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Ready Capital Corp
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Good day and welcome to the Sutherland Asset Management Corporation Fourth Quarter and Full-Year 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Rick Herbst, Chief Financial Officer. Please go ahead.
Thanks, Jessie [ph], and good morning, everybody. Thanks for joining us today. Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of all the risks that could impact our future operating results and financial condition.
During the call today, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial statements prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter of 2017 earnings release and the supplemental information that was provided.
By now, we hope everybody have had access to our fourth quarter 2017 earnings release and the supplemental information, both can be found in the Investors section of the Sutherland Web site.
And with that behind us, I'll turn it over to Tom Capasse, our CEO.
Thanks, Rick. We are pleased this morning to discuss our financial results for the fourth quarter and full-year of 2017. We’ve now completed our first full-year as a public company and have made significant progress on our business plan during this period.
In 2017, we successfully executed our strategy to optimize financial leverage with the focus in 2018 on operating leverage. Before turning it over to Rick, to go through with some of the financial results, I would like to touch on a few of the highlights for the quarter and the full-year.
Firstly, GAAP earnings for the quarter were $0.38 per share compared to $0.37 last quarter, representing the third quarter in a row of EPS growth. On a core basis, our earnings were $0.37 per share in the fourth quarter. Of note, our ROE has been about 9% in the last two quarters as we position the balance sheet to improve this metric in 2018.
Secondly, over the last six months that the FED has been raising rates, the values of mortgage REIT has been declining. For example KBW's weekly indices at residential mortgage and commercial mortgage REIT have declined by 18% and 8% over this period. We believe this is due to the perception that most mortgage REITs are negatively impacted in a rising rate environment. This is not the case with Sutherland.
We believe Sutherland is well positioned in a scenario where valuation is diverged between REITs that benefit from rising interest rate and those that are negatively exposed. In a rising rate scenario since our portfolio consists primarily of adjustable rate loans, we should realize an increased net interest margin from rising short rate on the portion of each asset funded with equity.
Rick will provide additional detail on this in a moment, but we estimate 100 basis point rise in LIBOR with increased pre-tax net interest margin per share by $0.12. On a related note, we also expect book value volatility -- expect less book value volatility as only 13% of our gross asset held for investment are subject to mark-to-market movement.
Thirdly, unlike many other loan strategies basically in excess supply over demand for credit at this stage of the economic cycle, the investment capacity in our small balanced commercial mortgage space remains robust. This is evident in a record quarterly loan additions of $376 million comprising 68% new originations and 32% small balanced commercial acquisitions. This trend has continued to forge [ph] here as we’ve acquired another $143 million of SBC asset and our loan origination pipelines remain strong.
Fourthly, we raised $255 million of recourse debt in the first three quarters of 2017, which was deployed throughout the second half of 2017 and into the early part of this year. These funds were primarily deployed in originations which occurred sequentially versus the bullet issuance of debt. This resulted in some cash drag which had an approximate 100 basis point reduction in core ROE in the fourth quarter.
At the end of January, we reissued a [indiscernible] offering of our notes to capitalize on the SBC acquisition opportunities. Of note, this tranche priced at 6.5%, a 400 basis point reduction from the first tranche priced just one year-ago. Throughout the year we've seen interest cost of our recourse to non-recourse debt facilities consistently declined, reflecting sequential tightening in off spread.
Fifthly, robust capital markets demand for our securitized products is evident in serial spread tightening. For example, our $465 million small balance commercial fixed-rate product securitization priced last week at a record high 6 basis point under AAA rated large commercial mortgage-backed securities or CMBS versus 65 basis points over the AAA CMBS for our first offering in 2014.
In the next two quarters we expect to close the transitional loan CLO and the legacy asset, CMBS transaction to avail ourselves with current favorable market conditions. We expect these securitizations will result in lower cost of funds, higher advance rates, and the conversion of recourse debt to non-recourse match funded debt. Sutherland and its predecessor private fund is an established issuer in the CMBS market having now completed 14 offering totaling over $2 billion since 2011.
Sixth -- number, six, one note on credit. To review, Sutherland retains all servicing on originated loans with the servicing of delinquent loans executed by Sutherland and Waterfall Asset Managers. Credit metrics on all -- on our originated and securitized loan book remain pristine. As of year-end, total delinquencies in our small balance commercial loan origination book totaled 1.4%, broken out with no delinquencies from our Freddie Mac portfolio and transitional fixed-rate loans experiencing delinquencies of 1.6% and 1.4%, respectively. The SBA origination business had delinquencies of less than 1%.
