Ready Capital - Q2 2024
August 8, 2024
Transcript
Operator (participant)
Greetings, and welcome to the Ready Capital Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Ahlborn, Chief Financial Officer. Thank you. You may begin.
Andrew Ahlborn (CFO)
Thank you, Operator, and good morning to those of you on the call. 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 2024 earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Zausmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capasse.
Tom Capasse (CEO)
Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. While we experienced a challenging quarter marked by what we believe will be bottoming multifamily credit fundamentals, we successfully executed several initiatives discussed on our last earnings call. These included active asset management, reallocation of low-yield assets, adding accretive leverage, the ongoing exit of the residential mortgage banking, and growing our small business lending platform, which together better position the company for earnings growth as we move into 2025. As we've done in prior quarters, we present credit metrics for both the originated CRE and M&A loan portfolios. To begin, all credit metrics across our $7.9 billion originated CRE loan book improved quarter-over-quarter. First, 60-day-plus delinquencies improved 270 basis points to 5.2% as of June 30.
Notably, office continues to dramatically underperform our core sector, multifamily. Office constitutes only 4% of the portfolio, but represents 16% of the delinquencies, with 60-day plus delinquencies of 26% compared to multifamily at 6%. Second, a 460 basis point improvement of risk score 4 and 5 rated loans to 5%. Third, nonaccrual loans declined 120 basis points to 4.6%. Additionally, 91% of accruing loans pay current. The remaining 9%, which feature a PIK component, have an average current mark-to-market LTV of 86%. The quarterly improvement in credit metrics was a result of two active asset management strategies on our part. Through June 30th, we have modified 25 loans totaling $801 million in our originated CRE bridge portfolio, with 82% completed in the second quarter.
The modifications focused on projects with healthy fundamentals, requiring additional time to stabilize and secure permanent financing. Modifications had the following average metrics: in-place debt yield of 5%, term extension of 12 months, 25% included spread reduction of 170 basis points, and 50% of sponsors contributed fresh equity. Second, we focused on the sale of underperforming assets, where the net present value of liquidation exceeded in-house asset management strategies in both the originated and M&A portfolios. As discussed last quarter, we transferred $720 million of loans into held for sale, comprising 47% originated and 53% M&A. Upon transfer, we recorded a $138 million valuation allowance net of tax benefits. Through today, $576 million of the portfolio is either under contract to be sold or has closed.
These sales are expected to generate incremental annual earnings of $0.24 per share from a reduction in interest and carry costs, as well as the income generated from reinvestment. Closed loans were reflected in quarter end credit metrics, with potential further improvement from loans closing post-quarter end, with the earnings accretion benefit beginning in the fourth quarter. Origination activity in our CRE loan business totaled $256 million in the quarter, comprising 61% in our transitional and 39% Freddie Mac, with the latter experiencing an uptick to $122 million in July. We continue to reposition our M&A portfolio, which consists of assets acquired in the Mosaic and Broadmark mergers, to reallocate the capital into our core businesses. As of June 30, the loan portfolio totaled $1.1 billion across 81 assets with improving credit performance.
60-day-plus delinquencies improved 910 basis points to 15%. The portfolio has a subpar levered yield of 10.8, but post-completion of our loan sales, we expect this portfolio to total $775 million and levered yields to increase to 11.6%.... Now, one additional observation on our overall CRE portfolio. In the quarter, continued negative migration and office loan credit negatively impacted peers with significant office concentration. Our recent asset management activities has further de-risked our portfolio. At quarter end, office exposure, net of specific reserves, was reduced to 4% of loan exposure, with planned liquidations reducing this to a targeted 3% by year-end. Of the 3% remaining, the average loan balance is only $2.8 million, and 85% are performing.
Meanwhile, 82% of our portfolio was concentrated in mid-market multifamily, where with a nationwide affordability gap driving rental demand, stress primarily relates to negative leverage, and the recent rate rally is a green shoot. Now, turning to our small business lending segment, origination of SBA 7(a) loans exceeded target, growing 80% year-over-year to $217 million, and puts us on pace to achieve our $1 billion target run rate by the fourth quarter. The quarterly volume was split 37% from our legacy large loan business, up to $5 million, and 63% from our FinTech iBusiness, which specializes in loans under $500,000.
