financing with the PPPLF. So the fees earned there will be a yield adjustment in the loan, recognized over the average life, which is probably under two years. In addition to that, you're going to get the spread from carrying that portfolio. So, I do think PPP round two could have a fairly significant impact on the earnings of the Company over the next, call it, six to eight quarters.

Crispin Love -- Piper Sandler -- Analyst

Okay. And just to clarify, so you were talking about the 1.5 times. You mean 1.5 times on a kind of a like-to-like in originations, right, not as -- because I think you're did something -- like we are expecting to do something like $40 million in round one in fees but you don't necessarily [Speech Overlap]

Andrew Ahlborn -- Chief Financial Officer

I'm talking about a dollar level.

Crispin Love -- Piper Sandler -- Analyst

Okay.

Andrew Ahlborn -- Chief Financial Officer

On a dollar basis. So if we did $40 million in round one, I certainly think round two profitability is going to exceed that.

Crispin Love -- Piper Sandler -- Analyst

Perfect. Thank you. Very helpful.

Operator

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

Timothy Hayes -- BTIG -- Analyst

Hey. Good morning, guys. Congrats on a nice wrap to a challenging year. First question for me, I know you kind of touched on the impact of higher rates on GMFS there. And in your disclosures you talk about, obviously, the impact from higher short-term rates on NIM and it seems like that would actually -- higher one month LIBOR would benefit you there. But just thinking about the higher long-term rate impact, like I said, you mentioned GMFS, but maybe if you could talk about the impact on the broader SBC ecosystem and what that could mean for kind of transaction activity and for your pipeline? And I know the magnitude and linearity of a move makes a big difference, but any comments around that would be helpful.

Thomas Capasse -- Chief Executive Officer

Yeah. It's good question. The largest segment of our origination, where most of the capital is dedicated is the small balance bridge. And we are kind of pivoting a little bit more to multifamily and industrial, for obvious reasons. But the -- what's interesting about -- as compared to the residential credit space, obviously, there is the correlation between NOI and rates in a rising rate environment, it's a bull market and you'll see, in this case, a recovery in the sectors of CRE that we're focused. So, as a result, purchase demand in commercial real estate will come off the bottom. And as a result of that, we are seeing a big -- regardless of the increase in the 10-year, let's say, the 100 -- let's say, we're at 2.5 at year-end, which is Wall Street [Phonetic] forecast, we don't -- we see purchase volume in the CRE space that we focus on kind of that mid-market level, where that -- which drives the need for bridge financing, so that we think that actually will be a neutral impact in terms of rates.

The only one area it may have an incremental is the Freddie Mac small balance, the GSE space, that could impact refi volume there, but nowhere it's near the delta that you have in the residential space. So, I'd say on balance, it's rising rates for us are a net positive because of the fact that our bridge book is floating rate based off LIBOR.

Timothy Hayes -- BTIG -- Analyst

Okay. That's helpful in framing that. I appreciate it. This might be a dumb question here, but I think the wording you guys used in your earnings release about, I guess, I forgot it was 4Q or 1Q origination activity. But was that you acquired or originated a certain amount of small and medium-sized commercial loans. Is that language different than we've used in the past in terms of the medium-sized loans? Are you doing some bigger loans here? Or was it still kind of business as usual for you guys?

Andrew Ahlborn -- Chief Financial Officer

Well, the...

Thomas Capasse -- Chief Executive Officer

Go ahead, Andrew. Sorry.

Andrew Ahlborn -- Chief Financial Officer

Yeah. So the majority of our lending activity in the first quarter has been in the bridge business -- bridge segment. And we have seen some uptick in loan sizes there. Historically, those loans have averaged below $10 million, but we are doing some larger loans in excess of $10 million. So that's really the reasoning for putting in that language.

Thomas Capasse -- Chief Executive Officer

Yeah. And actually, just to be more specific. We are doing some the same size loans, kind of in that $3 million to $25 million. But we're doing it across a number of properties with one sponsor where we cross-collateralize. So, it's still squarely in the kind of that mid-market property value. Again, as compared to the -- much of the larger C-REITs, which are focused on $100 million-plus single property deals.

Timothy Hayes -- BTIG -- Analyst

Right. I guess, my question around that, though is, are you budding up against more of the middle -- traditional middle market players as you get a little bit bigger? And does that impact the kind of the yield you're able -- or coupon you're able to achieve there? Or is there just increased competition as you kind of go higher in size?