Finally, as announced yesterday, our Board has authorized a $20 million stock repurchase program. While we are confident in our ability to continue to generate new high-yielding assets, we recognize the benefits of purchasing our stock when its trading at a significant discount to book value. We intend to purchase sufficient stock to fund existing equity compensation plan need and may purchase additional fixed [ph] shares if sufficiently accretive to shareholders.
Now a few comments on the continued strength in the small balanced commercial property market, which underpins our senior secured lending strategy. New balance, small balance -- new small balanced construction [indiscernible] at 17 million square feet in the fourth quarter, 88% below pre-crisis levels. This is resulting in tight supply, very similar to like we are experiencing in the housing market. As a result, SBC rents attain pre-crisis levels in the fourth quarter and property prices increased nearly 5% year-over-year.
With these rising rents, SBC credit remain strong with vacancies flattening at 4.5% across all sectors. Now as we’ve noted in the past, the SBC market beats to the drum of the housing market, less so in the large balance commercial real estate market. For example, while large balanced commercial real estate investment sales fell 7% in 2017, small balanced commercial is up 19% supporting record loan originations of 240 billion in 2016 and a 165 billion for the third quarter of 2017.
Meanwhile the SBA market also continues to be robust. Program wide SBA loan authorizations are up 12% year-over-year for the first five months of the SBA fiscal year. Over the same period, the number of bank lenders has decreased by 6%, increasing the opportunities for the few non-bank lenders. The SBAs budgeted authorization for this year are up 7% and we expect another increase next year.
We continue to believe that small balanced commercials correlation housing and the current 3-year lag in the credit cycle versus large balanced commercial real estate, with that Sutherland offers compelling diversification for investment portfolio is focused on senior secured direct lending strategy.
I’m now going to handoff to Rick to discuss our financial results.
Thanks, Tom. I’m going to touch on a few of the highlights on some of the slides included in the supplemental information that you received. Slides 2 and 3 depicts some summary highlights for the fourth quarter and the full-year 2017, in particular, a note that we added new loans of $376 million for the quarter which is representative of our ability to source new assets from both new loan originations as well as portfolio acquisitions. As for the full-year, we originated $1 billion of new SBC loans in 2017, up 62% from the 660 million in 2016.
Slide 4 depicts the components of our return on equity. The individual line items are reasonably consistent with the prior quarter, depending on whether you're looking at the GAAP or the core ROE. The modest drop in the gross ROE was offset by increased gains on sale.
Slide 5 shows modestly lower new loan originations this quarter as compared to the third quarter. The longer-term trend shows consistent growth throughout the year. The efforts we’ve made to grow our origination platform is definitely paying off and Slide Six depicts these originations by product type. We’ve revised the individual segment slides, include additional quarterly data to assist you in understanding some additional trends and metrics regarding our new loan production in each of these segments.
Slide 7, is the first of these slides and covers the SBC segment. The gross leverage yields declined a bit this quarter due to the allocation of our corporate debt offerings into our origination businesses. Particularly -- partially offset by an increased gains from Freddie Mac loan sales.
Slide 8 summarizes our Small Business Administration segment and includes the quarterly trend information I mentioned earlier. The gross leverage yields continues to be well above 20% in this business, although there was some decline in this quarter.
Similar to the SBC Origination segment, the allocation of our corporate debt offerings resulted in some decline in our gross leverage yields. And additionally, we experienced a modest reduction in gain from our guaranteed loan sales in this segment as well as a modest write-down for the MSR portfolio.
Loan originations in the fourth quarter were $38 million and we’ve already closed $31 million of new SBA loans in the first -- through today in 2018. Our pipeline continues to grow and we’re now the third-largest non-bank small business administration lender in the country.
Slide 9 shows some summary information to the acquired portfolio. Due to the nature of the asset in the acquired portfolio, the returns in this segment can be lumpy and we saw some of that this quarter with some outsized returns on a few asset. [Indiscernible] our net interest margin and levered yields on our legacy acquired SBC loan portfolio remain consistent quarter-over-quarter.
We are particularly excited about acquiring of $121 million of new SBC loans in the fourth quarter, the most of any quarter since we became a public company, and as Tom mentioned earlier, we've already added as of today another $143 million of accretive loan acquisitions so for this year.
As of today we deployed all the note proceeds from last year's offerings and a portion of the $40 million we raised in January, and we have remaining borrowing power of about $150 million. The pipeline here remains strong and we will selectively acquire more assets as liquidity permits.
Slide 10, summarizes our residential mortgage business. Our strategy has been to retain the servicing rights on loans sold, which increase in value in rising interest rate environment. In fact, the rise in the 10-year treasury in January resulted in an increase in the value of the servicing rights portfolio of over $5 million. While we do not include the fair market value changes in our core earnings, it is a simple fact that these assets have significant value, which increase significantly in a rising rate environment.
