Ready Capital Corp annual report, FY2022

Ready Capital Corporation — FY2022 Form 10-K Summary

Business context and reporting period

Ready Capital is an externally managed mortgage REIT focused on originating, acquiring, financing and servicing small-to-medium balance commercial loans, SBA loans, construction loans and residential mortgage loans. The filing covers the fiscal year ended December 31, 2022, with fourth-quarter results also disclosed. Waterfall Asset Management, LLC provides external management and investment advisory services.

Operating segments: SBC Lending and Acquisitions, Small Business Lending and Residential Mortgage Banking.
Portfolio: Total loan UPB was $10.5 billion and carrying value was $10.4 billion at year-end 2022, including $7.4 billion of bridge loans, $1.1 billion of fixed-rate/CMBS loans, $448.9 million of construction loans and $622.3 million of SBA 7(a) loans.
Acquisition: The Mosaic Funds acquisition closed March 16, 2022, adding construction-focused assets and approximately $763.3 million of assets at updated fair values.

Financial performance and key metrics

Metric	FY2022	FY2021	Change
Interest income	$671.2 million	$403.5 million	+$267.7 million
Interest expense	$400.8 million	$213.6 million	+$187.2 million
Net interest income before loan-loss provision	$270.4 million	$189.9 million	+$80.5 million
Provision for loan losses	$34.4 million	$8.0 million	+$26.4 million
Net interest income after provision	$236.0 million	$181.9 million	+$54.1 million
Non-interest income	$259.5 million	$319.8 million	-$60.2 million
Non-interest expense	$262.6 million	$312.6 million	-$50.0 million
Net income	$203.2 million	$160.0 million	+$43.2 million
Net income attributable to Ready Capital	$186.3 million	$150.2 million	+$36.0 million
Basic/diluted EPS	$1.73/$1.66	$2.17/$2.17	Lower per-share results due primarily to share-count growth
Distributable earnings	$218.7 million	$168.0 million	+$50.7 million
Distributable earnings per diluted share	$1.79	$2.29	Lower year over year
Dividends declared per common share	$1.66	$1.66	Flat

Net interest margin before the loan-loss provision, calculated from reported totals, was approximately 40.3% of interest income in 2022 versus 47.1% in 2021. The filing does not present a single company-wide GAAP net interest margin percentage.

Fourth quarter: Net income was $13.7 million, compared with $53.6 million in fourth-quarter 2021. Distributable earnings were $51.6 million, or $0.40 per diluted share, compared with $52.5 million, or $0.67 per diluted share.
Cash flow: Cash and cash equivalents plus restricted cash declined $26.3 million to $297.0 million at year-end. Operating activities provided $359.1 million, investing activities used $1.56 billion and financing activities provided $1.17 billion.
Balance sheet: Total assets increased 21.9% to $11.62 billion; total liabilities increased 17.9% to $9.72 billion; and total stockholders’ equity increased 47.6% to $1.89 billion.
Book value: Book value per common share was $15.20, compared with $15.36 at December 31, 2021.
Loan credit quality: Loans of $9.95 billion before the general allowance were 96.5% current or less than 30 days past due, 1.1% 30–59 days past due and 2.4% 60 or more days past due. Recorded non-accrual loans increased to $242.8 million from $99.5 million.

Debt, leverage and liquidity

Year-end total leverage was 5.1x and recourse leverage was 1.5x, within management’s stated targets of 4.0x–5.0x total leverage and 1.5x–2.5x recourse leverage, although reported total leverage was slightly above the target range.
Secured borrowings were $2.85 billion, PPPLF borrowings were $201.0 million and securitized debt obligations were $4.90 billion.
Senior secured notes, convertible notes and corporate debt had a combined carrying amount of $1.12 billion. Principal maturities include $115.0 million of convertible notes due in 2023, $120.0 million of corporate debt due in 2025 and approximately $660.9 million due in 2026.
Credit facilities and repurchase agreements had combined outstanding borrowings of approximately $3.34 billion, with several facilities maturing or requiring renewal during 2023–2024.
Management stated that the Company satisfied all debt and financial covenants at December 31, 2022 and had met all margin calls to date without selling assets in response to a margin call.
Contractual obligations totaled approximately $5.16 billion, including $1.56 billion due within one year. This excludes management agreement and derivative payments that do not have fixed and determinable amounts.

