Yahoo Finance READY CAPITAL CORP (RC) Q4 2018 Earnings Conference Call Transcript
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READY CAPITAL CORP (NYSE: RC)
Q4 2018 Earnings Conference Call
March 13, 2019, 8:30 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Ready Capital Corporation Fourth Quarter and Year End 2018 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.
(Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to your host, Mr. Rick Herbst, Chief Financial Officer. Thank you. You may begin.
Frederick C. Herbst -- Chief Financial Officer
Thank you, operator, and good morning, and thanks to those of you on the call for joining us this morning. Some of our comments today will be forward-looking statements within the meaning of the Federal Securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the Company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 2018 earnings release and our supplemental information.
By now, everyone should have access to our fourth quarter 2018 earnings release and that supplemental information. Both can be found in the Investors section of the Ready Capital website.
I will now turn it over to Tom Capasse, our CEO.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Thanks, Rick. Good morning. I'd like to take a brief moment to discuss the status of Ready Capital's pending merger with Owens Realty Mortgage, a publicly listed and established specialty finance REIT that focuses on originating small balance commercial real estate loans, very similar to our own transitional loan business.
We believe this transaction will benefit our shareholders by increasing both our equity base and -- well, with minimal dilution. Further, because we are not taking on significant staff expenses, our operating expense ratio should be reduced. Ready Capital will hold a special stockholders' meeting on Thursday, March 21st and with a positive shareholder vote, we expect to complete the merger by the end of the quarter. As I just described, the benefit to shareholders of both companies are numerous and we encourage shareholder participation in the proxy vote.
The fourth quarter marked Ready Capital's second anniversary as a public company. Before I comment on our quarterly financial results, I'd like to highlight some of the Company's accomplishments over the last two years. First, we have originated or acquired $3 billion in small to medium balance commercial and mortgage loans. Quarterly investment activity has more than doubled since our first quarter as a public company.
Second, our annualized return on equity and dividend yield, since becoming a public company, remains at the top of our peer group. Third, we've improved financial leverage raising $345 million in corporate debt and securitizing $2.9 billion in small balance commercial loans across all our product lines. Finally, our total shareholder return has been 42% since becoming public, reflective of the continued execution of our business plan.
Now I'll turn to fourth quarter financial results. First, GAAP earnings for the quarter were $0.30 per common share and $0.34 per share on a core basis. The earnings this quarter were adversely affected by negative marks on our interest rate swap positions used to hedge a record high inventory of fixed rate products, prior to securitization. The sudden decline in treasury yield at year-end resulted in an after-tax reduction in GAAP and core earnings of $0.12 per share. Absent this loss, core earnings for the quarter would have been $0.46 per share.
Rick will discuss the non-recurring nature of this in more detail in a few minutes. Secondly, our origination and acquisition activity remains robust. In the fourth quarter, we originated $400 million of small balance commercial or SBC and Small Business Administration or SBA loans. This is a 16% increase over the third quarter and in line with the Company's record highs in the second quarter, with an all-time record highs in SBA and transitional loan origination volumes.
Our investment activity remains strong in the quarter with $350 million of SBC loans originated or acquired as of yesterday evening. We expect total first quarter volume to be solid given, the current money pipeline of $365 million in originations and $165 million in pending acquisitions, some of which will close this month.
We do note that Freddie Mac volumes have experienced reductions due to increased market competition in the multi-family lending space combined with our decision to maintain a disciplined approach to credit risk. That said, we are actively pursuing to increase Freddie Mac volume and diversify our product mix.
Separately, the government shutdown and a cautious small business sentiment reduced overall new SBA 7(a) loan approval. In the first quarter, we've seen a correlated reduction in quarter-over-quarter origination volume, but remain encouraged by our performance compared to the overall market.
Total SBA approvals are down 18% to $7.3 billion for the first four months of the Government's fiscal year compared to a 29% increase for us over that period, due to our continued focus on higher balance real estate secured loans.
Finally, we remain active in the securitized debt markets. In the fourth quarter, we closed a $263 million legacy asset, commercial mortgage-backed securities transaction comprising loans sourced from our acquisition strategy.
In January, we completed our fifth fixed rate product securitization, which at $400 million was double the size of previous deals. We're also getting ready to launch a $300 million transitional loan, collateralized loan obligation subject to market conditions.
Let me now recap Ready Capital's 2018 performance. For the year, our GAAP and core earnings were $1.84 and a $1.76 per common share respectively, resulting in a dividend coverage ratio of 110% on a core earnings basis. This represents the return on equity of 10.8% and a core ROE of 10.3%, both exceeding our stated ROE target of 10%.