Slide 11 is a new one and summarizes the securitizations we've done within Sutherland. As our platform has evolved, we enjoyed greater secondary market acceptance across our product line, enabling us to match fund our assets with non-recourse debt. As tom mentioned, we closed another -- or we priced another fixed-rate securitization last week, a very tight spread, it will close today and that will further enhance our bottom line.
We believe this is indicative of the outstanding credit performance of the loans within these securitization. The fixed, floating and Freddie Mac securitizations include loans that we’ve originated, while the SBA and acquired loan securitizations represent assets acquired many of which were in some state of distress at the time of acquisition. As you can see, the newly originated product has adversely no delinquencies.
Interest rates continue to be on the minds of some investors. In Slide 12, it has been added to provide additional information about the interest rate sensitivity of our portfolio. As you can see on the lower left-hand chart, rising interest rates have a positive impact on our net interest income. The numbers here reflect the impact of rising rates on net interest margin based on our portfolio as of year-end. This does not include the positive value adjustment -- positive valuation adjustments on the servicing portfolio as I mentioned a minute ago, nor any potential impacts on new loan originations.
Slide 13 reflects the diversity of our loan pool similar to the presentation in previous quarters as our portfolio continues to show diversification of our first lien SBC loans across geographic and collateral types.
Slide 14 is another new one showing the funding mix of our capital structure. You will note the warehouse lines were lower in the last two quarters as proceeds from the note offering were used to pay down those facilities and so such funds could be fully reinvested. These long-term debt facilities have significantly improved our liquidity profile by placing less reliance on our mark-to-market warehouse [indiscernible] facilities.
Slide 15 summarizes our leverage ratios and we’ve included the actual calculations for your convenience and the leverage ratios remain within our target range. Slide 16, it's kind of a year to review slide which charts our progress against the objectives we laid out for investors last year. [Indiscernible] we are pleased with the progress we made in 2017.
Now I will turn it back over to Tom for some final thoughts before we open-up for questions.
Thanks, Rick. In 2017, we successfully executed our business plans to use recourse debt capacity to both fund accretive growth in our loan origination franchise with a record 1 billion in new loan originations and also reenter the loan acquisition market. While we are pleased with the progress we made this year, particularly in portfolio construction, we realize there is more work to be done.
As we move forward, our focus will continue to be on efficiencies in our loan origination process for the application of technology, marketing the ready cap platform and expanding our brand awareness across all product lines. At the same time we will deploy our capital efficiently as possible and optimize our operations in order to generate higher returns for our shareholders.
We look forward to the continued growth in our franchise and we thank you once again for your confidence in our company and for your continued support. Operator, we like to now open it up for questions.
Thank you. [Operator Instructions] And we will take our first question from Jade Rahmani from KBW Capital.
Thanks very much. In terms of strategic objectives to expand the platform, can you give anymore color on what you’re thinking about? Is that contemplating M&A transactions, adding additional product lines, or is that just ramping the volume of originations?
I’d say the existing -- it's the latter. It's really more of a focus on taking the existing products and continuing to expand the hiring new loan officers, buildings the other aspects of affinity programs. That's one area where we’ve -- we’ve some -- we’ve hired specific people for that. And the another -- so that’s basically the objective is to grow the core business. In addition to that, we are considering in the context of affinity a small balanced commercial program which is a conduit base to i.e. using the same methodology than underwriting that use the CMBS market and buying those loans from bank channels. That will provide us with another product up the food chain with respect to small balanced commercial and just be clear that when we define it as a conduit small balanced commercial between $5 million and $50 million -- sorry, $5 million and $35 million, and its packaged into a traditional CMBS conduit. So those are our primary focus with this quarter and the next quarter in terms of the strategic objectives.
In terms of the company's overall structure and efficiency generating gross ROEs in the 15% to 16% range, which seems pretty strong. And yet the net ROEs are quite significantly lower. Do you view that as a function of the company scale and is it possible within the existing capital base to drive the necessary operating leverage that will drive those net ROEs significantly higher?
I think it's possible, Jade. Without raising capital we have 400 employees between the Ready Cap and GMFS subsidiaries. So there's a certain operating expense component to that. Our focus this year has been to add assets with a little bit of leverage. So the focus -- I think more likely you will see the top line grow a little bit over time. We are making a big investment in technology and in some of the operating things, over time that should come down a bit. But I would think the real growth is going come on the top line.
And in terms of the G&A, is there any opportunity to rationalize it or reduce it? And is there any possibility to revise the management agreement at all to help bolster the net ROEs?