Thomas Capasse -- Chief Executive Officer

Actually, Adam, do you want to take it? From your vantage point on the credit side, you're obviously driving the approval of these loans. How would you view the current trends?

Adam Zausmer -- Head of Credit Risk Management

Yeah. I think in terms of the larger loans, certainly, sticking with kind of the highest performing asset classes through COVID, so specifically on the multifamily, industrial and self-storage side. And those tend to be slightly lower rates than we have gotten historically. And that's certainly a competitive sector. But I think the type of transactions that we are doing really enables us to improve our cash flowing bridge portfolio, which really enhances the overall portfolio and keeps us at a good risk profile.

Thomas Capasse -- Chief Executive Officer

Yeah. I'd just add to that. If you look at -- so we're moving to COVID -- less COVID affected sectors with tighter spreads. However, the come back in the CRE CLO market has more than offset any tightening on the lending margin such that the ROEs -- the incremental ROEs, Andrew, are running what, kind of in the 15 zone?

Andrew Ahlborn -- Chief Financial Officer

Yeah. Closer to 20.

Thomas Capasse -- Chief Executive Officer

Okay. Yeah. So they're about 300 basis points to 400 basis points higher than they were pre-COVID due to the up going up in credit quality from the standpoint of the, again, the sector is least affected by COVID.

Timothy Hayes -- BTIG -- Analyst

Got it. That's helpful, because that's what I was trying to get at as if we should be anticipating some type of yield degradation as you -- as competition picks up for the types of assets you're going after in the bridge business, but it sounds like that's more than offset by the financing side of things.

Thomas Capasse -- Chief Executive Officer

Yeah.

Timothy Hayes -- BTIG -- Analyst

And just -- right. And -- but just on your -- sorry, Tom, but just on your warehouse lines, your credit facilities, are you seeing kind of better leverage and lower costs there as well as the bank have to compete with that market? Just wondering if there's some tailwind there as well.

Thomas Capasse -- Chief Executive Officer

Andrew, what are you seeing in terms of the facilities?

Andrew Ahlborn -- Chief Financial Officer

Yeah. I don't think we're seeing significantly lower costs on where we've experienced historically. Although, now, as we mentioned in our remarks, we are seeing opportunities to bring in other lending partners. Right now we're in the midst of negotiating two new warehouse lines we think will be accretive going forward, one is a $500 million facility to fund our core origination activities. And in terms of that are fairly consistent with our existing warehouse lines. And then we are in the midst of finalizing a non-mark-to-market facility to fund our acquisitions business. So we are seeing opportunities to expand the partners who lend to us.

Adam Zausmer -- Head of Credit Risk Management

Yeah. And Andrew, just to add and I'd say that the larger loans, kind of the middle market larger loans that we're doing, the warehouse partners that we have are certainly very interested in these types of asset classes that we're lending in now, given kind of the credit strengths of these assets. So, certainly, seeing some better advanced rates from them and then lower financing costs.

Thomas Capasse -- Chief Executive Officer

And that in turn drives the ROE on the -- incremental ROE and therefore, the NIM attribution to again about 300 basis points, 400 basis points higher than where we were pre-COVID, both lower debt cost and higher advance rate due to the shift in property mix to more lower risk sectors and cash flowing properties.

Timothy Hayes -- BTIG -- Analyst

Got it. That's really helpful, guys. I appreciate it. I'm going to hop back into queue for now. But thanks again for taking my questions this morning call.

Thomas Capasse -- Chief Executive Officer

Sure, Tim.

Operator

Thank you. Our next question is from the line of Steve Delaney with JMP Securities. Please proceed with your questions.

Steven DeLaney -- JMP Securities -- Analyst

Good morning, Tom and Andrew, and congratulations on a truly great year under the circumstances. You mentioned in your Freddie Mac small balance that you had added some correspondent programs. Could you comment on that a little bit? I'm just curious if you're developing partnerships with community banks or independent mortgage brokers to source loans that are broader than your own network. Thanks.

Thomas Capasse -- Chief Executive Officer

Yeah. Actually, Adam, why don't you take that one?