Total SBC originations equaled $1.2 billion, with an additional $455 million in asset acquisition. Total investments in 2018 of over $1.6 billion represented 50% growth over the previous year. Furthermore, our adjusted book value remained fairly steady throughout the year growing $0.22 to $16.91 per share as we had minimal mark-to-market risk on our asset as compared to others in our space.
Now I'd like to make a few observations on the strength of the small balance commercial property market. Strong SBC space demand is reflected in record low fourth quarter vacancies of 3% to 5% and record annual rent increases of 5% to 10% across SBC sectors.
The combination of limited space and tight labor market is causing small businesses to reduce occupancy demand. As a result, year-to-date third quarter SBC prices slowed to 4% versus 6% last year, although they have finally reached the 2007 peak, three years behind large balance commercial real estate market.
Industrywide SBC originations decreased 5% through the third quarter, but at a $160 billion, will likely mark the sixth consecutive year of over $200 billion. The takeaway remains that among risk assets, small balance commercial senior lending will be a safe haven late in this credit cycle.
Now, before I turn over the call over to Rick, I want to personally state how happy I am that Andrew Ahlborn will be assuming the CFO role effective June 1. Andrew represents a great example of the depth of our team and has been a key finance executive working closely with Rick and our Company for nearly nine years. I congratulate Andrew on his well-earned promotion. He has joined us here today.
Also I'd want to -- I'd like to congratulate Rick on his retirement. Rick has been instrumental in helping to create a profitable, sustainable business model at Ready Capital, and as he transition to retirement, he leaves us in strong financial shape and well positioned for future success. Rick, we wish you all the best in retirement.
Frederick C. Herbst -- Chief Financial Officer
Thank you, Tom. Before I get into the results, I'd like to express my gratitude and appreciation for my time here at Ready Capital. After a decade here and before that as CFO of two other public companies, I must admit, I am looking forward to the next stage of my life. That said, I will miss my role and everyone here and I am confident of the Company's tremendous future success under the guidance of Tom, Andrew and the rest of the team.
Before hitting the highlights on some of the slides included in the supplemental information deck, I'd like to discuss a few of the income statement items this quarter. Tom mentioned the decline in GAAP and core EPS was due to outsized mark-to-market losses on our interest rate swap positions taken in anticipation of the large $400 million securitization, Tom mentioned. We have always hedged the interest rate risk associated with our fixed rate lending and securitization program. However, we did not use hedge accounting for these hedges.
Now that we have the track record sufficient to qualify, starting in the fourth quarter, we are utilizing hedge accounting and will do so going forward. The mark-to-market loss on hedges entered into prior to the fourth quarter, net of tax, totaled $3.9 million for the quarter and is included in the net unrealized gain line item in our financial statements.
The unrealized losses associated with the fourth quarter contracts are accumulated in other comprehensive income and will be amortized as a yield adjustment to the fixed rate securitization closed in January. $1.5 million of these unrealized derivative losses will be covered in January, as treasury rates rose by the time the securitization closed.
Going forward, we intend to use hedge accounting for these derivatives and we should not see dramatic unrealized gains or losses related to them in the future. Slide 3 and 4 depicts summary highlights for the fourth quarter of 2018, as well as for the full year 2018. Although unrealized losses negatively impacted our results in the fourth quarter, we remain encouraged by both the financial performance and the investment activity of the Company. Small balance commercial originations of approximately $400 million in the fourth quarter equaled the record high we set back in the second quarter.
Slide 5 shows the component of the Company's return on equity. We have updated the presentation to break out the effects of corporate leverage on ROE. We believe the new presentation enhances the usefulness and period-over-period comparability of the operating segments.
The decline in the leverage yield was due to a reduction in income from the residential mortgage bank segment related to mark-to-market loss on the residential MSRs and also a seasonal decline in origination volumes, as well as a decline in the small balance commercial originations segment due to reduced gains on Freddie Mac loan sales.
These declines were offset by increased SBA loan sale, a reduction in various operating expenses, and a reduction in the provision for income taxes related to those derivative and MSR losses.
Slide 6 summarizes our loan originations over the previous five quarters and we are pleased with the growth in both our SBA and transitional loan segments.
Our conventional business also experienced a strong quarter, only surpassed by the record volume set in the third quarter of 2018. Freddie Mac loan origination volumes remained flat quarter-over-quarter due to competitive pressures from other products in the marketplace.
During the quarter, we hired three new loan officers, as we remain cautiously optimistic that volumes will return to previous levels, despite increased market competition.
Slide 8 summarizes the SBC originations segment. Strong originations with fixed rate and transitional loans resulted in a 13% growth in balance sheet loans, the largest increase we've had to-date. A decline in the gross levered yield was attributable to lower gains from Freddie Mac loan sales as well as some spread compression in our fixed lending business up to the January securitization. Delinquencies remain low, although up a bit from last quarter. Of the 100 basis point increase in the 30-plus-day delinquent loan category, three-quarters of them have either paid in full or returned to current status at the end of the year.