In addition to organic growth, the company has a successful history of acquiring independent standalone operating companies that are complementary tuck-ins to core lending strategies, such as iBusiness in 2019 and Red Stone, our Freddie affordable segment in 2021. This contrasts with our Anworth 2020 and Broadmark 2023 acquisitions, which were primarily accretive capital raises. We closed on two strategic acquisitions in the quarter for cash, which support origination growth in our small business lending segment through expanded product offerings and increased market share. First, the acquisition of the Madison One Company is one of the largest national USDA lenders. The USDA program provides 80% government guarantees on commercial and real estate loans in rural areas and complements our core 7(a) offering with similar economics.
These include gain on sale revenue from the sales of the guaranteed portion, a retained servicing strip, and the net interest carry on the retained portion. Forward 12-month originations are expected to be $300 million, which adds $0.10 to annual EPS once fully ramped. Second, the acquisition of Funding Circle US platform by iBusiness, which is expected to increase SBA 7(a) small loan production by leveraging Funding Circle's leading front-end technology and established origination channels. Additionally, Funding Circle's core business loan product allows us to monetize leads from SBA 7(a) turndowns. Integration and rightsizing of the platform are expected to be complete by year-end, with projected 2024 earnings drag of $0.04 per share and profitability achieved in 2025, with EPS accretion of $0.05 per share as we move through next year.
Looking forward, we believe organic growth in these platforms will, over time, enable us to comfortably exceed our $1 billion target and achieve No. 3 U.S. market share. The high ROE capital-light element of our small business lending segment is a clear, and we believe, underappreciated differentiator among our peer group, as it provides earnings contribution in a countercyclical manner compared to CRE. Now turning to earnings. As outlined over the last 2 calls, we continue to execute on 4 initiatives to improve EPS by year-end. First, the reallocation of low-yield assets into 15% levered ROE current yields. As discussed earlier, our sale efforts are expected to generate incremental annual earnings of $0.24 per share upon full reinvestment. Second, leverage. Current total leverage at quarter end was 3.5x, below our long-term target of 4x.
We continue to pursue adding accretive leverage, including the collapse and re-securitization of under-levered CLOs and the rotation into secured and corporate debt when accessible. The annualized EPS contribution from a half turn of leverage at current spreads is $0.08 cents per share. Third, the exit of residential mortgage banking. In the quarter, we completed a sale of 40% of the MSRs at a $3 million premium to our basis, with the remaining 60% coming to market shortly, with expected settlement in the early fourth quarter. The platform sale is expected to close also in the fourth quarter. Total proceeds from the sale of the MSRs and the platform are expected to be approximately $50 million, with annual EPS accretion upon reinvestment of approximately $0.04 cents per share.
And fourth, as described earlier, growth of the small business lending platform, which, upon stabilization of our recent acquisitions and projected growth, we expect to add an incremental annualized $0.20 per share contribution. The potential annual cumulative earnings impact of these efforts is $0.56 per share. We believe that even probability weighting the success of each, the actions will lead us to returning to achieve our 10% annual return target. We're confident about the future earnings potential of the platform. At the same time, we're acutely aware of recent challenges, including not reaching our 10% target. Our recent strategic efforts have focused on initiatives that prioritize long-term earnings power rather than delivering immediate benefits.
The impact of commercial real estate recession has been felt, and we believe that the tides are turning in this CRE cycle, with green shoots in the form of rate declines and in multifamily, peaking deliveries and improving transaction volume. With that, I'll turn it over to Andrew.
Andrew Ahlborn (CFO)
Thanks, Tom. Quarterly GAAP and distributable earnings per common share were a loss of $0.21 and income of $0.07, respectively. Distributable earnings less realized losses on asset sales was $0.19 per common share, equating to a 5.8% return on average stockholders' equity. Earnings were impacted by the following factors: First, revenue from net interest income, servicing income, and gain on sale increased $6.2 million or 9% quarter-over-quarter to $73.7 million. The change was driven by $2.4 million of growth in net interest income due to $229 million of net loans returning to accrual status and a $3.8 million increase in gain on sale revenue due to incrementally higher loan sales of $35 million at premiums averaging 11%.