Material changes versus the prior comparable period

Loan investment activity declined to $8.06 billion from $10.16 billion, primarily because residential agency originations fell to $2.38 billion from $4.21 billion and SBC originations fell to $4.52 billion from $5.27 billion. SBA originations increased modestly to $499.6 million.
SBC interest income increased substantially with higher loan balances, the Mosaic acquisition and higher interest rates. Interest expense also rose materially because of increased borrowings and higher funding costs.
Residential mortgage banking revenue fell to $24.0 million from $137.3 million, reflecting lower origination volumes and weaker loan-sale economics. Related variable expenses fell to $4.3 million from $75.1 million.
PPP loans declined to $187.0 million from $870.4 million, while PPPLF borrowings declined to $201.0 million from $941.5 million as loans were forgiven and repaid.
The allowance for loan losses increased to $90.5 million from $45.4 million, and the provision for loan losses increased to $34.4 million from $8.0 million. Management cited tighter monetary policy, inflation and geopolitical risks in its reserve modeling.
Residential mortgage servicing rights at fair value increased to $192.2 million from $120.1 million, generating a $46.1 million unrealized gain in 2022.
Common shares outstanding increased to 110.5 million from 75.8 million, primarily reflecting merger-related and other equity issuances. The Company repurchased approximately $37.0 million of common stock during 2022.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal quantitative earnings or dividend guidance. Management expects to continue originating SBC and construction loans, using securitizations and other financing to fund portfolio growth. At year-end, the stated pipeline totaled approximately $1.91 billion, including $1.30 billion of SBC originations, $357.2 million of SBA originations and $240.5 million of residential agency originations.

Interest rates: Management expects higher short-term rates to increase borrowing costs while loan coupons reset with a lag. The filing estimates that an immediate 100-basis-point increase in rates would increase 12-month pretax net interest income by approximately $18.9 million, before considering broader economic effects or management actions.
Credit and real estate risk: Rising rates, inflation, declining property values, construction cost increases, office and retail weakness, borrower defaults and higher loss severities could pressure earnings, book value, liquidity and dividends.
Liquidity and financing risk: Repurchase agreements and credit facilities can require additional collateral or repayment following asset-value declines. Securitization markets may become unavailable or more expensive.
Concentration: Multifamily collateral represented 67.0% of loan UPB, Texas represented 20.1% of real-estate-secured loan UPB, and 75.7% of loans were in the 60%–80% LTV range.
External management: Dependence on Waterfall, conflicts of interest and termination costs remain material. The management agreement runs through October 31, 2023 and renews annually unless terminated under specified conditions.
Broadmark transaction: On February 26, 2023, the Company announced a definitive merger agreement with Broadmark Realty Capital. The proposed transaction would issue approximately 63 million Ready Capital shares, with Ready Capital stockholders expected to own approximately 64% of the combined company. Closing remains subject to transaction conditions and approvals.
Other subsequent event: On February 7, 2023, the Company securitized $586.0 million of floating-rate SBC loans and sold $483.5 million of senior bonds at a weighted-average cost of SOFR plus 2.9%.
Unusual accounting items: Results included $15.2 million of merger transaction costs and other non-recurring expenses, $33.1 million of CECL-related adjustments in distributable earnings and a $46.1 million unrealized gain on residential MSRs.
Litigation: The Anworth merger litigation reached an agreement in principle subject to court approval. A separate CAIS lawsuit related to the Mosaic Manager was dismissed with prejudice after settlement.
Audit and controls: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included residential MSR valuation and the allowance for loan losses.

Most important facts for an investor to verify

Whether increased loan delinquencies, non-accrual loans and the higher CECL allowance continue to trend upward, particularly in bridge and construction portfolios.
Actual funding costs, refinancing capacity and collateral requirements as 2023 credit facilities and the $115.0 million convertible notes mature.
Whether total leverage remains above the stated target range and how leverage affects dividend coverage and book value volatility.
The sustainability of distributable earnings after excluding unrealized MSR gains and other non-GAAP adjustments.
The valuation sensitivity of the $192.2 million residential MSR portfolio to prepayment rates, discount rates and servicing costs.
Completion terms, dilution, assumed debt and integration benefits associated with the Broadmark merger.
Exposure to multifamily, Texas and construction lending concentrations, including changes in collateral values and LTV ratios.
The status of the 2023 convertible-note maturity, short-term financing renewals and any potential margin calls or covenant changes.