Slide 9 covers the activities of our SBA segment. Gross levered yields remained strong at 31% driven by a 57% increase in loan sales and rising interest income due to increases in the prime rate. An increase in delinquencies is related to the acquired CIT portfolio. Based on the low loan-to-value ratios and our successful workout history, we do not anticipate any significant credit losses in this portfolio.
Slide 10 shows summary information of the acquired portfolio. This segment continues to provide stable double-digit levered yield, further supported by variable gains from our joint venture investments. The performance of the portfolio remains strong and we will continue to add to the portfolio as opportunities and capital permit. The percentage of match-funded fixed rate loans increased dramatically, due to the securitization of these loans in the quarter.
Slide 11 summarizes our residential mortgage business. Volumes declined in the quarter due to expected seasonality and continued pricing competition in our third-party origination business. Our servicing portfolio now exceeds $7.5 billion and we believe serves as a natural hedge to loan origination volumes in a rising rate environment. Operating expenses dropped $900,000 quarter-over-quarter which is reflective of efforts to right-size the business to anticipated volumes.
Slide 12 is an update to the summary of the securitizations we've done within Ready Capital and this schedule includes the $263 million legacy SBC securitization that we closed in November. Delinquencies of our originated product remains virtually nonexistent.
Slide 13 provides information about the interest rate sensitivity of our portfolio. The chart on the left side shows that 26% of our portfolio is fixed rate loans not matched with fixed rate debt. The completion of the fixed rate securitization in January reduced this number dramatically. As you can see on the chart to the right of the slide, 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 the quarter-end and does not include the positive valuation adjustment of the servicing portfolio or any potential impact on the loan origination. The chart has been updated to reflect the use of hedge accounting on a go-forward basis.
The next few slides are similar to those presented in previous quarters and reflect the diversity of our loan pools and composition of our capital structure and various liquidity sources.
Now, I'll turn it over to Tom for some final thoughts before we take questions.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Thanks, Rick. We believe Ready Capital's differentiated focus on the small balance commercial space has and should continue to provide relative resiliency against the potential late cycle price correction in commercial real estate assets. With the Owens merger closing, we will have accomplished another goal of generating non-dilutive capital to fund budgeted origination and acquisition volume through 2020.
Looking ahead, we will continue to explore new lending product to leverage our origination network, including alternative agency program, small business products, and expansion into Europe. We are excited about 2019 and beyond and are looking forward to building this Company and value for our stakeholders.
So with that, operator, I'll now open it up for questions.
Questions and Answers:
Operator
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Jade Rahmani -- KBW -- Analyst
Thanks very much. In terms of the market volatility that played out in the fourth quarter, particularly December, did you see any pickup in portfolio loan sales or potential situations in the bridge loan space with borrower not qualifying for an extension, not able to get a refi and mortgage REITs or debt funds trying to sell certain loans?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Not really because it was more -- that was more of a -- kind of risk off environment that occurred at the end of -- starting in August and culminating on Christmas Eve. That was really more of a Main -- Wall Street to Main Street. We haven't seen any related impact in either the banks on the secondary acquisition side or the bridge market. Now, again, our focus is -- our average bridge loan is only $8 million.
I mean, the industry is probably more like $25 million to $50 million and the larger guys in the hunt, literally hundreds of millions. So, we are hearing that some of those projects are starting to become big -- you're starting to see a lot of froth in terms of underwriting projects a year ago that are not meeting their business plans and are now having -- running out of interest reserves and having potential defaulter workout situations. But in our markets, we haven't seen any of that intense competition and as a result, our credits remain strong.
Jade Rahmani -- KBW -- Analyst
And if there was a pickup in the rate of delinquency or default in the $20 million or so loan size range, is that an area that you might look to play in, given your track record and history, length of experience doing loan workouts?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yes, we're always -- that's our core business plan. Rain or shine, if we see a situation -- you know just stepping back a second, there's a 100 commercial mortgage alerts last quarter, so there is a 152 bridge lenders. I'd say about 40% of them are start-ups that really don't have a lot of experience as our team would or some of the large are obviously public REITs, and you're going to -- you're definitely going to see a number of maturity defaults in these, because again, the fact that they bankrolled unseasoned sponsors with cuspy (ph) projects. So yes, we would look to -- our acquisitions team is always on the prowl with the brokers to purchase these projects from the funds at a discount.