The leverage yield in the portfolio increased to 16.3% due to the liquidation of $140.1 million of underyielding assets and a higher percentage of accrual loans. Second, a net increase in the combined provision for loan loss and valuation allowance of $57.5 million. The movement was the result of both marking loans that are under contract to sell to final execution prices and the markdown of additional loans expected to be sold. For loans under contract or sold, which totals $579 million in unpaid principal balance, the quarterly impact, net of tax, was a loss of $44 million or $0.26 per share. These sales are expected to reduce interest expense and carry costs by $21 million and generate $121 million in incremental liquidity.
For the remaining loans, there was an incremental benefit of $6.8 million, net of the effects of tax. In addition to the provision and allowance activity, we liquidated $42 million of REO at a quarterly net loss of $4.1 million. For the remaining REO, we took a $9.1 million charge-off. The cumulative effect of all REO activity in the quarter was a loss of $0.03 per share, net of tax. The cumulative year-to-date effect of all loss, provision, and allowance activity related to the disposition of REO and non-performing loans is a book value decline of 7.5%. And third, operating costs improved 15% to $65.8 million. Included in our operating expenses are REO charge-offs of $9.1 million.
Absent the effects of REO charge-offs, the normalized operating expense ratio was 6.7% as a result of cost-cutting initiatives completed earlier in the year. We expect operating costs in our core business to continue to improve throughout the remainder of the year. These improvements will be offset by the effects of the Funding Circle acquisition, which is anticipated to add an additional $8 million or $0.05 per share in operating costs over the next two quarters. On the balance sheet, book value per share was down 3.5% to $12.97 per share. The change was primarily due to mark-to-market or realized losses on loans and REO liquidations, and an $18.3 million reduction to the bargain purchase gain associated with the Broadmark transaction.
Our expectation is that the book value per share is reflective of the clearing levels to execute our portfolio repositioning efforts. In the quarter, we repurchased 2.3 million shares at an average price of $8.61. Liquidity remains healthy, with $226 million of unrestricted cash and an additional $40 million in committed but undrawn borrowings. With that, we will open the line for questions.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question we have is from Crispin Love of Piper Sandler. Please go ahead.
Crispin Love (Analyst)
Thank you, and good morning, everyone. Can you just give a little bit more detail on the loan sales that occurred in the quarter? If I'm thinking about it right, you made roughly $416 million of sales, took the $20 million of realized losses on those. First, just how'd that compare to initial expectations? Were there multiple buyers there? Curious kind of where the non-bank asset managers, and then how would you feel on the, on the progress on... I think it should be probably about additional $100 million or so that is to be sold that's not committed, and then timing there. Thank you.
Tom Capasse (CEO)
Yeah. Andrew or Adam, want to comment?
Andrew Ahlborn (CFO)
Yeah, Adam, why don't you take the first part on the buyers, and then I can walk through the financial effects more.
Adam Zausmer (Chief Credit Officer)
Yeah, sure. I mean, you know, from the buyer's perspective on, you know, the loan sales that we put out for bid, you know, we got back, you know, roughly 15 individual buyers, for the pools that we have in the market. They're mainly regional investors, and, you know, some local groups, you know, specifically where we were liquidating land assets through the Broadmark transaction. You know, these investors, you know, at the local level, you know, certainly help push up pricing. And, you know, we got much more favorable sales prices by, you know, kind of the local folks that knew these markets well, you know, as opposed to, you know, selling as an outright pool.
Andrew Ahlborn (CFO)
And then in regards to the financial facts, just on a to start on a year-to-date basis, for loans that have either closed, which is roughly $20 million, and loans that are under contract to close, that will settle in the third quarter, which is roughly $550 million. You know, the cumulative impact, the EPS impact for the year was $0.70. So that's net of, net of tax. In the quarter, the EPS impact was $0.26. So that'll provide the delta from where we were marked in March. When you look at what is remaining, it's a little under $130 million in balance, mostly comprised, you know, 70% of loans that are 60+ days delinquent. 50% of that is office.
They've been marked down to, you know, even further further than where, you know, the trades that cleared. So the, the trades that did clear, cleared around a 70% level. The rest of the pool has been marked down to roughly $0.50, and it's dependent upon the, you know, the collateral. So for example, office has been marked down, you know, roughly to 25%. Multi is a little bit higher. That gives you a sense of, of the financial effects, and we expect to, to continue to move out of that pool, you know, as we work through the rest of the year.