On the first part, there are opportunity to rationalize and that’s what I refer to with technology. Now there's an investment in the technology, and we hired a new technology -- chief technology person as well as you know the CRO earlier in the year. So a little -- it only take a little while to realize some of those benefits, but that's obviously our objective, so we can do more volume with the same or lower cost structure. But that doesn't happen overnight. As for the management agreement, I mean, that’s something that the independent board might consider. I don't -- that hasn't really come up as an issue, the management [indiscernible] struck when we initially raised capital in 2013 privately and confirm when we did the merger. We have raised [ph] merger with ZAIS. So I think we have as part of the ZAIS merger I think the -- and part of the initial capital raise our fee structure is 1% over $500 million of equity, which is where we’re now and I think that’s favorable to most of the comps out there in terms of the other commercial mortgage REITs. Our incentive compensation structure is only 58% over 8 hurdle, most of the comps will have 20% over 8, and we’ve committed to take at least half of that in stock, it's been one of the [indiscernible]. So I think -- I don’t know, does that answer your question.
Yes it does. I mean, I think that -- the issue from my perspective is the capital base just needed to grow the overall originations volume, the amount of assets on the balance sheet all need to grow in order to absorb those G&A costs that seem outsized relative to the company size. Just wanted to see if you could comment on yield trends, any spread compression, pressures in the market, any changes in borrower appetite, given recent interest-rate volatility?
That’s a good question because -- and it highlights the fact that we're not one trick pony, right. We have basically three silos, the investor product, which are the Freddie Mac, fixed and the fixed rate small balanced product and then the transitional loan business. And of course we could acquire this nonperforming or re-performing loans. So in terms of what’s happened with the interest rate, it is great because it highlights the fact that as in any rate environment we tend to be able to reallocate capital into origination sectors where we’ve the highest ROE and there's highest volume. So in this market what’s happened is we’ve seen with the 10-year rising now almost 150 basis points above the summer of 2016 lows. We see the fixed-rate product volume increasing significantly. And the reason for that is we compete at the margin with more aggressive banks and they fund off deposits, so they tend to have -- move it in -- as the conduit CMBS spread tends to compete more favorably with the depository in a rising rate environment. So that volumes increase. The Freddie Mac that also has increased because of increased investment sales in new construction in the multifamily industry and some of that is due to sponsors investing in or buying new multifamily properties before rates rise significantly beyond where they are today. The one area I would say there's competition is spread compression is the transitional loan business. There's a lot of private lenders entering that, but we tend to be able to focus on differentiated sectors and asset classes which some of the newbie's are not as familiar with. So, we have had some spread compression in that business. The SBA business is just -- its floating rate and new business GDP growth in terms of small businesses is projected to be -- I think its 5%, 6% versus 3% from an overall economy. So that market is driven -- is less interest-rate sensitive, so that’s what we’re seeing in terms of the impact of interest-rates on our book.
And just lastly on credit trends. Can you comment on what drove the sequential uptick in SBC delinquencies as well as SBA delinquencies? Was that seasonality related or anything underlying that?
Along the SBC, we had three loans that went delinquent as of December 31. Two of those [indiscernible] half of the bucket you see there have returned to performing status. So the other one we’re still working with. So, again, its three loans not a trend. On the SBA side, there's 2,000 loans in the portfolio. There's about a 100 loans that are delinquent, and the legislative uptick there we don’t really see it as a seasonal trend. I think it's just kind of -- statistical log numbers that they tend to go up and down over time, but we don’t really see any significant trend there.
And I will just comment, some of that is the CIT legacy loans which are seasoned, I think it's 7 years less and they tend to have much higher delinquencies given the tail aspect of that portfolio. But overall, just add on to what Rick saying, you’re going to see for a brand-new book of business, you’re going to see a expected ramp in delinquencies to a projected stabilized level, because we underwrite the fixed-rate product and transitional loans and the SBA to add expected loss [ph] that kind of ranges between 2% and 3.5% depending upon the product. But because of the newness of the vintage you’re going to see a ramp in delinquencies probably through a stabilized level of around 2%, 2.5% over a 3-year period.
Thanks very much for taking the questions.
No, problem.
Thanks, Jade.
And we will take our next question from Steve DeLaney with JMP Securities.
Good morning and congratulations on a strong first year. You guys did right at $1 billion in your core SBC and SBA loans in 2017. I’m curious, if you’ve set a goal that you could share with us for 2018 and which product line do you think has the most growth potential for you this year? Thanks.
Yes, I hesitate to be too specific with the numbers rather than we expect fairly strong growth. It's not going to be 60% year-over-year as it was last year, but maybe a longer range of half of that growth percentage. We see across the board on the SBA side it will grow a lot more, because we’re starting from a lower base, recall we really started to see the origination there -- or [indiscernible] origination network back in the fourth quarter of 2016 and we did 40 some million in that year, $120 million -- I’m sorry, $130 million this year and it will be north of $200 million we expect …
Okay.