Jade Rahmani -- KBW -- Analyst
And in terms of the skill set again, and value of the platform; are you interested in building a special servicing type of operation, and can you remind us whether Ready Cap is a rated special servicer?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Ready Cap is currently not a rated special servicer. What we do is, our model utilizes a technology from the external manager, called Waterfall Controlled Asset Management, WAMCAM (ph), it's a system we've built over -- literally over a decade that enables us to plug into our servicers and monitor the underlying credit looking at NOI updated, the ASRs and we -- anything that's non -- that becomes delinquent or on watch list, we assign a team within the external manager to manage that.
We look at net present values. We update the values on a monthly basis. So what we do is we own the MSR, we farm out the servicing to a large, low cost servicer to do the PNI collections, but we -- once a loan goes delinquent, we manage that delinquent loan with our own internal staff that has experience, having bought about $5 billion of small balance commercial non-performing loans since the recession.
So, it's a low-cost model which enables us to control all of the special servicing and at the same time, enables us to do something called Champion Challenger to pivot from one servicer to another based on their operational metrics.
Jade Rahmani -- KBW -- Analyst
Turning to investment activity, can you give any ranges by segment of what you expect for the first quarter and 2019 for originations across the various products?
Frederick C. Herbst -- Chief Financial Officer
Yeah, Jade, I can give you some color, given that we're halfway through the -- about a month (ph) of the quarter. The conventional fixed rate products will be probably, slightly under where it was in the fourth quarter, but still a pretty strong quarter. The transitional loan business is going well, that should be pretty close to where we were on the fourth quarter and our acquisitions are up over where we were in the fourth quarter.
So in total, the total capital deployed is around $400 million. I think it'll be a reasonable estimate. Obviously it's hard to tell in the next couple of weeks what's going to close in the pipeline. But should be in that range, where we do see a little bit of a down trend is in the Freddie Mac business, that looks like it will fall short of where we were in the fourth quarter and we've seen more pricing pressures from Fannie and others and we are -- I think we've talked about in the past, we are looking this year to expand our agency product line.
And then, on the SBA side, there was a little bit of a dip with the government shutdown and the slowdown in the authorizations and a little bit of the -- or the market slowing down a little bit, but our pipeline is very strong there. So we think we'll make that up over the rest of the year, but I would think our originations are not going to hit. We had a record fourth quarter. I think they're going to be more in line with where we were in the previous couple of quarters on the SBA side.
Jade Rahmani -- KBW -- Analyst
Thanks very much.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yeah.
Operator
Thank you. Our next question comes from the line of Ben Zucker with BTIG. Please proceed with your question.
Ben Zucker -- BTIG -- Analyst
Thanks for taking my questions and congratulations Rick, on your retirement. It's been fun working with you.
Frederick C. Herbst -- Chief Financial Officer
Thank you, Ben. You too.
Ben Zucker -- BTIG -- Analyst
You mentioned the January fixed rate securitization and it was roughly $400 million and definitely your biggest ever, by a wide margin. I'm wondering, did you guys receive any increased efficiencies from that larger transaction size that might show up in lower fees being amortized?
Frederick C. Herbst -- Chief Financial Officer
We certainly, the cost -- the cost, obviously, it's kind of almost a fixed cost. So as a percentage of the outstanding deal, it was much lower than typical. The advance rates were pretty much on par with what we've seen in the high '80s on previous deals.
Ben Zucker -- BTIG -- Analyst
That's helpful. And do you think, going forward like this is a move and a change in strategy to maybe to target bigger securitizations, but maybe less frequently and improve on the expense efficiencies?
Frederick C. Herbst -- Chief Financial Officer
Yeah, I think so. It all depends on where the volumes come in for that product, and they've been pretty strong here in the last quarter or two. But yeah, ideally, we'd like to do them maybe north of the $300 million range. I should point out, but the way that with the hedge loss that we had, obviously as the rate movement toward the end of the year, but also we had such a huge inventory because it was such a large securitization.
So we -- the notional amounts of the hedges were more than they typically were. We did recapture that $1.5 million of that loss in January. We closed out the hedge business as well due to interest rate swap contracts on those loans. So we were able to recoup some of that -- the loss that we realized in the fourth quarter.
Ben Zucker -- BTIG -- Analyst
That's great to hear and I think that's important for the market to hear as well so thanks, Rick. Tom, I'm wondering, is there any product or part of your business that you're most excited about right now? And I'm trying to get a feel for where we might see the ORM Capital allocated? It looks like you have a pretty healthy pipeline kind of across the business generally, so is it just going to feel like kind of even distribution or what are you thinking right now?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
I'd say the -- definitely, in terms of incremental capital beyond the regular way originations you've seen over the trailing four quarters, the incremental capital will probably be utilized to focus on both wholesale channels in our existing businesses. So for example, in the SBA business, we're looking at doing secondary conduit, buying loans from community banks, and also doing non-owner -- sorry, conventional non-SBA owner-occupied loans, which we have a track record of securitizing. We just did a $263 million legacy deal. That's the wholesale channels within the origination business and that's managed by the businesses -- operating businesses there.
