Ready Capital Corp

NYSE:RC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning and welcome to Ready Capital Corporation's Second Quarter 2021 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded.

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

[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 second quarter 2021 earnings release and our supplemental information. By now, everyone should have access to our second quarter 2021 earnings release and the supplemental information. Both 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 Officer and John Moser President SBA lending on today's call.

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

[Tom Capasse, Chief Executive Officer]

Thanks, Andrew. Good morning and thanks for joining our second quarter earnings call. Before jumping into commentary, I would like to welcome John Moser, President Ready Capital Small Business Administration or SBA lending business to today's call. Over subsequent quarters we will introduce various leaders within the organization, who will share their thoughts and expertise on their operating segment given the current performance of our SBA business a better place to start with John.

Ready Capital differentiated investment strategy continues to produce quality earnings at all operating segments normalized post COVID. The quarterly results reflect post COVID loan demand resurgence in our existing lending channels, expansion into new and complementary markets. Deployment of sale proceeds from substantially all Anworth assets and lower funding costs from accretive capital market transactions.

The linear economic recovery support sustainable loan demand in our cars, small balance commercial or SBC and Small Business Markets well into 2022. Credit metrics also remained stable post expiration of COVID support measures. Building off a record first quarter, our SBC lending segment grew 17% quarter-over-quarter originating a record $1.1 billion with increased volume across all loan products. This volume increase is indicative of Ready Capital's differentiated product offering as a leading non-bank capital provider for SBC property owners. Lifecycle financing from heavy transitional to stabilize agency in conventional products.

Additionally, we remain focused on lower data CRE sector evident in our second quarter production remaining concentrated in cash flowing and multifamily which accounted for 87% of volume. All four SBC segments provided strong contributions. First transitional loan origination posted a record $807 million across 47 loans, the segment benefiting from post COVID demand by strong sponsors looking to either acquire our reposition previously underperforming assets. Relevant metrics on the quarter's originations include an average loan size of $15 million spread of LIBOR plus 3.75 and a LIBOR floor of 25 basis points.

Given current CLO execution, we expect retain yields to be in the mid-teens. The current money up pipeline for traditional loans is $355 million. Back in our fixed rate lending activities rebounded for the first time since COVID across both our structured fixed-rate loan and CMBS product. In total we originated $53 million of fixed rate products but have a growing pipeline that is currently $170 million money up.

Before the end of the year, we're contemplating a $250 to $300 million CMBS transaction, which will generate additional gain on sale income. Relevant metrics include weighted average coupon of 5% and LTV of 64%, third in our Freddie Mac small balance loan program. Demand for multifamily housing drove record originations to $240 million in the quarter. Increased demand was bolstered by attractive rates, which are 3% in top tier markets with Freddie being especially aggressive on our SBL product as a qualifies for the 50% FHA affordability mandate. Based on our current expectations we expect our annual Freddie Mac production to be 20% higher than 2020 evident in our $118 million money up pipeline.

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

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

[John Moser]

Thanks, Tom. In the post COVID small business demand for capital and human capital and technology investments we have made in our SBA business pay dividends in the second quarter. Originations in the quarter were $146 million, a record for our business and 190% growth from last quarter's volume. Volume was driven by increased demand from reopening small businesses unless conventional credit supply has Bank Senior Loan Officer survey showed lagging cyclical easing of credit guidelines. Based on our year-to-date 7A authorizations, we now rank as the number one non-bank in number 7 overall in the SBA lending industry nationwide.

In addition to record volumes secondary market premiums for the guaranteed loans remained attractive and provided a premium of 13.15% net for the quarter. Elevated premiums were driven by high demand for guaranteed floating rate. SBA pools returns to the other floating rate guaranteed investments and historic low prepayment speeds. We are taking several measures to capture 7A market share including the following. First human capital, we continue to hire top SBA talent and 34 staff in the last three quarters. Moreover with PPP flooring more banks into SBA lending we feel it prudent to higher entry-level college students to train to take advantage of the expertise in the industry to build the future leaders in our organization.