Crispin Love (Analyst)
Great. Thank you, Andrew and Adam. I appreciate the color there. And then just on the core earnings trajectory going into the back half of the year, I know you gave a lot of detail in the prepared remarks, but just curious on how you'd expect core earnings to trend to the back half of the year, what the main drivers are, and then narrowing the gap between earnings and the dividend to get closer to that 10% ROE target. And then, do you think that 10% target is probably not attainable, sometime in 2025? Just curious on your thoughts there as we get from, if we take the 2Q, call it kind of core earnings, less the realized loss of $0.19 and how that builds going forward.
Tom Capasse (CEO)
Yeah, I mean, we provided-
Crispin Love (Analyst)
Yeah
Tom Capasse (CEO)
... the last quarter and this quarter a bridge, with respect to the four initiatives we're undertaking, the lead one being reallocation of low-yielding assets and elimination or reduction of nonaccruals. But Adam, I'm sorry, Andrew, maybe just comment on terms of the timing and accretion.
Andrew Ahlborn (CFO)
Yeah. So when you look at the quarter and the $0.19, I'd say that is a fairly deflated starting point to begin with. So, you know, in the quarter, there were a couple of one-time items that are included in core, like, you know, reserves, repair and denial in the SBA, some bad debt expense related to ERC. They continue to wind down of the purchase future receivables book. So the cumulative effect of through all those one-time items was roughly $0.02-$0.03. So let's say the starting point is more in the low 20s when you look at core earnings. You know, the bridge to dividend coverage really focuses on the items that were in Tom's prepared remarks, starting with this portfolio cleanup exercise that we've undertook.
You know, that is expected just from a reduction in carry costs and interest alone, to generate $0.03 per share on a quarterly basis. The reinvestment of proceeds, which are expected to be a little north of $120 million, you know, at market yields today, produces another $0.02-$0.03 per quarter, depending on the yield. And then when you look at the, you know, the investments we've made this quarter, mainly into operating platforms rather than, you know, our core loan book, and, you know, specifically with Madison One, that business should generate anywhere between $15 million-$17 million in annual net income, given that it has an existing servicing asset, etc. That should produce another $0.02-$0.03 per share.
And then just continued organic growth of our, you know, existing SBA business and just repositioning of our, you know, the normal cadence of the portfolio. So I do think there's a clear path to getting back to, you know, that 9.5%, 10%, 10.5% return level, which would cover the dividend. In terms of the timing, a lot of these items will occur over the next couple of months. So some are more immediate. For example, the reduction in carry costs will happen as soon as trades settle. The reinvestment will take throughout the remainder of the year. Madison One is going to take a month or two to get their pipeline up to speed and get back online.
So I do think the full financial effects of these items will not be felt until we move into 2025. When you look at the remainder of 2024, we'll certainly feel some of the benefits of these activities, but we'll also have other items weighing on earnings. For example, Funding Circle is going to have a, you know, a negative drag on earnings for the next 2 quarters before it turns profitable. But I do believe as we move into 2025, there's a path to getting back to, you know, the return levels we expect.
Crispin Love (Analyst)
Okay. That all sounds good. Thank you, Andrew. Thank you, Tom. Appreciate you taking my questions.
Tom Capasse (CEO)
No problem. Appreciate your time.
Operator (participant)
The next question we have is from Douglas Harter of UBS. Please go ahead.
Douglas Harter (Analyst)
Thanks, and, and good morning. I was hoping you could talk about what is your appetite and what would be the opportunity to continue to kind of roll up, other originators in the SBA channel?
Tom Capasse (CEO)
Yeah, in the SBA, it's interesting. There's very limited M&A opportunities because... There's only 14 or 15 non-bank licenses. Actually, there was a lot of hullabaloo in Congress about the Funding Circle license, so we terminated that in conjunction, I'm sorry, the SBA. We facilitated with the SBA, the termination of that license, and, you know, maybe it'll be reallocated. But the punchline is, most of the participants are banks. There's probably about 1,800 of the 5,000 banks in the U.S. that participate. So really, the M&A is limited. It's more about looking at acquisition, you know, with the current pullback by banks, we're seeing the opportunity to lift out teams, let's say, of specialists. We just brought on a team from...