The other side which is -- which we're excited about is, it brings up the opportunity for us to spend more money on acquisitions. There's still a lot of these secondary portfolios out there, both scratch and dent small balance deals which the -- or the so-called extended for tenant deals that now the regulators are forcing banks to reserve again.
And secondly, there are performing multi-family, for example, portfolios where banks are hitting these caps, the regulators put a cap of 300% -- I think it's 300% of Tier 1 capital. And if you have a certain growth rate, then you have -- it impacts your CAMEL ratings. So we're seeing a lot of interest from banks in terms of buying those on a flow basis. So we're -- yes, we're going to be focused both on those three, those two things.
And the third thing is, we are looking at businesses and portfolios through our London team that have ROEs equal to or greater than what we're doing here in the US, both on the transitional lending side as well as the stabilized core -- the stabilized property lending. Those are the three areas we're looking to deploy capital beyond just the existing pipeline.
Ben Zucker -- BTIG -- Analyst
That's really helpful. And then if I could sneak in a follow-up since you led me there. You're talking about expanding into Europe and you mentioned the London team and some of your peers speak very highly of this European market. So is there any kind of build out or investment required for you to start showing this international capability or do you kind of have the pieces in place already?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Pieces in place, we've got a -- at present, the external manager Waterfall had an office for three years in London, led by one of our partners, and they have a team of about a dozen in London and we have a team of about five in Dublin. And they have -- they're buying NPLs in various jurisdictions in Europe, so they have all the infrastructure and the same technology we do here for due diligence, appraisals. So if we did something there, we would probably pick on (ph) one of our Ready Cap staff to work with the existing external manager to manage that business there. But you know, they're established and again we focus on small balance asset -- small balance property is not the -- not competing with the large P/E funds with $100-million-plus transactions; we're still focused again on that small to middle market where we think there is greater -- less competition and greater returns.
Ben Zucker -- BTIG -- Analyst
Great, thanks for taking my questions everyone.
Operator
Thank you. Our next question comes from the line of Tim Hayes with B. Riley FBR. Please proceed with your question.
Tim Hayes -- B Riley FBR -- Analyst
Hey, good morning everyone. My first question just on the operating expense reductions, were those predominantly at GMFS and how should we think about OpEx trending over the course of the year. Is there more wood to chop there? And where do you see the Company adding more resources?
Frederick C. Herbst -- Chief Financial Officer
The OpEx was down this quarter, fortunately. Part of it was volume related, you know just things that relate to origination volumes. It wasn't so much GMFS. GMFS on the -- if you're referring to the slide on section -- on Page 5, that's -- it was up in the top line there. We did have the opportunity to clean up. Over the course of the year you -- we may have to close various things and then drew them up as we get little more clarity toward the end of the year.
I would think going forward once we close the merger, we're not really adding any OpEx to speak off; very nominal OpEx, but we have a capital base of 40% higher or so. So that expense ratio should be down around the 8% level. So we're making some investments in technology that will ultimately result in some cost savings, but until you get the technology implemented, sometimes it doesn't hit right away.
Tim Hayes -- B Riley FBR -- Analyst
Okay, so there were no -- I mean, I know you had talked about in the past acquiring a Fannie licensing, getting into some other agency products and obviously the SBC business ramping, just wondering if you're thinking about adding more headcount over the course of the year around any of those verticals?
Frederick C. Herbst -- Chief Financial Officer
Nominally, we are hiring new loan officers and loan origination staff, we think we have capacity within our current infrastructure to handle additional volume from where we are today. If the volume goes up higher, which we hope it will, we will use it to hire some support staff to support that volume, but it shouldn't be dramatic.
Tim Hayes -- B Riley FBR -- Analyst
Understood. And then, what is your view of the mortgage banking landscape and for GMFS, with the Fed seemingly getting more dovish and lower expectations for higher rates at this point. Do you see refi's potentially coming back or do you expect more volatility? And if it's the latter, do you see opportunities to add around this segment inorganically?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yeah, remember that the refi's are going to be, what is it 30% of the total?
Frederick C. Herbst -- Chief Financial Officer
20%.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
20% to 30%, down from at 70% in 2016. Our business, historically, GMFS has managed that risk through via approach -- a focus on purchase through homebuilders, direct ads regarding them, radio ads, and Internet ads regarding focus on home purchase. So I think they're well positioned to, if you will, hunker down and there have been some OpEx cuts in the fourth quarter and ongoing this quarter.
So they've right-sized their operating expense ratio and -- but they continue to see opportunities to buy teams rather than buy companies. These are bolt-ons, they are local market, some of the top loan officers believe, let's say another -- you know another -- the lender that's more focused on refi but they were top producer focused on the purchase market.