Second Marketing. In the first quarter, we hired a senior level marketing executive to develop custom programs specifically targeting various segments of the SBA 7A market both broad base and small business verticals such as our FedEx program. Additionally, we hired an affinity executive to continue to build strategic alliances with larger referral partners to continue to build the pipeline and generate new relationships. We have originated $30 million year-to-date through our affinity channels with expectations to grow affinity volume to $00 million in 2021.

And third Technology. We have made enhancements to our front-end origination system designed to enhance the client experience and build efficiencies in the process. Further, we continue to partner with our FinTech Knight Capital following up the successful prepayment protection program or PPP portal with the rollout of 7A small balance loan program. This program supplements our large loan 7A volume by targeting loans under 350,000 with expedite underwriting using credit score. Through second quarter we have originated $3 million, a small loans with a target annual volume of $30 million for 2021 and target annual rate run rate of $100 million.

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

The disruption with the pandemic with small businesses has proven the SBA lending, will be a needed solution to help Main Street businesses to obtain capital to expand and grow their businesses. Because Ready Capital is so quick to meet the needs directly coming out of the recent pandemic with PPP, we are well positioned to mine and lead generation list of over 100,000 PPP borrowers in numerous potential affinity partners to grow our 7A volume. We look forward to continuing relationships with these borrowers and we'll continue to expand our capabilities to help small businesses finance their ambitions.

With that I will turn it back to Tom.

[Tom Capasse, Chief Executive Officer]

Thanks, John. In our residential mortgage business originations remain elevated at $1.1 billion but as expected cyclical margin compression resulted in the quarterly margins declining 85 basis points and averaging 107 basis points. During the quarter, purchase volume reverted to historical run rates of 56% of total production. GMFS is focus on purchase origination channels will blunt the decline in refi volume the FHFA's recent removal of the 50 basis point adverse market fee will prolong the refi boom. Additionally, a high retention rate of 28% aided the growth of our servicing asset to over $10 billion in balance with a low pool WACC of 3.5%. We expect volumes to remain around $1 billion for the third quarter with reductions in the fourth quarter due to seasonality potential rate increases.

Now in terms of the portfolio of loans held for investment grew $680 million to $5.2 billion and remain highly diversified across 4500 loan with an average loan balance of only $1.2 million. Unlike our peers, we have little single asset concentration risk, the largest loan representing under 2% of the gross portfolio. Performance in the portfolio inclusive of our Freddie Mac loans remained stable with 60-day plus delinquencies under 2.5% and credit metrics continuing to be attractive with an average LTV of 66%.

Now turning to our corporate development in terms of bolt-on acquisition, the new products we're making great strides in these efforts. We announced last week, the acquisition of Redstone company to expand our multifamily agency origination business. We welcome the Redstone team to the Ready Capital family as a natural addition to our existing agency channels. Redstone is the Freddie Mac license multifamily servicer with over $4.2 billion of originations. It's formation in 2002. The primary focus is providing construction and permanent financing for the preservation and construction of affordable housing nationwide through the use of tax exempt bonds. The business generates recurring revenue, primarily through origination and servicing fees.

We believe that under the Ready Capital umbrella Redstone position to not only maintain its market leadership, but expand three position in the space. Redstone will also further Ready Capital CSG [ph] focus on affordable housing. In terms of new products in our acquisition segment, we continue to leverage the global investment sourcing of our external manager waterfall. New sector initiatives include a $100 million allocation to a waterfall lower-middle market CRE Equity Fund on which Ready Capital shares and the GP promote.

$75 million housing a lot loans in the US, $50 million flow commitment for housing construction loans in the UK. And a $25 million flow commitment for retail manufactured housing loans to park operators. These new sector allocation serve as beta sites for potential future program rollout to continue to diversify our core SBC investment strategy. In terms of the stability and outlook of earnings as we move ahead, we continue to grow core earnings with a combination of net interest margin from post COVID capital redeployment in our SBC, CRE segment supplemented by continued earnings strength in our government sponsored gain on sale businesses. In addition to the earnings from these two core segments increased acquisition activity and recognition of PPP income will drive attractive returns over the next few quarters.