Andrew, where, where was that? Somewhere in the West. But, yeah, so we're seeing more and more of that as a way to increase the large, the so-called large loan, above $500,000. And then with respect, that, all that being said, that's really the way to grow the large loan. The smaller side of it, the fintech, where we're looking at other products, like what Funding Circle did, these unsecured loans to small businesses, there could be some opportunities on the fintech side. But in the core SBA, given that there's limited licenses, most of the growth in that business, it will be through acquisition of specialist origination teams.
Douglas Harter (Analyst)
Great. And I guess once you kind of hit the $1 billion run rate, you know, and integrate the two acquisitions, you know, how do you think about what is, you know, kind of the long-term growth or intermediate to long-term growth you could continue to deliver on that product?
Tom Capasse (CEO)
Well, the market itself is SBA 7(a) is around $25 billion-$30 billion, depending upon where you are in the credit cycle. And Andrew, what is USDA? I think it's maybe another $1 billion or $2 billion.
Andrew Ahlborn (CFO)
That's right.
Tom Capasse (CEO)
So if we, you know, we're currently at a run rate of $1 billion. I think the largest is Live Oak. They run about, what, Andrew? $3 billion. So, you know, our goal is to get to probably around a, you know, $1.5 billion-$2 billion is our, our, if you, if you will, our 12- to 24-month target. With, obviously, a lot of that being driven by leadership in the, in the small loan component, which is, you know, there is a higher element of minority women-owned businesses, which is supported by the SBA and the current, and we would argue both in whatever administration. So that, I think that, that will be the big driver of growth.
I think that, as far as, like, an intermediate-term target, that 1.5-2 is achievable based on the unique dual approach of the large loan, more traditional loan officer based, you know, we call them pods, let's say, specialists in certain industries and certain geographic regions. And since we're national, we're not a bank, we're not constrained by our local market. And then the growth of the fintech via, in particular, for example, Funding Circle had about $4 billion what is it, Andrew? of existing originations in the U.S. over the last number of years. And so those borrowers all have WACs of, I think it's pushing 40% on these unsecured loans to small businesses.
The SBA provides for a longer amortization at around 26%. Right, Andrew?
Andrew Ahlborn (CFO)
Correct.
Tom Capasse (CEO)
Yeah, 26%. So we're going to obviously we're going to immediately refi those borrowers, and it's accretive to them, and, you know, we're able to, obviously, generate strong gain on sale income because these loans trade at higher premiums in the secondary market, given that there's limited refinancing risk. So, yeah, so that's to answer your question, maybe a little long-winded, but that's how we're thinking about that business. And then, you know, honestly, I think we don't get enough... Given that it is, somewhat unique versus the peer group, I don't think we fully get the credit for the, the potential earnings accretion on this business, which is, countercyclical to the CRE.
Douglas Harter (Analyst)
Great. Appreciate the answer.
Operator (participant)
The next question we have is from Stephen Laws of Raymond James. Please go ahead.
Stephen Laws (Analyst)
Hi, good morning. Tom, appreciate all the comments on the earnings ramp, both your prepared remarks and, you know, the answer to Crispin's question. You know, to kind of follow up on that, as you think about the different drivers of the earnings ramp, you know, where's the biggest risk in executing that strategy? Is it, you know, returns on new investments? Is it credit issues in the existing portfolio? Can you talk about the execution risk around getting back to a 10%+ return?
Tom Capasse (CEO)
Yeah, I think. Yeah, if you just look at the peer groups, the second quarter, the current quarter's earnings, it's not reinvestment risk, even with this rate rally. It's really about negative migration on the existing multifamily, additional negative migration, credit migration on the existing multifamily book. I'll let Andrew, I'm sorry, Adam, maybe comment on that. But, you know, again, we're heavily into the lower middle market in not the hot markets where you're seeing peak deliveries. So if I look at, you know, kind of the our credit dashboard on the strategic refinancings and a number of things we've been doing, most of these borrowers are in a situation where the negative leverage is really driving, it's the main constraint, right?
Their caps have rolled off, and now there's negative leverage versus the in-place cash flows, and they have to, you know, if it's more heavy transitional, their debt, the current cash flow will decline. So they need a bridge over troubled waters to get to, you know, to get to execution of their business plan, which has suffered more from, you know, less from aggressive rent increases, and more driven or cap rate compression on exit. It's more driven by negative leverage.