Adam Zausmer -- Head of Credit Risk Management

Yeah, sure. For -- we -- the agency product that we have is the Freddie Mac SBL license. So that's the smaller balance agency loan. To the extent that, our production folks have opportunities that are larger in size, kind of fit the profile of either a Freddie, Fannie type of financing. We're partnering with various lenders that have those licenses, where we send them opportunities, and then the license that they don't have is particularly on the smaller balance side where our specialty is and they send us opportunities. So that's -- it's kind of a back and forth partnership and we kind of feed each other [Speech Overlap]

Steven DeLaney -- JMP Securities -- Analyst

Got it. Okay. So you're accessing the DUS program or the K program simply by working with those licensees to show them loans. And hopefully, there's some reciprocity there, maybe on the small balance side. Is that what I'm hearing?

Adam Zausmer -- Head of Credit Risk Management

Exactly.

Steven DeLaney -- JMP Securities -- Analyst

Okay, great. So I think you...

Adam Zausmer -- Head of Credit Risk Management

Yeah. No, I'm sorry. I was just going to add. And then on our bridge side, it also works well, where we balance opportunities off of our agency partners on the larger balance side that just kind of check out just to make sure that the takeout sizes to an agency financing. So then when our loans kind of stabilize, come to maturity, we then again partner with those agencies -- sorry, we partner with the lenders that have those products and they really become a takeout for our bridge lending.

Steven DeLaney -- JMP Securities -- Analyst

Yeah. Okay. No, that's very helpful, and we'll keep an eye on that. Obviously, great business and limited number of licenses out there. So, definitely important part of what you have. Look, we all know 2020 was the best year ever for resi mortgage. I think what some people are missing, lot of IPOs and lot of volatility in the stocks. Our view is while 2021 is going to come down from 2020, it's probably still going to be the second best year ever for the resi mortgage business. And just to make sure I was clear on your guidance. I think I heard you say, look for volume to be down 30% to 40% year-to-date, and a normalization down from the high-200s to maybe the low-100-plus or whatever by the fourth quarter of next year. Did I get that reasonably accurate?

Thomas Capasse -- Chief Executive Officer

Yes.

Steven DeLaney -- JMP Securities -- Analyst

Okay, good. I will take all that into account. Okay. Thanks. And to pick up on where Tim was -- Tim Hayes a little bit earlier. I think you answered this and my question about the pending, I think Andrew mentioned you've got a CLO financing targeted coming up and you've got over $600 million of recently originated. It sounds like the return profile between the combination of pricing on the loans, and we've seen CLO pricing in terms of execution speed is tight as ever. It sounds like your expectation for the next CLO that the net return on equity could exceed the median or the average within your existing portfolio. Is that an accurate takeaway?

Andrew Ahlborn -- Chief Financial Officer

Yeah. I think that's right, Steve.

Steven DeLaney -- JMP Securities -- Analyst

Okay. All right. Well, thanks -- thank you all for the comments.

Thomas Capasse -- Chief Executive Officer

Sure, Steve.

Operator

Next question is from the line of Stephen Laws with Raymond James. Please proceed with your questions.

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning. Tom, first on the ANH acquisition, when that closes how do we think about capital reallocation? Are we actively or how quickly sell down the MBS portfolio as you think about investment opportunities in other business segments? And as we think about kind of when that's fully done, how does that change the current business mix of given the opportunities you like today?

Thomas Capasse -- Chief Executive Officer

Yeah. I think it's a very -- and Andrew, chime in. But based on our current acquisition and origination forecast in the core SBC business, it looks to be a linear one to two quarter reduction in the MBS portfolio in lock step with funding the origination investment -- net investment in the SBC loans. So, this -- the Anworth merger plus the ability to relever that roughly $300 million-plus of capital provides us with funding for all of our base case originations and acquisition forecast for 2021. That said, there are a number of potential kind of bolt-on acquisitions we're looking at across the -- across our platform more broadly. Recall, the Knight Financial acquisition back in fourth quarter of 2019. So, between the regular way acquisitions and originations, in particular, in the bridge space, where we're seeing a lot of post-COVID demand and these potential smaller bolt-on acquisitions, we think we're going to be able to very quickly redeploy that capital in a one to two quarter time period.

I don't know, Andrew, if you could comment on that?

Andrew Ahlborn -- Chief Financial Officer

I think that's right. I think you will see some movement post-close to get out of some of the more volatile items and to bring their existing leverage more in line with where we have. But outside of that, I think we'll manage the runoff to meet the investment pipeline.