… probably for 2018. On the SBC side, slower growth in that, but certainly growth over the 2017 levels of $869 million that will be -- it should be well north of $1 billion. And then within that we will see where it goes between Freddie. Freddie makes up the largest component of that and then the rest between the Bridge and the fixed rate product.
Now that’s helpful, Rick. Thank you. I notice you did a joint venture on a loan -- a pool that you acquired. Can you talk a little bit about how that transaction came together and is it possible that the count - the party that you worked with is there future opportunities to work together?
Yes, this is debt [ph] transaction. Basically all of the small balanced commercial acquisitions are managed through the Waterfall trading desk.
Okay.
We bought -- I think it was roughly $5 billion of total SBC assets, top three in the U.S. So we are pretty well-connected, if you will, to the FDIC, the market, the community banks we work with various brokerage firms that have a practice in working with depositories on an M&A context. So, in short, this was a bank failure, one of the [indiscernible] that have occurred in the last couple of years that we worked on with another private equity fund. We did together utilizing the same special servicer, we can -- we both did pull up the due diligence and we're successfully -- successful bidder on the pool is located in the mid -- middle -- Midwest and we were -- we did that to roughly a 14%, expected ROE -- over ROE. We’ve already experienced some liquidations there that are more favorable than what we had budgeted, but that’s a very typical bid and, yes, we'd likely continue to work with that private equity partner to source other -- some more opportunities.
So I take it the FDIC was the seller?
Correct. This was a [multiple speakers]
Okay. All right. Great. Thank you. That’s good color. And then lastly one -- just -- go ahead.
I was just going to [indiscernible], we have about a 25% ownership piece of that pool.
Got it. So your $54 million is 25%?
Correct.
Okay, got it. Thank you, Rick. And just one final thing. I just noticed in your Freddie Mac loan sales, it looks like the gain on sale margin was up to 4.5% in the fourth quarter. Could you comment on why it was above average and where you might expect it to be on average going forward in 2018? That will be my last question. Thanks.
Those -- that gain percentage, that’s based on the equity in that segment, not the loan sales. The loan sales …
Oh, I see. I’m sorry.
… that remains fairly stable, that was more of a volume on sales, but on average they’re running about 1.5% or so.
Got it. Okay. Yes, it did look -- I didn’t understand that that was the margin on the equity not on the actual [indiscernible]. Thank you for your comments.
Thanks.
And we will take our next question from Scott Valentin with Compass Point Research.
Hey, good morning, everyone. Thanks for taking my question.
Hi, Scott.
Just regard to the dividend, I know you declared that the first quarter dividend of $0.37. And I guess, I was just wondering how to think about the dividend going forward, if we think about a 10% ROE target which I know you guys were just over I think 9%, yet a 100 basis point negative carry on the corporate debt that will put you over 10% call and you still have asset sensitivity which you benefit from rising rates. And then lower tax rate going forward, I think you guys should benefit a little bit there. So if we assume a 10% kind of ROE for 2018 and your book value finished at -- you guys have adjusted book I think 16.69 is what you put out there, but 16.75 is GAAP book. I mean is it fair to assume kind of a $1.68 kind of earnings power for the portfolio? And then on top of that if that's the right way to think about it? How should we think about the dividend payout? I know you guys have [indiscernible] about a 100% payout ratio. I was just wondering how to reconcile the ROE with the dividend with the earnings? Thanks.
Yes. Thanks, Scott. I will let you do your own math on what the EPS might be for 2018. But as it turns to the -- as it relates to dividend, last quarter we paid out a little bit more depending on the core net income $0.05 to $0.10 more than our EPS was. And so I think we did discuss at the Board level. I think it will be a quarter-to-quarter decision. I think maybe a little gun shy about raising the dividend this quarter. We are going to see how the first quarter goes and probably revisit the topic I would say. Our goal as you say is to payout close to 100% of certainly core earnings and flexible earnings. So as we see how the quarter evolves and as these strategies play out, I think there's an opportunity there. But just didn’t want to do at this particular quarter.
Okay. Fair enough. And then just on the 10% ROE target, is that still kind of the target going forward or is that changed at all by the changes in market conditions?
That’s still our goal.
Okay. Okay. And then just on the tax rate, I know you guys had -- it was much lower this quarter. I think in the past its been about a 9% effective tax rate payer with the new corporate Tax Reform are using about a 5.5% rate going forward. Is that still -- is that a fair way to look at it or is it going to be different number going forward?