We see across our portfolio, a lot of the—we firmly believe that multifamily, especially lower middle market, has bottomed in this quarter or maybe the next quarter, with the caveat that certain markets that have peak deliveries, like the Atlanta market, for example, may have a longer trajectory. But again, the underlying fundamentals with the, you know, if you look at pre-COVID, so pre-COVID, rent was only 6% advantage over a monthly mortgage payment. It—even today, with the rate rally, it's still about a 58% difference now. So the demand is there. It—we're in the affordable segment, and, you know, we just, the, the, these.
So that's the big risk is negative migration, which in our multifamily book, which due to those factors, we think is, you know, a low risk. Yeah, Adam, do you want to? Yep.
Stephen Laws (Analyst)
Yeah, no, appreciate the comments on that, Tom.
Tom Capasse (CEO)
Yeah.
Stephen Laws (Analyst)
Just kind of curious where you view the risk getting back there, but but seems like you've got it laid out pretty well. You know, wanted to talk about, I guess, to follow up on that, right? Credit, you know, the 60-day EQ and the CRE portfolio down to, you know, low 6s from around 10. You know, where do you expect that to stabilize? You know, you know, is it going to be a little volatile near term? Do you expect it to continue trending down, and kind of what's the normalized level for the type of assets, you know, and borrowers you have in your portfolio?
Adam Zausmer (Chief Credit Officer)
Yeah. Hey, hey, it's Adam. Yeah, I mean, listen, you know, we believe, you know, certainly the first half of 2024, you know, will have been the most challenging part of the cycle. You know, delinquency levels, you know, they will remain volatile, you know, through the next 12-18 months. You know, levels will move up and down as new assets, you know, experience issues and others get resolved. I think, you know, a lot of the work that we have done on the liquidation side, you know, is certainly going to reduce those exposures, you know, specifically on liquidation of some of the larger office assets. So I think that's going to be a net positive.
And, you know, from a peak perspective, you know, still, you know, it's certainly Q1, you know, around that 10% number today, you know, at 6.3%. You know, we think we hit the peak, and we don't expect, you know, the CRE portfolio to exceed, you know, the Q1 2021 levels. You know, certainly concentrated in the most resilient and liquid asset class, you know, multifamily, which is over 70% of the portfolio. And, you know, we expect this sector to rebound nicely as rate and economic fundamentals improve. And I think, you know, from where our basis is in these transactions, you know, we think the long-term valuations are, you know, certainly supported by continued affordability issues in the SFR sector.
And then we, you know, which is, you know, particularly beneficial to, you know, the area of the multifamily arena where we focus, which is the workforce housing. So, you know, coupled with, you know, a lot of the modest progress that we have made, you know, for, you know, extremely cooperative borrowers that really needed more time to execute their business plan. So again, I think, you know, the worst is certainly behind us. On the multifamily side, you know, made a lot of progress, you know, in working through the M&A portfolios. So yeah, I think we've already hit our peak.
Stephen Laws (Analyst)
Great. And lastly, Tom, again, buybacks, you know, how do you consider, how do you think about capital allocation to buybacks versus, you know, new investments? You know, you were pretty active in Q2, fairly close to where the stock is now, you know, below 70% of book. So just wanted to get your thoughts on capital allocation between those options as you grow leverage.
Tom Capasse (CEO)
Andrew, you want to comment?
Andrew Ahlborn (CFO)
Yeah. So we have approximately $42 million left in our program. Liquidity today, you know, remains very healthy, you know, at over $250 million. The sales we described earlier, as well as GMFS and some other initiatives, are going to bring in additional liquidity. So I certainly think the share repurchase program, depending on where the stock is trading and other uses of capital, which include, you know, new investments as well as protecting the existing portfolio, will be a tool we use to try to deliver value here. But I certainly think the liquidity position of the company, you know, allows us that opportunity.
Stephen Laws (Analyst)
Great. I do have one more, sorry. You mentioned the servicer in your CLOs in the last couple of calls and potentially changing that or bringing it in-house. Any update on that?
Tom Capasse (CEO)
Adam, you want to comment? You know, we've actually had some pretty positive experience this quarter with the servicer.