So the short version is, I think well they're not -- we're not looking to do any large acquisitions, we're looking to find teams and do maybe some market expansion like Texas, et cetera. But yes, we expect them to have -- given the fact that they're -- they have a $7.5 billion MSR portfolio and it provides a very -- in relation to their production, which is about $2 billion a year.
It's a very good balanced business with about 60% purchase. So we -- so, yes, long winded way of saying I think they'll continue to do their job as they have for over a decade and plug out a low double-digit ROE with a lot less volatility than a lot of their competitors that are more refi focused.
Tim Hayes -- B Riley FBR -- Analyst
Okay, appreciate the comments there. And then my final question, just around Owens, have they made any progress divesting of assets over the past several months, and do you still anticipate the REO portfolio largely being divested over the next 1.5 to 2 years upon the merger closing?
Frederick C. Herbst -- Chief Financial Officer
Yes to both. They have disposed of a handful of properties, relatively smaller ones. They do have one very large property, the ski resort out in Tahoe and they've sold a couple of the condo units there, but there are other larger projects there as well. We do anticipate that they will all be disposed of over the next 18 months and we'll be -- the smaller properties will go fairly steadily, we think over that period, and then the larger property will obviously be chunkier.
Tim Hayes -- B Riley FBR -- Analyst
Got it, OK. Thanks for taking my questions.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yeah.
Operator
Thank you. Our next question comes from the line of Scott Valentin from Compass Point. Please proceed with your question.
Scott Valentin -- Compass Point -- Analyst
Good morning everyone. Thanks for taking my question. Rick, congratulations on the retirement and appreciate all the time you spent over the years working with me; really enjoyed it, so best of luck there.
Frederick C. Herbst -- Chief Financial Officer
Thank you.
Scott Valentin -- Compass Point -- Analyst
And then just on the -- when you think about leverage and asset growth, obviously the Owens deal is a key part of that story going forward. On Page 16, your leverage right now I think is 3.7 times on a consolidated basis and then you're at 2.1 on a recourse. I mean is that -- are those levels were you're comfortable running and then with Owens coming onboard, leverage will level step down because of the capital, is that the way to think about it and that provides capacity to keep growing the balance sheet?
Frederick C. Herbst -- Chief Financial Officer
Yes, the leverage will step down immediately. Overtime it will grow back up closing on these levels as we relever that balance sheet. We're acquiring it on really no leverage at all. And we want to lever that back up to get the returns. So I think over time, we'll get back up to the -- we've always, on the recourse side, tried to keep it around 2-to-1 as the max. On the total leverage, while it will go down immediately after the merger closes, as we do more and more securitizations that will ramp back up as well. So wouldn't surprise me over the next year to year and a half, we'd get back up to these levels as we deploy that capital.
Scott Valentin -- Compass Point -- Analyst
Okay. And then in terms of the conventional SBC origination, I know you guys mentioned a lot more transitional versus conventional. Was that a conscious effort on your part or that's just where the market led you in terms of pricing?
Frederick C. Herbst -- Chief Financial Officer
It's more where -- more where the market is, just the average size of the loans on the transitional business which is, you know we almost did twice as much in the fourth quarter of transitional versus conventional and that will be something similar to that in the first quarter. The overall size you can -- if we're doing an average of $8 million, but sometimes we'll do $10 million, $15 million and $20 million loans, those dollars can be put to work much more quickly than on an average basis on the conventional side of a couple of million dollars.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
First one is market-driven as well. We're seeing a lot more transaction volume in the sub -- the sub-$20 million property value, in terms of sponsors buying properties and rehabilitating into them, just seeing a lot more market demand as well. We're just seeing -- when you go upstream, you're seeing more of a pull-back in transaction volume.
Scott Valentin -- Compass Point -- Analyst
Okay, all right. And then, on credit quality on Page 12, you guys list 30 day delinquencies by securitization. The RCMF 2018-FL2, it showed a pretty big 2.1%, 30-day delinquency number. Just wondering if there's anything one time in there or there is a couple of large credits. I know you mentioned 75% delinquencies have since paid off or become current. Is that true for that securitization, I guess?
Frederick C. Herbst -- Chief Financial Officer
In that loan, I have to look back, let me just see if I have it here, little quick here. Okay, I don't have it in front of me. Let me take a look and I can come back to you.
Operator
Thank you. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.
Christopher Nolan -- Ladenburg Thalmann -- Analyst
Rick, Congratulations, wish you well. And Andrew, welcome.
Frederick C. Herbst -- Chief Financial Officer
Thank you.
Christopher Nolan -- Ladenburg Thalmann -- Analyst
On Owens, is the expectations for 1% EPS accretion in 2019 still hold?