Yes, I think that’s reasonable. That’s probably going to be [indiscernible] there around that level. We’ve done a lot of kind of financial structuring to reduce that tax rate and did I think pretty effectively and then obviously with the Tax Reform that cut down the bill as well. So I think we’re in the range.
Okay, thanks. And one follow-up question. Just I know you did $40 million of corporate debt issuance in January, I was just wondering how much capacity you guys think you have left? And then what the leverage goal is, I think your 2.7 [indiscernible] just wondering what you could see that going up to?
In terms of capacity, we’ve -- cash is fungible, so you can't really track every dollar in and dollar out, but we spent a portion of the $40 million. One thing I would point out is, we did see some drag in the third and fourth quarter. Recall that we raised $180 million in last summer between end of June and middle of August. Just the nature of our business as Tom alluded to earlier, it goes out gradually with originations or acquisitions. It's tough to deploy that all at one slug. We’ve now deployed all of that. So the $40 million while we haven't deployed it all yet, we’ve deployed some of it. That’s a much lower on a percentage basis of kind of available liquidity with a much smaller piece that would be our goal going forward to raise capital in smaller slugs unless, obviously, if we can raise equity, that’s a different story. In terms of the debt side, we would raise it in smaller slugs and will be less dilutive on an ongoing basis. The -- what was the second part of your question, Scott.
Just on the -- so you guys I think have issued $255 million, just wondering in terms of total corporate debt outstanding how much capacity is left? I know you mentioned small chunks of it, $50 million of capacity left and then following that question was the leverage -- target leverage?
Okay. Yes, I’m sorry. Yes, in terms of buying power, the remaining capacity we have was probably about $150 million of acquisitions. Not to say we’re going to do all that tomorrow, but that gives us the capacity going forward. On the leverage target, yes, we're up -- the total we try to keep our recourse leverage around 1.5 to 1 and you can see on the chart on 15, we’ve been pretty good at that so far. That's probably going to creep up a little bit, now that we’ve added this $300 million or so of recourse debt, but we never -- I don’t think we'd ever go over 2 to 1, unless we're just -- depending on where we’re in the securitization cycle, like the securitization is closing today. We had $165 million of loan. We sold [indiscernible] of $150 million, so it generated cash of about $12 million or $13 million versus where we were on the warehouse line. But that will convert $150 million of recourse debt to nonrecourse debt and the match funded -- the interest rate sensitivity and all that, so that will always -- that’s always going to be our model depending on, I mean, like the recourse a lot higher than 2 to 1, if we have three securitizations coming in the next month, it could, but on average it should be in this range. The total recourse little bit different because as we do the securitizations it has to that total recourse numbers, so certainly sometime this year we are going to be 3 to 1. I don’t think we’re going to hit 4 to 1 this year, but keep in mind -- keep our view is to keep the recourse part around 1.5 to 1. We are okay with the match funded leverage, if that’s just our model. Obviously, if and when we raise capital that will bring those numbers down a bit, but at this point we're comfortable with the ranges that we have now.
Okay, right. Thanks for that color.
Good. Thank you.
And we will take our next question from Tim Hayes with B. Riley FBR.
Hey, guys. Congrats on capping off a really strong year. Obviously growth seems to be in focus for 2018 and do you just -- you’ve talked about hiring some loan officers to support that growth and do you have any expectations of how expenses will trend this year compared to last?
Just the comment on the loan officers is that the business putting aside the [indiscernible] residential lending business, they have the 20 year plus history, it's very efficient in terms of operating ratio. Turning to the two businesses we have, the very -- where we add loan officers, we look at how much the volume is and the NIM acquisition. The additional NIM that they will generate in our financial model and right now we could probably with the existing infrastructure in terms of closing underwriting in the case of the SBA business loan servicing, we could probably increase our volume by 35% to 40% without a significant increase in OpEx. So that’s why Rick was -- Rick's point about tough line. You will see -- ideally you will see a reduction -- a sequential reduction in the OpEx ratio as we add new loan officers to the existing fixed cost support base in terms of underwriting and closing. A good example of that is the SBA business in New Jersey. If you recall, that was the purchase of CIT business portfolio which -- and the servicing staff, which had -- because they had shut down in 2010 their origination. So we rehired in 2016 -- in '17 we rehired put in place very strong production oriented senior management team and they’re now executing their business plan, but there's -- that’s a good example of where you will see a reduction in the OpEx ratio based on the fact that you have a lot of support and servicing staff with no origination. So, yes, but we are very, very cognizant of managing our OpEx ratio and our new CLO is working with Rick and the financial team to rationalize that as we ramp the origination business. But, yes, there's definitely what we think of it is, is if your loan officer in, for example the SBA business, you should be at least doing $5 million to $10 million a year in SBA originations which obviously generate significant net interest margin and that business gains on sale in the secondary market.