Adam Zausmer (Chief Credit Officer)
Yes, you know, the majority of the improvement, you know, certainly on our bridge side, you know, is due to the collaboration with our third-party special servicer. Certainly, you know, quicker speeds to resolve, what was, you know, in the first half, really, you know, a heavy backlog of relief requests submitted by our clients. You know, we have in process now, you know, an additional, you know, 10, 10-plus mods totaling about $300 million that we expect to execute in short order here. And, you know, we really feel, you know, the third-party special servicer now has a, you know, like I mentioned, a really greater sense of urgency, is being more proactive to effectuate the pending resolutions. So yeah, I mean, things have certainly improved.
I think they're, you know, on the same page with us in terms of, you know, executing these, you know, industry-standard mods, and, you know, again, giving our clients more time and more breathing room, in a tough market to stabilize the assets and achieve permanent financing.
Stephen Laws (Analyst)
Great. Appreciate the comments this morning.
Operator (participant)
The next question we have is from Jade Rahmani of KBW. Please go ahead.
Jason Sabshon (Analyst)
Hi, this is actually Jason Sabshon on for Jade. For my first question, it would be helpful to hear what was earnings excluding the tax gain, and how long do you expect the tax gains to continue for? And on that note, what do you estimate as the current economic run rate of distributable earnings?
Andrew Ahlborn (CFO)
Yeah, so the tax activity in the quarter is actually a little different than what occurred in the first quarter. So the tax activity in this quarter was directly related to the loan sale activity, so tax benefits directly related to losses or valuation allowances or reserves on loans that are liquidating. So I don't think you can you know look at the tax items this quarter in isolation. A little different than last quarter, where the tax activity was specifically related to you know restructuring within the organization to monetize certain NOLs. So this is a direct offset to those losses.
Then, you know, as we described previously, you know, we do believe that the activities that we laid out in our remarks, and that I commented on, provide a path forward towards, you know, covering that $0.30 dividend. We think that path takes us into 2025. With that being said, the dividend is, you know, set at right around 9.5% on value today. So, you know, given our target of 10%, we think as this cycle works its way through, that the platform is to push beyond that. We don't think that occurs until we move, you know, into the back half of 2025, though.
Jason Sabshon (Analyst)
Got it. Thank you. Just to move to delinquencies, how much of the decline in DQs was related to the loan portfolios that you sold? And separately, it would be helpful to hear more color on how delinquency rates within CLOs are calculated, because we noticed some differences between the reported rates and the implied rates based on interest payments received in the remittance reports. Thank you.
Andrew Ahlborn (CFO)
Yeah, so in terms of... I'll, I'll take the first one and let Adam take the, the second half. When we look at delinquency rates in the portfolio today, we only sold through June 30th, you know, $20 million of what we, you know, are, of the full population that we are under contract to sell. So the impact on the reduction in delinquencies in, in this quarter's number, you know, was only about $15 million, so very minimal. The majority of it was driven by, you know, modifications and natural improvement in, in credit. You know, Adam, I'll let you take the second one.
Adam Zausmer (Chief Credit Officer)
Yeah, I think, you know, from how the delinquencies are reported, you know, the public information on the CLOs, you know, would, I think, you know, look different than what's in our numbers today, given that, you know, our... You know, when you look at our bridge portfolio in, you know, in the supplemental deck, and you look at the, you know, the delinquency rates, that is the total bridge portfolio. So that's not just what's in the CLOs. That includes what's on our balance sheet. So I think there's a difference there. And then I think, again, I think it's just really, really a timing aspect of, you know, when those remittance reports are out, when the information's published, depending on which research report you're looking at.
I think we've certainly seen, you know, over the past few months, you know, a wide range of, you know, delinquency rates across all the issuers, depending on, you know, what report you look at and the timing of it.
Jason Sabshon (Analyst)
Great. Thank you.
Adam Zausmer (Chief Credit Officer)
Sure.
Operator (participant)
The next question we have is from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Christopher Nolan (Analyst)
Hey, guys. Andrew, is it fair to say that the allowance, valuation allowance volumes are really a function of, how much you're transferring to held for sale?
Andrew Ahlborn (CFO)
Yeah, the majority of the reduction in CECL this quarter was directly related to that.
Christopher Nolan (Analyst)
Given that's trending down-
Andrew Ahlborn (CFO)
W-
Christopher Nolan (Analyst)
Given the comments on the call saying that, you know, you think you saw the peak in terms of multifamily, should we expect the valuation allowance charges to go down in the second half?