Stephen Laws -- Raymond James -- Analyst

Great. Appreciate the color on that. And, Andrew, to touch on the other operating expenses, down quite a bit in the last four quarters. Is this -- can you give us an idea of a little bit more detail what's in that line item? But also, is this kind of $50 million a year annualized number the right target, or how do we think about this expense going forward?

Andrew Ahlborn -- Chief Financial Officer

Yeah. So the fourth quarter, the movement, a lot of that was due to adjustments in bonus compensation in the residential mortgage banking business. So, although a lot of that adjustment occurred in the fourth quarter, I think the -- as a percentage of profitability, it's more in line with what -- on an annualized basis with what you can expect going forward. So, that reduction was offset by some increases in year-end accruals.

But to answer your second question, yeah, so I think the annual run rate here is more in line with what you can expect in the new year.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks a lot.

Operator

Thank you. Our next question is from the line of Randy Binner with B. Riley FBR. Please proceed with your questions.

Randy Binner -- B. Riley FBR -- Analyst

Hey, thanks. Good morning. I just have a few follow-up questions across the -- what we've covered so far. So, first on the resi origination figure, which you think -- I think you said down 75% on refi versus last year, and then overall down 34%. So that number kind of continues to jump out at me and I just want to understand if that's a comment more toward your book or that the resi origination market overall.

Thomas Capasse -- Chief Executive Officer

I'm sorry, it's the overall. That was just -- I was just quoting an MBA data that we did recently, that said that. And just to be clear, that's not decline in the origination volumes. The shift in this quarter they expect to be go from 70%-ish, 75%-ish last -- same quarter last year down to only 25% or so this quarter. Just to -- so that's percentage of industry originations.

I mean, I think, again, we view the overall decline, obviously, the purchase volume going down very significantly and offset by -- sorry, the refi volume going down significantly, offset by a secular shortage of homes and increase -- therefore, increase in purchase demand, but that net-net will be 30% to 40% in the industry. I would argue that GMFS is in a market, where there's still -- again, it's a lot more it's -- if you look at the CPRs, they're usually about 1 to 2 points slower in the MSR book and the delta on refi is a -- is probably 20%, 30%, less than hot competitive markets like California. So, yeah, anyway, so that we do expect that sort of decline in overall volume tied to a -- again, that's more tied to a view of the tenure being above two at year-end, but -- so that's helpful, that's how we're thinking about it in the context of the broader market and -- but a lower percent of decline in for GMFS.

Randy Binner -- B. Riley FBR -- Analyst

Okay. Understood. That is helpful. And then on -- you mentioned the CLO coming up, just kind of curious if you have a sense of how that might price versus whereas -- if it's possible to, and compare it to where a similar book would have price pre-COVID. I guess, the high level question is, where do you think a CLO can price for your high-quality book now versus pre-COVID, higher or lower?

Thomas Capasse -- Chief Executive Officer

Yeah. Andrew or Adam can -- maybe touch on what you guys are hearing in the current market. But pre-COVID, I think we were at what Andrew, maybe -- on the AAA seniors, AA seniors, we're at L+ 110, 125. Is that right?

Andrew Ahlborn -- Chief Financial Officer

Yeah. It's right.

Thomas Capasse -- Chief Executive Officer

Then it gapped out -- in the dark days of first quarter of last year, the seniors gapped out to like 600 over for the worst trades. Today, Andrew or Adam, I think we're basically at or near pre-COVID types. Is that correct?

Andrew Ahlborn -- Chief Financial Officer

Yeah. I think that's right.

Randy Binner -- B. Riley FBR -- Analyst

Okay. That's helpful. That's good. Just curious, I mean, the market's gotten quite a bit tighter. And then so that's just one data point. But last thing I had was, you mentioned, I think, kind of some origination affinity relationships. But -- and I think those were well described. But then in the opening script, I thought I heard that you had some kind of FinTech activity there inside -- if we could just spend a second on that, if I heard that, right, what is the -- I guess, what's the -- what is that technology play that you use? Because to me, it sounded like the affinity relationships were pretty traditional. But we'd like to hear if there's a technology enabler there?