Got it. That’s helpful. Thank you. And then as it relates to the buyback program, how do you prioritize buybacks versus asset growth with your stock currently trading at 90% of book value right now, especially as kind of evaluation has improved decent bps since over the -- just over the course of a week, which is probably when the Board look to approve the program?
Yes, you’re right. When we talk about [indiscernible] at the Board meeting the stock was trading about a $1 or so less than where it is now. So frankly its probably more of an appetite to repurchase stock at those levels [indiscernible] because they’re more accretive obviously. We do have some equity compensation plans that we need to fund, that won't be paid out for a couple years, but we will purchase stock in the open market to satisfy those, we believe that the stock will go up over time. So it’s the good bye now for us. And we know we’re working with our advisors on the timing of those purchases. Just in general, I think [indiscernible] parameters, but just in general we will be more aggressive when the stock is at more of a discount, obviously, and it's a fine line between retaining -- we are still not capital constrained but we do realize the benefit of supporting the stock-price and purchasing shares. But there's a -- it's kind of a double [indiscernible] between preserving that capital to growth going forward and supporting the stock-price in the short-term.
Got it. Thank you.
And we will take our next question from Raj Patel with Farallon.
Hi, guys. Few questions. One question on just the turnover of assets. If you think about the whole long-term asset for the gross assets, how much of that gets retained each year and then you redeploy just thinking about if the interest rates are at least the 10-year up a 150 basis points from mid 16th and now -- and I’m trying to translate that into where that 10% ROE target should move just naturally with the -- with as the book turns over?
[Indiscernible] duration on the assets to what Rick commented on the impact of ROE. But if you look at our book of assets they’re relatively long-duration. And the SBA -- really rigid SBA loans have a duration of 5, 5.5 years. The Freddie Mac has a duration of probably 4.5, 5 years. The SBC, small balanced commercial fixed product is probably in that same -- at that same range, 4 or 5 years. The short -- shorter duration assets that require reinvestment are the assets acquired loan, so it has a duration of about maybe 2 years. And the -- and this is the one I think that people may look at Sutherland and our Ready Cap origination businesses, one of our silos which is important to us is our transitional loan business. That business turns over very quickly. The duration there is about 1.5 year, and if you -- if most of the larger REITs are focused almost exclusively on that, obviously, in much larger balanced market, so that have -- but that has -- that -- there you see in that business right now a lot of repayments and spread compression. So long way [indiscernible] saying that if you look at it -- think of it as a duration of our equity based on the waiting of the net equity invested in each of those silos, I think about maybe 25%, 30% is in the short duration, the transitional loan and the acquisition business. We tend to have a -- don't have the issue of having a significant redeployment of capital. I mean on a gross basis we have two point -- roughly big as two point -- was it Rick, two point …
Loans at $2.2 billion.
… $2.2 billion. So if I had to assign a constant prepayment rate or amortization rate, that's probably in the area of around 15% per year.
Okay. So 15% of that, so maybe half of the equity gets turned over when naturally freights go up, maybe half of that flows through [indiscernible]?
Yes. That’s correct. But I think you’re reinvesting higher rates, but I think the more important point in terms of looking at the impact of rising short rate, now that we mean LIBOR or prime, the SBA loans are based off of prime rates. The -- most of the small balanced commercial loans that are reporting on a transitional base of LIBOR, but if share rates rise, then it's -- more of the impact is really on the amount of equity funding the current book as opposed to reinvestment.
Got it. Okay. And then you mentioned, I might have missed this, you’ve two upcoming securitizations in addition to the one that already priced, that’s closing today. Is that right?
That’s right. We do.
Okay. And what is your expectation of the benefit as you get -- what we expect on spread versus the warehouse -- with the warehouse?
We’ve been running kind of between 50 and 100 basis points cheaper in general. And then generally a little bit higher advance rate as well.
Okay.
Yes, maybe 5 to 8 point from the advance rate.
Okay. And then -- okay, that’s good. That’s in addition to kind of where we get some -- having less drag from the cash, just more efficient financing in the short-term.
More efficient, obviously, nonrecourse.
Right. And then, can you comment just specifically, because I think I might have been confused from the last quarter call, how much drag you actually expect from all the fund raisings? I know you spent some money from last year and spent some of the $40 million. But the comment on drag of a 100 bps in Q4, what would -- what’s your expectation of that kind of number in Q1?
It should be dramatically less, because through the first quarter -- earlier in the first quarter we spent all the last year's offerings and now as I mentioned just its much more increment. I would think it should be less than 50 basis points in terms of drag. And on top of that we already deployed -- benefit -- get the benefit from the earnings stream from the funds that we redeployed probably in a year.