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

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

[Andrew Ahlborn, Chief Financial Officer]

Thank you, Tom, and good morning everybody. GAAP earnings and distributable earnings per share were $0.38 and $0.52 respectively for the quarter. Distributable earnings of $41.4 million represent a 68% growth from the prior quarter. For the fifth consecutive quarter, distributable earnings have both exceeded our target 10% return and covered our dividend. The earnings profile is reflective of the reemergence of our multifaceted business in the post COVID economic climate the growth in our loan and servicing portfolios, the recognition of PPP earnings and the redeployment of capital from the Anworth merger. Additionally, the revenue profile of the company continues to normalize with 52% contribution from stable interest income and servicing revenue in the quarter.

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

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

Gain on sale revenue grew 121% to $23.7 million due to increased production in both the SBA and Freddie Mac SBL operations. In the quarter, we sold $102 million of SBA loans compared to $36 million in the first quarter at average premiums of 13%, likewise, Freddie Mac SBL sales rose 8.5% to $181 million with premiums averaging 169 basis points. Revenue from residential mortgage banking was up 41% to $10.7 million. As anticipated, these changes were due to an 85 basis point decline in average margin which normalized 93 basis point at the end of the quarter. We expect production and margin levels to remain similar in the third quarter. In the quarter net additions to the MSR were offset by a $4.7 million valuation decline due to movement in CPR assumption.

We believe the MSR to have significant embedded value due to the lower WACC and increased balance. Additional income statement items of note include a $4.2 million increase in income from joint venture as our CRE equity investments, move through the execution of business plans and a $6.1 million increase in operating expenses due to increased employee compensation accruals, increased dollars allocated to marketing and technology efforts and a $3.7 million expense related to PPP production. On the balance sheet key items included efforts to reposition the Anworth assets, growth in our loan and servicing portfolios, several capital markets transactions and the inclusion of increased PPP assets. To start, we successfully liquidated $374 million of agency RMBS securities in the quarter, which generated approximately $25 million in liquidity for reinvestment in our core businesses.

At quarter end, the remaining Anworth assets included a $168 million of RMBS securities, $84 million of residential loans and $26 million of REO, all of which are expected to be liquidated over the next two quarters. These assets were supported by $171 million of debt and $106 million of equity at quarter end. PPP assets grew to $2.3 billion and our finance through the PPP LF. The assets are held net of a $95 million discount which represents unrecognized fees that will be accreted into income over the next few quarters. We also expect to receive 65 basis points on the gross value of the PPP loans, which is the difference between the 100 basis point rate and the loan and the 35 basis point cost of funds on the PPP LF.

In addition, we booked R&D reserves of $3.7 million on PPP assets to account for the remaining uncertainty in the program. On the right side of the balance sheet, we continue to focus on maintaining appropriate recourse leverage ratios and reducing our cost of funds. To start, we completed our 10th securitization of acquired loans. The deal securitize $233 million of assets had an advance rate of 80% and a weighted average cost of funds of 160 basis points. Next, we closed new $500 million warehouse facilities that support our origination and acquisition activities across all CRE product.

And finally, we successfully refinanced the Anworth preferred securities with a new $115 million offering at 6.5%, reducing costs 162 basis points. Additionally, we expect to price our 6th CRE CLO this week and advance rate in the mid '80s and weighted average spreads of sold bonds, 10 basis points inside our previous execution. Looking forward, we are pursuing the into refinance our existing parts of the capital stack to lower costs and extend duration.

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

[Tom Capasse, Chief Executive Officer]

Thanks, Andrew. Ready Capital differentiated strategy in diversified model continues to deliver superior returns for our investors. The continued efforts to increase our scale capture market share and expand our entry points into the small balance commercial sector will serve shareholders well into the future. With that, we'll open the line for questions.

[Operator]

[Operator Instructions] Our first question from the line of Crispin Love with Piper Sandler. Please go ahead.

[Crispin Love, Piper Sandler]

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

[Tom Capasse, Chief Executive Officer]

Yes, there is really two factors. Well, one factor it comes to the majority of it, which is that as forbearance and eviction and other COVID measures are starting to roll off, we're starting to see a lot of banks address the problems directly in terms of their portfolios and most of what we're seeing a scratch and dent not GFC type excess leverage. So we're definitely seeing a number of especially regional and community banks looking to offload CRE risk in targeting a ratio of under 250% of Tier 1 capital. So that's the bulk of it and then as we mentioned, we also are diversifying our portfolio into new asset classes like the UK housing construction and CRE equity so that accounts for the balance of it.