Andrew Ahlborn (CFO)
I don't think we're quite in a position yet to start drastically reducing the CECL reserve. When you look at, you know, across all of our product types, we actually did for loans that are not held for sale, we did take it up slightly, and across all of our CRE products. The 7(a) allowance came down slightly in the quarter. But I don't think what you'll see is a reduction in CECL as we move forward. You know, just given that there is some level of uncertainty as we move through the next couple of quarters here.
Christopher Nolan (Analyst)
Great. And Tom, given your comments on the focus on workforce housing and so forth, all you said was true. The one point that you're missing, though, is that's a segment of multifamily which is really vulnerable to rent regulation, rent stabilization, rent control, things like that. Given that you guys have a nationwide portfolio, are you keeping an eye for that? And any comments you can make on that?
Tom Capasse (CEO)
Oh, yeah. No, just to underscore that, just that, we definitively have very little, if any, exposure to rent regulation. What Andrew meant, when workforce, it's not the rent-regulated, which is kind of the lower tier of the market. You know, I think 80% of the median income based on rent regulations. We focus on the middle income, you know, kind of A minus, B plus in suburban areas with middle income individuals, rather than Class A Manhattan or, you know, CBD. So that very little, if any, of our portfolio has any exposure to rent regulation. I think what Andrew... I'm sorry, Adam, what was that?
It was like even the New York, some of the stuff we purchased from the banks in the New York area, it's less than what % of our total exposure?
Adam Zausmer (Chief Credit Officer)
Yeah, you know, it's less than 1% of the portfolio has any-
Tom Capasse (CEO)
Yeah
Adam Zausmer (Chief Credit Officer)
... any rent, rent-regulated, rent, you know, controlled, stabilized, et cetera, in the, you know, in the New York City metro area, for sure.
Tom Capasse (CEO)
But you're right. That being so, the bottom line is we have no exposure to that risk, but that is definitely a risk. We see that through the activity of our ReadyCap Affordable, the old Red Stone business, which is deep in that market. Now, they don't, you know, they're in the LIHTC market, where there's very limited defaults. But there's definitely a lot of volatility in that market with respect to pending initiatives in various municipalities throughout the U.S.
Christopher Nolan (Analyst)
Great. Final question. On Funding Circle, given that's a fintech company, and I presume it's sort of populated by guys who are very sharp on current trends in terms of online lending and so forth, strategically, what does that imply in terms of how, Ready Capital can utilize that platform for other things? Any thoughts on that?
Tom Capasse (CEO)
Yeah, so they, they definitely have a very complementary platform to our current, you know, front-end technology, the loan originations, the algorithms that the iBusiness uses. They have a longer track record, with, again, their primary- They were owned by one of the larger U.K.-based entity, which is one of the largest providers of credit to small businesses on an unsecured basis, at the so-called SMEs in the U.K. Actually, the external manager has a significant funding relationship with them, so we're very familiar with their, yeah, the quality of their originations. This business was deemed non-core, and they've sold it. So the first- there's kind of a twofold approach to harvesting the value in the platform.
One is to obviously just immediately cross-sell the $4 billion of borrowers that you know have current unsecured loans in north of 35%, that we can refinance near you know in mid-20%. So that's one. Two is to reduce OpEx, where there's overlap between the two platforms. And again, they're both tech-oriented, so that is already underway and very limited execution risk. And the third is, as you're indicating, the potential for bolt-on products, which the most obvious would be unsecured loans that don't meet the SBA guidelines, you know, equipment leasing, et cetera. And so that's kind of stage three of how we would generate you know the value from the platform.
But again, the interesting about this whole small business, it's a very small percentage. It's very difficult to deploy capital given the inherent leverage in the government programs. So we will consider, you know, looking at the flow programs on unsecured small business loans, which, you know, we can either sell in the secondary market or to the extent where we have capital, and it, it's ROE accretive, holds on balance sheet.
Christopher Nolan (Analyst)
Great. Thank you for the comments.
Tom Capasse (CEO)
No problem.
Operator (participant)
There are no further questions at this time, and I would like to turn the floor back over to Tom Capasse for any closing remarks.
Tom Capasse (CEO)
Again, we appreciate the comments and the participation and look forward to the next quarter's earnings call.
Operator (participant)
Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your line.