But does it actually -- okay, so that you’re saying less than 50 bps on the new fund rates, but the old fund rate should be accretive at the current [ph] not a drag?
Correct.
Okay.
Correct.
Okay. All right. Great. Thank you guys very much. Look forward to you guys get into your target.
Thanks, Raj.
Thanks, Raj.
And we will take our next question with Robert Matt, Private Investor.
Hi, Tom and Rick. As you know I’m a private investor in …
Hi, Rob.
… how are you guys. I’ve been an investor in Sutherland, I guess from before even began. And I’ve observed the transition where I think and I want to just get confirmation on my statement, I think you began as a trading firm dealing with the secondary market and then you morphed into a mortgage company which you focused on as you were trying to go public. And I -- from what I hear and what I see you seem now to have actually going to back into the secondary market at least initially. Is that correct?
Yes, I think that’s a fair characterization. Our view as a public company, the company has more franchise value with a captive originator and captive deal flows opposed to a trading company. We did step back from the acquisition business really just due to lack of capital and our desire to grow that origination franchise. So two things have happened. One, the franchise now has grown to a point where it's kind of a standalone, and its producing real good volumes for us. And we’ve been able to raise some debt capital to allow us to take advantage of those acquisition opportunities. We’ve seen those opportunities throughout the time. We just didn't have the capital to take advantage of those and recently we have by virtue of being a public company, one of the -- I guess, the benefits -- that we thought would happen as a public company, but I think its exceeding our expectations as our ability to raise debt capital at reasonable rates as compared to where we were as a private company. So the benefit of that is we’ve been able to step back into the acquisition side of the business. I think originations will still be our focus and our primary source of assets, but with the additional capital we're able to take a manageable sources.
Robert, the other thing, I appreciate your continued support of all time. The one thing I would point out is the way to think about the -- your question in a more macro basis. Where are we -- you’re going to see where we’re in the credit cycle. When we started out, obviously, the community banks were [indiscernible] and we were buying assets, just like we did back in RTC days, [indiscernible] days in the 80s and 90s. So where we’re, we are now 8 years, 9 years into the cycle and there's only a handful of nonbanks in our space, nonbank finance companies that are direct lenders. So it just natural that we would start to reallocate equity to the origination opportunity, because there's less of the acquisitions available. That being said, if the economy turn, then we would start to focus more on acquiring loans rather than originating loans because that's where we have highest ROE. The key point is that with our capital base in our franchise we have the flexibility to pivot and reallocate capital based on where the -- where we’re in the credit cycle. But that how you watch the evolution over the last -- since the crisis of the strategy.
Yes, Tom, I think it's great. I mean, at this point in time, you’ve established what I consider to be a major foundation in the SBC market, and the ability to service it. And from what I’ve seen in the past, when you’re able to acquire in the secondary market, you're able to get ROIs that were much better than the origination markets. So I’m happy to see that you’re back into it. Am I correct on that?
It's like [multiple speakers]. Yes, go ahead. Sorry.
If that’s the case, looking forward it's amazing to me that that a stock that is backed by such a broad portfolio of relatively small loans is yielding 10% currently and that’s based on just acquisition business. And going forward I would think that we would be able to get a higher ROI, if we have a foundation that's 10% of requiring other mortgages, like a 13% to14%.When you expect the dividend not only to be secure, but have a growth potential.
Well, that is certainly our plan.
I mean from an investor's point of view this seems like the stock is way undervalued which of course is why you would want to buy some of those especially when it gets down in the $13 range. Am I missing something with regards to the security of the dividend going forward? What risk are we dealing with here?
No, I don’t think you’re missing anything. I think you’re on point. $13 we agreed, we are undervalued and that’s why we put in the buyback program. We are taking advantage of opportunities both in the originations and the acquisitions. Our whole goal is to get our ROE up to double-digits. We believe, time will tell, as we get there, we believe if we’re at a double-digit ROE, where our peer group is around 8.5% or 9% ROE, then we should trade in line or above the peer group, right. Now we’re trading a little bit below and it's still relatively new company. We still [indiscernible] four quarters as a public company, showing a track record. Next quarter we will be adding two months from now. So [indiscernible] and -- but we agree with your thesis.
Well as a final comment, thank you for your help and keep up the good work. And I’m looking forward to the ROI improving as you buy more in the acquisition market and hopefully that market hasn’t dried up.
Those opportunities are there. It's really just a question of having the capital to support them.
Okay. Thanks for your time.
Thank you.
It appears there are no further questions at this time. I’d like to turn the conference back to management for any additional or closing remarks.
We appreciate everybody's continued support and look forward to our next quarter's earnings call.
And that concludes today's conference. Thank you for your participation. You may now disconnect.