[Crispin Love, Piper Sandler]

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

[Tom Capasse, Chief Executive Officer]

Hey Crispin. So our best guess is that that balance will run off over two to four quarters. If you look at our round one production, it took about a year the majority of those loans to be forgiven. And then as you look at the income profile there is still $95 million of unrecognized fee income that will flow through interest income over that time period. In addition to the carry of the asset which is 65 basis points. The recognition in terms of quarter-over-quarter recognition is going to be a little choppy in that the recognition of that discount will be really based on velocity of forgiveness but we do expect that to play out sometime over the next two to four quarters.

[Crispin Love, Piper Sandler]

Okay, great. That's it for me. Thanks for taking my questions.

[Operator]

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

[Christopher Nolan, Ladenburg Thalmann]

Hey, guys. Tom is the $0.42 dividend is the new base dividend going forward.

[Tom Capasse, Chief Executive Officer]

Andrew, you want to touch on that.

[Andrew Ahlborn, Chief Financial Officer]

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

[Christopher Nolan, Ladenburg Thalmann]

Okay. And given that implied as [ph] 11% expected return is that the new baseline we should look at rather than the 10% target.

[Andrew Ahlborn, Chief Financial Officer]

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

[Christopher Nolan, Ladenburg Thalmann]

Great, that's it from me. Thank you, guys.

[Operator]

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

[Tim Hayes, BTIG]

Hey, good morning guys, congrats on a nice quarter. My first question just on capital transactions you highlighted the sixth CRE CLO in the market with potentially as CNBS transaction fixed rates in that transaction at year-end. You also have a $180 million of 7.5% senior notes coming due early next year. I'm just curious kind of a maybe a two part question here, just when you think you'll look to address those notes and how you might do so and if you feel the need to hold on to some excess liquidity to address or just to hold on to and until those notes are addressed. And then if there is any other transactions that you might be entertaining would love to hear your thoughts?

[Andrew Ahlborn, Chief Financial Officer]

Yes, in terms of the senior secured. We are exploring all options to so to take advantage of what is an attractive market for issuers what that looks like. I think we're still exploring, but it could be using securities we have in the past such as baby bonds and maybe a refinance of the senior secured, but also potentially looking at newer avenues for us like a term loan or how you deal. So that is something I would expect to see from us sooner rather than later and then in terms of broader capital markets activities, as I said we are pricing the 5th CRE CLO this week before year-end. I do expect we'll do a seventh deal, plus the CMBS deal Tom described and then potentially also doing and acquire deal depending on the pipeline. So I think we'll be busy over the, the remaining four months or so of the year.

[Tim Hayes, BTIG]

Yes, it sounds like it. Okay, that's helpful and then you mentioned I think Tom mentioned on this call, we spent some time on the last call talking about the opportunity in Europe and doing some more lending there, can you just talk about the resources you have there. The offices in what they've been, do you have boots on the ground there originating loans already. I'm just going to get a feel for the kind of the infrastructure and the resources you have to source small balance commercial loans in Europe right now and what that opportunity looks like for you?

[Andrew Ahlborn, Chief Financial Officer]

The external manager has about 30 staff in offices in London Dublin in Spain. There's about over 1 billion of net assets, probably a couple of billion of gross assets in loans and structured credit. So that team is deeply. It has the ability to source a number of flow programs with Bridge and small balance lenders in those markets. Most recently we committed to housing construction loans in the UK. Previously we had a deal and currently have a flow program in Ireland with a company called origin and so we are going to look to continue to expand those relationships, but we do have boots on the ground, asset managers, originators that source these document these transactions and also they are fully hedged in the spot market.

[Tim Hayes, BTIG]

Okay. So how does the gross ROE on I guess flow program loans compared to what you're originating here.

[Andrew Ahlborn, Chief Financial Officer]

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

[Tim Hayes, BTIG]

Got it. Okay, that's helpful and then just my last question. Just on the Redstone acquisition, can you maybe just give us more of a feel for how meaningful this is for you. I understand wanting to go more affordable. That's probably the right thing to do given the new administration change of the FHFA's what their agenda might look like, but how meaningful is this for you from, like, an equity and from an earnings standpoint. Does it meaningfully accelerate your originations and end of the agency multifamily space. I'm trying to get a feel for what this means for you?