Frederick C. Herbst -- Chief Financial Officer
I think what we said is, the dilution will be less than 1% (multiple speakers) and it will be accretive -- over the subsequent four quarters, it will be accretive. I don't know that we specified the accretion, so I...
Christopher Nolan -- Ladenburg Thalmann -- Analyst
Okay. That was on book value, as I recall; I was just asking about EPS especially. Okay, great. And then also the origination -- excuse me, the pipeline for the SBCs this quarter or in the fourth quarter seems to be materially higher than it was in the third quarter. Are you seeing that sort of translate to deal so far in the year, because I know you've comment on this earlier, I just wasn't quite sure if I got it?
Frederick C. Herbst -- Chief Financial Officer
We're definitely seeing, on the fixed rate side, the pipeline has picked up and we've seen this in the past, when Freddie falls off a little bit, the conventional product becomes a little bit more competitive in terms of rates, as Freddie's rates go up a little bit. So we are seeing a pickup on the fixed rate side and the bridge, because of a larger loan size, the bridge pipeline kind of fluctuates up and down because a couple of loans can really move those numbers pretty significantly. So yes, we are seeing that and we anticipate that for our forward originations.
Again, the Freddie is off a little bit on the pipeline and the loan closings. The impact of that, just so everybody is clear, Freddie, because it's more of a gain on sale business that has an immediate impact to the bottom line results, whereas the other businesses, which have picked up, they will have an impact on the longer-term results, which we're building into our portfolio at very accretive yields and spreads. But on day one, we don't see the P&L pickup that we might see on Freddie.
Christopher Nolan -- Ladenburg Thalmann -- Analyst
Great. Follow-up question, your asset sensitivity seems to have increased quarter-over-quarter, is that such just transitory?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yes, that was due to the securitization, that we're building up inventory, fixed rate inventory as of December 31st that got cleared out in January. So that number goes way down. It goes down around 10% post securitization and (inaudible) in fixed-rate loans, but its impact was a big reduction.
Christopher Nolan -- Ladenburg Thalmann -- Analyst
Great, thanks for taking my questions.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from the line of Crispin Love with Sandler O'Neill. Please proceed with your question.
Crispin Love -- Sandler O'Neill -- Analyst
Hi, good morning. Thank you for taking my question. The loan acquisitions looked a little bit light during the quarter, something at about $9 million and can you explain a little bit what drove the lower loan acquisition during the quarter and then kind of what you're seeing in the first quarter. Rick, I heard your comment earlier about that you expect it would be higher, but I'm wondering, it should be more in line with previous quarters that loan acquisition number?
Frederick C. Herbst -- Chief Financial Officer
I think it's going to come in around somewhere between -- a figure around $60 million, might be plus or minus $10 million one-way or the other, we have a couple of deals in the pipeline that may or may not close by the end of quarter. So it's not $140 million that we did a couple of quarters ago, but it's more in line with the historic average. Fourth quarter was low, really just due to timing on a couple of deals and our originations were pretty strong. We always -- it depends where our liquidity is and where the originations are. We can dedicate excess capital to the acquisitions. We always deploy or allocate our capital first to originations, and then to the extent we have excess liquidity, we can really turn the dial-up or down on the acquisitions. We always have a pipeline of those and we're always able to pull the trigger on those if we have capital. So it really just depends on where we are in the situation liquidity-wise.
Crispin Love -- Sandler O'Neill -- Analyst
Okay, and then just one on the SBA gain on sale margin. I saw it came out at about 9.1% in the fourth quarter. How does that -- how is that comparing to what you're seeing in the first quarter right now?
Frederick C. Herbst -- Chief Financial Officer
It's actually rebounded a little bit, kind of in the mid-9% so far, 9.5%. Historically, that's been around 11%. So we're hoping it will stabilize around 9.5% to 10%. Just to remind you or others, any premiums over 10% need to be split 50-50 with the SBA, so that's not -- to the extent that goes over time, it's not a dollar-to-dollar impact, to us it's 50% of that. So the impact is not as dramatic as you might otherwise think.
And also, the mix of our loans we -- and the new group of originators out on the West Coast, they do a little bit -- slightly different product and that they might be little bit lower interest rate loans given the type of assets they lend against and those have a little bit of a different, a lower premium just given -- again, just given where the coupon is. So on a weighted average that could bring down the -- our premiums on a given quarter, but the premiums out in the market have rebounded a bit from where it were.
Crispin Love -- Sandler O'Neill -- Analyst
Okay, great, thank you for taking my questions and congratulations on your retirement, Rick.
Frederick C. Herbst -- Chief Financial Officer
Okay, thank you.
Operator
Thank you. (Operator Instructions) Our next question comes from the line of Raj Patel with FCM. Please proceed with your question.