Thomas Capasse -- Chief Executive Officer

Yeah. The FinTech reference, it relates to the unsecured -- Knight Financial, the unsecured small business lender that we acquired late last year. And they're part of us an ecosystem of the smaller lenders that utilize scoring methodologies. But importantly, they develop portals, which enable a small business power to go online and download documents and go through a scoring program and use -- it use a much less manually intensive origination front-end -- loan origination system and we're able to utilize that product first, with respect to these small loans, which the SBA allows you to use a scorecard on, the scoring methodology, so that obviously, it's custom fit to a technology front-end platform, like what Knight has. So, we've adopted that to roll out a small loan program, which we'll use it for affinity.

And then we're going to do the same program with the large loans, the 7(a) loans, which are more labor-intensive, but we have delegated underwriting authority from, as a preferred lender from the SBA. So, that -- and that can be white labeled to, let's say, a bank, a credit union or what have you. So, those are -- that's how -- that sort of front-end system, both in terms of the -- an online portal and the ability to score and download documents is what we're talking about as opposed to the more traditional method, which is having a BDOs that said -- the Business Development Officers that will then take the referrals and then go through their more traditional loan underwriting process.

Randy Binner -- B. Riley FBR -- Analyst

Understood. Thanks so much.

Operator

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your questions.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Hey, guys. For the ANH acquisition, because of the changes in the interest rate environment, since the deal was announced, any changes in terms of the expectations for accretion to book value or earnings for Ready Capital?

Andrew Ahlborn -- Chief Financial Officer

Yeah. So, ANH's book value from September 30 through December 31 increased slightly. You saw some appreciation in January that was given up in February, but we expect the accretion or dilution to be right around, if not, slightly improved from where we modeled it at September 30.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. And so, a follow-up question. Tom, given your comments in terms of -- excuse me, Andrew's comments in terms of lower expense run rate, what is the expectations in terms of core ROE target for 2021? Thanks.

Thomas Capasse -- Chief Executive Officer

Yeah. I think our view is that, pre-COVID, we were targeting a 10% return on book. I would say that, post-COVID, given the incremental increase in the ROE on the core bridge lending business, coupled with the -- some of the gain on sale businesses continuing to contribute. I think the residential mortgage banking is not going to repeat at 2021, but it will be strong. And clearly, the SBA, with the PPP round two and the -- they've also increased the guarantee amount from 75% to 90% through October 1, that, along with continued strength in the Freddie business, those gain on sale -- that those two will offset sort of decline incrementally in the mortgage banking segment. So that we expect to have ROE target in excess of that 10% that we were targeting pre-COVID.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from the line of Tim Hayes, BTIG. Please proceed with your question.

Timothy Hayes -- BTIG -- Analyst

Hey, guys. Just one more follow-up for me. And I just want to put your last comments in kind of the context of the dividend, which I know is a Board decision. But if you're going to be bigger following the acquisition of Anworth and you're having a higher ROE target than you did before COVID, where your dividend was $0.40. And you're expecting, all these tailwinds to the gain on sale businesses, ex-GMFS and the core bridge business to more than offset, what's going on with GMFS. I'm just trying to understand at what point we might be -- there seems to be very good dividend coverage here. So, at what point, or what would it take for you guys to recommend an increase in the dividend at the current level?

Thomas Capasse -- Chief Executive Officer

Andy, do you want to touch on that?

Andrew Ahlborn -- Chief Financial Officer

Yeah. So, as we said on previous earnings calls, the goal is to first get back to that $0.40 dividend level. I think we're well on our way to that. Again, I can't speak -- it's a Board decision. But in terms of when we get to that level? I think the Board is probably going to look at, how the Anworth's integration goes in combination with, certainly, the expected revenue from PPP round two, which as I said before, could be quite substantial. So, given those fact patterns, a return to normal, I believe could happen quicker than might otherwise have been expected absent [Phonetic] PPP.

Operator

Thank you. We've reached the end of the question-and-answer session. Now, I'll turn the call over to Mr. Thomas Capasse for closing remarks.

Thomas Capasse -- Chief Executive Officer

Yeah. I mean, we appreciate everybody's time and after a tough 2020, and we feel we're strongly positioned for 2021 and I look forward to the next earnings call.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Andrew Ahlborn -- Chief Financial Officer

Thomas Capasse -- Chief Executive Officer

Adam Zausmer -- Head of Credit Risk Management

Crispin Love -- Piper Sandler -- Analyst

Timothy Hayes -- BTIG -- Analyst

Steven DeLaney -- JMP Securities -- Analyst

Stephen Laws -- Raymond James -- Analyst

Randy Binner -- B. Riley FBR -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

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