[Andrew Ahlborn, Chief Financial Officer]

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

[Adam Zausmer, Head-Credit]

Yes, sure. Hi this is Adam Zausmer. I mean so Redstone there is certainly a very strong [indiscernible] originator, right. They've been around since 2002 there are market leader in this space. We've spent substantial time with the team in the highly experienced in this space right that are Freddie Mac licensed servicer so that's syncs up very well with our product line, we some very strong JV partners. From a collateral perspective at Ready Capital right, multifamily is definitely a space that we're extremely focused on giving the involving environment. There is significant tenant demand for affordable housing right across the United States and properties that risk involved in often have lengthy weightless and is also a nominal impact from events such as a pandemic, as a majority of the rent of subsidizing cash flow stable. There is certainly a new low risk products for Ready Capital that enhances the diversification from a credit perspective and income stream and this team is going to continue to operate as it is with the strong pipeline and significant government support for facilitating affordable housing projects. So again it syncs up extremely well with our investment strategy.

[Andrew Ahlborn, Chief Financial Officer]

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

[Tim Hayes, BTIG]

Okay. I appreciate the comments there, Adam and Andrew. I'm going to leave it there. Thanks again, guys.

[Operator]

Our next question is from Stephen Laws with Raymond James. Please go ahead with your question sir.

[Stephen Laws, Raymond James]

Hi, good morning. Andrew follow up an earlier question on the Triple fee income. I think $95 million expect I guess over that balance sheet runs off two to four years; I'm sorry two to four quarters. Is there any deferred costs that we net out of that or how do we think about how much of that drops to the bottom line.

[Andrew Ahlborn, Chief Financial Officer]

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

[Stephen Laws, Raymond James]

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

[Tom Capasse, Chief Executive Officer]

Andrew, you want to touch on that?

[Andrew Ahlborn, Chief Financial Officer]

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

[Stephen Laws, Raymond James]

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

[Tom Capasse, Chief Executive Officer]

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

[Stephen Laws, Raymond James]

Appreciate the comments there. Thanks for your time as well.

[Operator]

Our next question is from Matthew Howlett with the B Riley. Please go ahead.

[Matthew Howlett, B. Riley]

Hey, good morning guys. Thanks for taking my question. Is the balance sheet is growing and I know that net interest income is going to be moving up over the next few quarters. I just want to focus on the margin, the gains on margins on the multifamily like you said was $169 million on the Freddie and the SBA net sale premiums grew 13% although was normalized levels are they running above historical averages. How do we think about the sustainability of those margins in longer term?

[Tom Capasse, Chief Executive Officer]

Yes, certainly in the 7A space. Historically, they have run 10% to 11%. So there are a little elevated. Now the other thing I will add, as you look at the earnings profile going forward is we have started to sell some percentage of our 7A production at lower premiums in an effort to build a higher servicing strip. So when you look ahead in general, all we've decided for a portion of the assets to sell closer to that historical norm or the 10% premium, which results in a higher servicing strip. So there is no gain on sale income due to the excess servicing there and then in the Freddie Mac space. They've been running right around that 150 basis point mark for quite time. So maybe a little bit higher in the quarter but pretty normalized.

[Matthew Howlett, B. Riley]

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

[Tom Capasse, Chief Executive Officer]

Starting in the third quarter.

[Matthew Howlett, B. Riley]

Starting the third quarter. Got it, okay. Does that will effectively spread out more of those earnings on that segment as its grows.

[Tom Capasse, Chief Executive Officer]

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

[Matthew Howlett, B. Riley]

Got it. Okay, good. Okay and then with the PPE income coming and you outlined some of the acquisitions and investments you made in the company technology. Can you sort of go over it looks like you're going to have sort of the boost earnings at least the next four to six quarters. I mean how can you allocate in terms of raising the dividend, buying back stock or making these investments. What can you tell us in terms of how you think about excess earnings and how that will be allocated or return to shareholders.

[Tom Capasse, Chief Executive Officer]

Andrew you want to touch on it.