Raj Patel -- Farallon Capital Management, L.L.C. -- Analyst
Thanks, Rick. I'd like to add my congratulations as well. Thanks for the effort over the last number of years, really appreciate it.
Frederick C. Herbst -- Chief Financial Officer
Thank you Raj.
Raj Patel -- Farallon Capital Management, L.L.C. -- Analyst
My question I think is a bit of a tack on to the Owen's questions. So you talked about the Tahoe Resort being left, what -- if you can just update us on what the rest of the portfolio that you expect to acquire at the end of the month look like? And is it earning or is it liquid securities? Just what does that look like, and how quickly can you ramp that up on -- based on ROA basis?
Frederick C. Herbst -- Chief Financial Officer
They had about 60 loans for about $100 million or $1,100 million, all relatively short duration. I think the average maturity date is around nine months; now sometimes they get extended. But relatively short and a fair amount of loans have paid off even since we announced the acquisition. So we think that will continue. So for the most part, those loans will repay over the next 12 months or so and again, some will get extended, but the vast majority should pay off and those are unlevered at the moment.
We are going to put them on our warehouse line immediately to get some leverage, then redeploy that capital. And then on the assets, it's really, other than the large asset in Tahoe, it's a bunch of -- not a bunch, but maybe a dozen or so smaller properties, ORM puts out a report, it's a little dated. But I think the last one they did was maybe in September that details all of their REO and they have disposed of a few of those properties since, but it's -- they're really pretty much one-off transactions that should get disposed of here over the normal course of business here over the next year.
Raj Patel -- Farallon Capital Management, L.L.C. -- Analyst
If you get your hands on the book and quickly lever up the $100 million and then that starts flowing off naturally anyway. From the last question, will we see some SBC acquisitions that step up since that seems to be something you can do at any time to get that money to work faster?
Frederick C. Herbst -- Chief Financial Officer
Yes, absent any dramatic upswing in the pipeline, well pipeline is strong, but absent some -- or some really large bridge loans coming in, yes, that would be the plan to deploy that acquisitions.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yes staff -- I'd say the trick staff the external manager is part of their budget for 2019 have specifically been directed to focus on and working with (inaudible) et cetera to source in bank M&A context, some of these acquisition opportunity whereas we hadn't been doing that as aggressively in the prior two years given the focus on origination. So we hope to ramp that up and deploy that to get the NIM accretion from the ORM addition to book capital in a relatively short period.
Raj Patel -- Farallon Capital Management, L.L.C. -- Analyst
And then my last question, I think, Tom, you mentioned London or Europe, I'm a little rusty on the REIT rules, how would that impact the structure and taxes, et cetera, the TRS stuff?
Thomas Edward Capasse -- Chairman and Chief Executive Officer
No, this would be just acquiring portfolios outside of the TRS and I'll refer to Rick, but there is no specific European...
Frederick C. Herbst -- Chief Financial Officer
You know this, were a lot -- it's the same rules as long as they're backed by real estate; there is no prohibition against foreign lending.
Raj Patel -- Farallon Capital Management, L.L.C. -- Analyst
Got it. Great, thank you very much. Again Rick, good luck to you.
Frederick C. Herbst -- Chief Financial Officer
Thanks very much.
Operator
Thank you. We have reached the -- we've reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Capasse for any closing remarks.
Frederick C. Herbst -- Chief Financial Officer
Just before I turn it over to Tom, I want to answer the previous question on the delinquency, on the floating deal, there was one loan that went into 30-day delinquency, it's a property they have in California, where the project is, it was a rehab project that is still a little bit behind schedule in getting the approvals, because it's a historical building. We don't anticipate any losses. We're at LTV of around 70% on our loans, so that the collateral and those asset's value. So we think we're money good (ph) on that loan. But it is -- was 30-day delinquent as of December 31. Tom, over to you.
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Yes, first I'd like to congratulate Rick Herbst for his contribution to the Company and welcome Andrew, who I worked with for almost a decade. We think he has -- Rick has left us in a strong financial position and with the ORM merger, we believe that was a smart way to raise non-dilutive capital, and we look to deploy that and improve our -- maintain our targeted returns. So with that, I appreciate everybody's time and look forward to the next call.
Operator
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Duration: 49 minutes
Call participants:
Frederick C. Herbst -- Chief Financial Officer
Thomas Edward Capasse -- Chairman and Chief Executive Officer
Jade Rahmani -- KBW -- Analyst
Ben Zucker -- BTIG -- Analyst
Tim Hayes -- B Riley FBR -- Analyst
Scott Valentin -- Compass Point -- Analyst
Christopher Nolan -- Ladenburg Thalmann -- Analyst
Crispin Love -- Sandler O'Neill -- Analyst
Raj Patel -- Farallon Capital Management, L.L.C. -- Analyst
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