Ready Capital Corporation 10-Q Summary
Business context and reporting period
Ready Capital is an externally managed, Maryland REIT that originates, acquires, finances and services small-to-medium balance commercial loans, SBA loans, residential mortgage loans and related mortgage-backed securities. The filing covers the three and six months ended June 30, 2021; financial statements are unaudited and prepared under U.S. GAAP.
Operations are reported through Acquisitions, SBC Originations, Small Business Lending and Residential Mortgage Banking. In the second quarter, Knight Capital was moved from Acquisitions to Small Business Lending and prior periods were recast.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $103.0 million | $63.2 million | $176.4 million | $132.8 million |
| Net interest income before loan-loss provision | $47.6 million | $19.8 million | $70.2 million | $42.4 million |
| Net interest income after loan-loss provision | $42.1 million | $20.4 million | $64.7 million | $3.2 million |
| Non-interest income | $75.9 million | $120.9 million | $164.8 million | $143.5 million |
| Net income | $30.9 million | $34.7 million | $59.9 million | $(16.9) million |
| Net income attributable to Ready Capital | $27.2 million | $33.9 million | $55.2 million | $(16.6) million |
| GAAP EPS, basic and diluted | $0.38 | $0.62 | $0.85 | $(0.33) |
| Distributable earnings | $41.4 million | $39.2 million | $66.1 million | $40.4 million |
| Distributable earnings per share | $0.52 | $0.70 | $0.95 | $0.73 |
| Dividends declared per common share | $0.42 | $0.25 | $0.82 | $0.65 |
The filing does not provide a clear consolidated operating margin or net interest margin based on average earning assets.
Balance sheet, cash flow and liquidity
- Total assets were $9.0 billion at June 30, 2021, up 67.1% from December 31, 2020. Total stockholders’ equity was $1.3 billion, up 54.4%.
- Cash and cash equivalents were $200.7 million, with restricted cash of $57.1 million. Cash, cash equivalents and restricted cash totaled $272.0 million at quarter-end.
- Six-month operating cash flow was $20.9 million, compared with $48.0 million in the prior-year period. Investing cash flow was $(1.33) billion and financing cash flow was $1.38 billion.
- Total loan portfolio assets were $7.81 billion, including $2.18 billion of PPP loans. Loans, net and loans held for sale totaled $2.69 billion, excluding PPP loans.
- Loans more than 60 days past due represented 2.8% of loans before the general allowance, compared with 3.5% at December 31, 2020. Non-accrual loans were $170.2 million, or 3.3% of loans, versus $134.2 million at year-end.
- The allowance for loan losses was $49.6 million, including $30.4 million of general reserves and $19.2 million of specific reserves.
- Total liabilities were $7.7 billion. Major borrowings included $1.70 billion of secured borrowings, $2.29 billion of PPPLF borrowings, $2.31 billion of securitized debt, $333.7 million of corporate debt, $179.8 million of senior secured notes and $112.7 million of convertible notes.
- Recourse debt-to-equity leverage was 1.8 times at June 30, 2021. The Company reported compliance with all debt and financial covenants.
Material changes versus prior comparable periods
- Q2 net income declined $3.8 million year over year, primarily because residential mortgage banking income fell $43.9 million and the Company recorded a $5.5 million loan-loss provision versus a $0.6 million recovery in Q2 2020.
- Net interest income before provisions increased $27.8 million in Q2, supported by larger loan balances and PPP activity. Non-interest expense declined $21.1 million, principally because residential mortgage banking variable costs and compensation costs were lower.
- Residential mortgage banking income fell to $36.7 million from $80.6 million, reflecting lower volumes and margins. Small Business Lending income declined to $19.9 million from $39.3 million because Q2 2020 included one-time PPP Round 1 fees.
- The six-month improvement to net income primarily reflected lower CECL reserves, PPP-related income and reduced unrealized losses on certain assets.
- On March 19, 2021, Ready Capital completed the $417.9 million ANH merger, issuing approximately 16.8 million common shares and Series B, C and D preferred shares. By June 30, the Company had liquidated approximately $1.8 billion of ANH assets and repaid approximately $1.6 billion of related indebtedness.
- In June, the Company issued 4.6 million Series E preferred shares for net proceeds of approximately $111.4 million.
- Loan originations totaled $2.32 billion in Q2 and $4.43 billion for the first half, compared with $1.37 billion and $2.58 billion, respectively, in the prior-year periods.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative earnings or dividend guidance. Management’s stated objective is to grow the investment portfolio and generate risk-adjusted returns primarily through dividends and secondarily through capital appreciation. The Company declared a $0.42 common dividend for Q2.
- COVID-19 remains a significant uncertainty affecting borrowers, commercial real estate, small-business lending, financing markets, liquidity and asset valuations. Approximately 0.7% of the commercial real estate loan portfolio was in forbearance at June 30, 2021.
- Interest-rate exposure is material because assets and financing have different repricing characteristics. Management estimated a $1.6 million pretax improvement in 12-month net interest income from an immediate 25-basis-point rate increase, versus a $0.6 million improvement from a 25-basis-point decrease; larger rate moves produce asymmetric results.
- Liquidity risks include margin calls, higher collateral requirements, lender non-renewal of repurchase facilities and the need to sell assets during stressed markets. Total counterparty exposure on repurchase agreements and credit facilities was $693.0 million, or 7.7% of total assets.
- Credit risks include delinquencies, defaults, collateral-value declines, concentrations in multifamily, retail, SBA and commercial real estate assets, and potential losses beyond CECL estimates.
- Fair-value measurements include significant Level 3 assets, particularly residential mortgage servicing rights. Their values are sensitive to prepayment rates, discount rates, defaults, home prices and servicing costs.
- On July 15, 2021, after quarter-end, Series B and Series D preferred shares were redeemed. On July 31, 2021, the Company acquired Red Stone for an initial $63 million cash payment, $7 million of executive retention payments and 128,533 common shares; additional contingent payments may be due.
- The Company disclosed shareholder litigation relating to the ANH merger and stated that it intends to defend the actions vigorously.
Most important facts for investors to verify
- Whether PPP loan repayments, forgiveness timing and deferred fees materially affect future earnings, liquidity and PPPLF borrowings.
- The sustainability of distributable earnings and the $0.42 quarterly common dividend after excluding non-recurring items and fair-value adjustments.
- Credit performance, non-accrual trends, forbearance levels and reserve adequacy as COVID-related support programs expire.
- Refinancing and maturity risks, including the $180 million of senior secured notes due in February 2022 and the $115 million convertible notes due in August 2023.
- Exposure to short-term secured financing, collateral calls, lender renewals and changes in LIBOR or replacement benchmark rates.
- The final accounting, integration costs and contingent consideration associated with the post-quarter-end Red Stone acquisition, as well as the final measurement-period accounting for ANH.
- The outcome and potential cost of the ANH-related shareholder litigation and the effect of redeeming Series B and Series D preferred stock.