[Andrew Ahlborn, Chief Financial Officer]

So as we said in the first quarter. The Board has sort of outline that recognition of PPP income. Well be considered as part of that normalized dividend. What I will say though is the PPP income did standard our TRS entities. So there is the ability to retain some of those earnings in the form of book value appreciation over time and so depending upon how taxable income at the end of the year, which is highly dependent on the distribution of those PPP revenue streams, up from the TRS had a taxable income at the end of the year, compares to our dividends paid, there may be a need for a special dividend. But I would say the Board is really considering net income as part of our sort of stable dividend strategy going forward.

[Tom Capasse, Chief Executive Officer]

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

[Matthew Howlett, B. Riley]

Got you. And some of you are still looking at these Redstone type acquisitions, bolt-on acquisitions or is there an update on the pipeline and I know you mentioned a few of these other programs that you're to look at, but anything in terms of bolt-on acquisitions.

[Tom Capasse, Chief Executive Officer]

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

[Matthew Howlett, B. Riley]

Got it, that's interesting. Thanks a lot guys.

[Operator]

Our next question is from Jade Rahmani with KBW. Please go ahead.

[Unidentified Analyst]

Hi, this is Sarah [ph] for Jade. My first question is do you view distributable EPS sustainable at current levels, or should we expect a moderation in the back half of ‘21 and in '22?

[Tom Capasse, Chief Executive Officer]

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

[Unidentified Analyst]

Thank you. And my second question is, could you please provide an update on credit, what percentage of loans in the credit portfolio are non-accrual and how did that compare with last quarter and what percentage or 60-day two implant?

[Adam Zausmer, Head-Credit]

Hi, this is Adam. On CRE portfolio performance 60-day delinquencies is 2.8% versus about 1% pre-pandemic. We feel self 3% 60 plus is a healthy target in this environment. Certainly seeing stabilization trends across the portfolio, a 30-days delinquencies less than 1% of the portfolio under forbearance today. 85% of expired forbearances remain current. We continue to upgrade our risk scores including loans that for better performing for three consecutive months post forbearance. The non-accruals today, Andrew that's, that's the 3% correct versus 2.8% last quarter. And then in comparison on the CRE portfolio CMBS conduit have 60-plus delinquency levels about twice of what Ready Capital is at around 5%. So our performance remains extremely healthy, and to date portfolio has experience zero loss through the pandemic.

[Unidentified Analyst]

That's great. Thanks for taking my question.

[Operator]

Thank you. Our next question is from Chris Muller with JMP Securities. Please go ahead.

[Chris Muller]

Hey guys, thanks for taking the question. Just a quick one from me. So on the transitional loans. Can you just talk about was there a deliberate shift from you guys over the last two quarters to originate higher volumes of that or was it a shift in the market that I guess the demand came to you and then where do you expect that quarterly origination rate to normalize that, it looks like the pipelines dropping a little bit but still pretty strong.

[Tom Capasse, Chief Executive Officer]

Yes. I'll refer to Adam, who is heavily involved on the production side, but as far as the overall market and demand for the Bridge product, there is definitely a COVID effect we're seeing, which we think has legs into early 2022 and that's basically the sponsors that have minor increases in vacancy due to the COVID like workforce multifamily what have you there electing to do Bridge instead of permanent financing to spend on the deferred CapEx or planned CapEx that they were going to do any waste to upgrade the property. So there is that plus there is higher transaction volume with weak sponsor selling the strong sponsors but with that Adam, what would you comment on in terms of the pipeline, what we're seeing there.

[Adam Zausmer, Head-Credit]

Yes, I mean Tom still seeing tremendous activity from our Bridge platform, certainly the focus from a credit perspective on clean of deals with high degree of confidence in the business plans. Our sweet spot has really been good cash flowing multifamily and industrial in attractive markets with limited credit story. This strategy is mostly due to the stress environment as Tom mentioned selectively executing larger you see the average balance of our portfolio is going up, the debt. So we're selectively executing larger multifamily loans. We are in the market now with the CLO about 90% plus of that portfolio is in the multifamily space that continues to be an asset class that we like again especially in this environment.

[Chris Muller]

Great, thanks. And congrats on another strong quarter.

[Operator]

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

[Tom Capasse, Chief Executive Officer]

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

[Operator]

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