Ready Capital Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
Ready Capital is an externally managed REIT and multi-strategy real estate finance company that originates, acquires, finances and services small-to-medium balance commercial, construction, SBA, residential mortgage and related real estate investments. The report covers the unaudited quarter ended March 31, 2023, filed May 9, 2023.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Interest income | $217.6 million | $124.4 million | +$93.2 million |
| Interest expense | $(160.4) million | $(61.0) million | $(99.4) million |
| Net interest income before loan-loss recovery | $57.2 million | $63.4 million | $(6.2) million |
| Recovery of loan losses | $6.7 million | $(1.5) million provision | +$8.3 million |
| Total non-interest income | $44.1 million | $87.8 million | $(43.7) million |
| Total non-interest expense | $(70.6) million | $(67.5) million | $(3.1) million |
| Net income | $37.0 million | $64.3 million | $(27.3) million |
| Net income attributable to Ready Capital | $33.1 million | $61.5 million | $(28.3) million |
| Basic/diluted EPS | $0.30/$0.29 | $0.70/$0.66 | Lower |
| Distributable earnings | $38.1 million | $48.9 million | $(10.7) million |
| Distributable earnings per diluted share | $0.30 | $0.48 | Lower |
| Common dividend declared per share | $0.40 | $0.42 | $(0.02) |
The filing does not provide a conventional revenue figure or a single consolidated operating margin. Based on reported net income and total assets, net income was approximately 0.32% of quarter-end assets; this is not a period-end or annualized return measure.
Balance sheet, cash flow, debt and liquidity
- Total assets were $11.54 billion, down 0.7% from December 31, 2022. Total stockholders’ equity was $1.88 billion, down 0.5%.
- Cash and cash equivalents were $111.2 million; cash, cash equivalents and restricted cash totaled $246.7 million, down $50.3 million during the quarter.
- The loan portfolio, including consolidated VIE loans and loans held for sale, totaled approximately $10.29 billion at quarter-end. Loans, net on the consolidated balance sheet were $3.13 billion, while consolidated VIE assets included $6.78 billion of net loans.
- Total debt carrying amounts included $2.48 billion of secured borrowings, $5.30 billion of securitized debt obligations, $169.6 million of PPPLF borrowings, $343.8 million of senior secured notes, $114.7 million of convertible notes and $663.6 million of corporate debt.
- Management reported total leverage of 5.1x and recourse leverage of 1.4x. The company was in compliance with its debt, financial and convertible-note covenants.
- Operating cash flow was $(0.9) million, investing cash flow was $47.9 million and financing cash flow was $(97.3) million. Financing outflows principally reflected repayments of secured borrowings and PPPLF borrowings, while investing inflows included loan paydowns and real estate sales.
- Contractual maturities for senior secured, convertible and corporate debt included $115.0 million in 2023, $120.0 million in 2025 and $660.9 million in 2026. The $115.0 million of 7.00% convertible notes mature August 15, 2023.
Material changes versus comparable periods
- Interest income increased 74.9%, primarily from higher interest rates and the larger SBC portfolio, but interest expense increased 162.9%, substantially reducing net interest income before loan-loss effects.
- Net unrealized losses on financial instruments were $11.7 million versus a $45.3 million gain in Q1 2022. The change primarily reflected a $6.1 million unrealized loss on residential MSRs and a $3.5 million unrealized loss on derivatives.
- Residential mortgage banking income increased to $9.2 million from $8.4 million, but related variable expenses increased to $5.5 million from $1.0 million.
- Other income included $9.7 million of employee retention credit consulting income, compared with none in the prior-year quarter.
- PPP-related net income declined to $2.5 million from $18.3 million as PPP balances continued to decline through forgiveness and principal repayments.
- Loan investment activity declined to $828.8 million from $3.07 billion. SBC originations were $410.5 million versus $2.19 billion, SBA originations were $92.3 million versus $101.0 million, and residential agency originations were $326.0 million versus $769.1 million.
- Non-accrual loans increased to $251.7 million from $242.8 million, or 2.5% of loans, while loans 60 or more days past due increased to 2.7% from 2.4%.
- The allowance for loan losses decreased to $67.8 million from $90.5 million, reflecting a $4.5 million recovery and $18.2 million of charge-offs, principally related to construction loans.
Guidance, outlook, commentary and unusual items
- Management described continued market volatility, elevated interest rates, inflationary and macroeconomic concerns, and geopolitical uncertainty. Results remain sensitive to interest-rate movements, credit spreads, prepayments, property values, defaults and funding availability.
- Approximately 86% of portfolio loans were adjustable-rate and 14% fixed-rate based on unpaid principal balance. Management stated that 72% of fixed-rate loans were match-funded in securitizations.
- The company entered into an agreement to acquire Broadmark Realty Capital. Each Broadmark share would generally convert into 0.47233 Ready Capital shares, subject to adjustments. Closing was expected as soon as Q2 2023, subject to stockholder approvals and other conditions.
- A shareholder lawsuit filed in April 2023 alleges securities-law violations concerning the Broadmark merger proxy materials and seeks to enjoin the transaction, among other relief. The company intends to defend the action.
- The company’s loan portfolio remained concentrated in multifamily collateral at 67.6% of unpaid principal balance and in Texas at 20.0%. Loans with LTV ratios of 60.1% to 80.0% represented 76.1% of the portfolio.
- Unfunded commitments totaled $819.8 million for loans, $16.7 million for loans held for sale and $0.9 million for preferred equity investments. Commitments to originate residential agency loans totaled $185.2 million.
- The company contributed $36.6 million to a $125.0 million commitment to a fund managed by Waterfall Asset Management, leaving $88.4 million unfunded.
- The filing provides no formal earnings, dividend or origination guidance for the remainder of 2023.
Most important facts for an investor to verify
- Whether the Broadmark merger closed on the expected timetable, its final exchange ratio, share issuance, integration costs and effect on leverage and book value.
- How the company funds or refinances the $115.0 million convertible notes maturing in August 2023 and manages other 2025–2026 maturities.
- Trends in non-accrual loans, 60-plus-day delinquencies, construction-loan charge-offs and the adequacy of the $67.8 million allowance.
- Exposure to margin calls, collateral haircuts and refinancing risk under secured facilities and repurchase agreements, particularly with Credit Suisse, where reported risk was $350.1 million, or 18.5% of equity.
- The sustainability of the $0.40 quarterly common dividend relative to distributable earnings of $0.30 per diluted share and the company’s REIT distribution requirements.
- The recurring versus non-recurring nature of the $9.7 million employee retention credit consulting income and the impact of unrealized MSR and derivative volatility on GAAP earnings.
- Changes in multifamily, office, construction and regional real estate conditions, together with the effect of interest rates and prepayment speeds on asset values, funding costs and servicing-right valuations.