Business Context and Reporting Period
Ready Capital Corporation is an externally managed, multi-strategy real estate finance company that originates, acquires, finances and services small-to-medium balance commercial loans, SBA loans, residential mortgage loans and related mortgage-backed securities. The company reports four operating segments: Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing and Residential Mortgage Banking.
This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparative information for the three months ended March 31, 2019. The quarter was materially affected by the COVID-19 pandemic, market volatility and the adoption of the CECL credit-loss standard.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Interest income | $69.6 million | $48.8 million |
| Interest expense | $46.9 million | $35.8 million |
| Net interest income before loan-loss provision | $22.6 million | $13.0 million |
| Provision for loan losses | $39.8 million | $0.5 million |
| Net income (loss) | $(51.5) million | $30.5 million |
| Net loss attributable to Ready Capital | $(50.5) million | $29.5 million |
| Core earnings, non-GAAP | $1.2 million | $11.3 million |
| Basic and diluted EPS | $(0.98) | $0.90 |
| Dividends declared per share | $0.40 | $0.40 |
Non-interest income was $22.5 million, compared with $56.3 million in the prior-year quarter. Residential mortgage banking activities increased to $36.7 million from $14.6 million, but this was offset by $33.4 million of net unrealized losses on financial instruments and a $16.4 million unrealized loss on residential mortgage servicing rights. Total non-interest expense increased to $64.8 million from $41.3 million.
Total assets were $5.27 billion at March 31, 2020, up 5.9% from December 31, 2019. Total stockholders’ equity was $775.6 million, down 8.2%; Ready Capital equity was $757.9 million. Book value per common share was $14.55, compared with $17.01 at March 31, 2019.
The total loan portfolio, including loans in consolidated VIEs and loans held for sale, was $4.47 billion at March 31, 2020, compared with $4.25 billion at December 31, 2019. Loans, net in consolidated VIEs totaled $4.16 billion, including a $46.4 million general allowance and specific reserves. Delinquencies were 2.2% for loans 30–89 days past due and 1.5% for loans 90 or more days past due; non-accrual loans had a carrying value of $70.4 million.
Cash and cash equivalents were $122.3 million and restricted cash was $93.2 million, for combined cash and restricted cash of $215.4 million excluding cash held in consolidated VIEs. Including VIE cash, cash, cash equivalents and restricted cash totaled $224.0 million. Net cash used in operating activities was $100.0 million, net cash used in investing activities was $144.5 million and net cash provided by financing activities was $340.5 million, producing a $96.0 million increase in cash, cash equivalents and restricted cash.
Secured borrowings were $1.70 billion, up 42.8% from year-end 2019. Securitized debt obligations were $1.69 billion, guaranteed loan financing was $457.0 million, convertible notes were $111.3 million, senior secured notes were $179.4 million and corporate debt was $150.1 million. Recourse debt-to-equity leverage was 2.8x. The company reported compliance with its debt and financial covenants at March 31, 2020.
Material Changes Versus Prior Comparable Period
- Net income declined by $82.0 million to a $51.5 million net loss, while core earnings declined by $10.1 million to $1.2 million.
- Interest income increased $20.8 million, primarily from growth in acquired and originated loan portfolios. Total loan originations increased to $1.21 billion from $680.5 million.
- The loan-loss provision increased by $39.3 million, substantially reflecting the adoption of CECL and the deterioration in economic forecasts associated with COVID-19.
- On January 1, 2020, CECL adoption increased the allowance for loan losses by $11.1 million and reduced opening retained earnings by $6.8 million, net of tax. The company identified a $35.4 million impact from CECL on Q1 2020 core earnings reconciliation.
- Net unrealized losses on financial instruments increased to $33.4 million from $6.9 million, including $11.9 million of MBS losses, $16.4 million of residential MSR losses and $4.2 million of derivative losses.
- Secured borrowings increased $509.5 million because the company relied more heavily on short-term financing and completed no securitizations during the quarter. Consolidated VIE assets declined $149.0 million because of loan paydowns.
- Residential mortgage banking revenue increased substantially, but related variable expenses also rose to $20.1 million from $9.2 million.
- The prior-year period included a $30.7 million bargain-purchase gain from the Owens Realty Mortgage merger and $5.5 million of merger-related expenses; the current period had no comparable bargain-purchase gain.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings, book-value or dividend guidance. Management stated that the company is preserving liquidity, monitoring COVID-19 impacts and evaluating future distributions. The $0.40 quarterly dividend declared for March 31, 2020 was paid on April 30, 2020 using a combination of cash and common stock, resulting in approximately 2.7 million shares issued.
COVID-19 created material uncertainty regarding borrower performance, commercial real estate values, credit losses, servicing-right valuations, financing costs, margin requirements and access to debt and equity capital. A decline in collateral values could trigger margin calls, asset sales at losses, covenant pressure or loss of borrowing capacity. The company stated that it had satisfied all margin calls to date and remained in compliance with applicable covenants as of March 31, 2020.
Subsequent to quarter-end, as of May 11, 2020, the company had facilitated approximately $2.1 billion of loans through the SBA Paycheck Protection Program and had obtained SBA approvals to fund more than $2.9 billion of loans. The filing does not state the ultimate revenue, credit or liquidity impact of this activity.
Other significant exposures include short-term secured financing, counterparty risk, interest-rate and prepayment risk, commercial real estate concentration, valuation risk for Level 3 assets, and the requirement to distribute sufficient taxable income to maintain REIT status. Unfunded SBC loan commitments were $329.8 million for loans held for investment and $8.9 million for loans held for sale; residential mortgage commitments were $601.6 million.
Investor Verification Points
- Verify the composition and adequacy of the $58.0 million ending allowance for loan losses and the sensitivity of CECL estimates to COVID-19 assumptions.
- Review subsequent-quarter delinquency, forbearance, non-accrual and charge-off trends, especially for transitional, retail, lodging and SBA-related exposures.
- Assess liquidity against secured financing maturities, margin-call requirements, collateral haircuts and the company’s 2.8x recourse debt-to-equity leverage.
- Confirm whether the company can sustain the stated dividend level in cash, stock or a combination, and evaluate dilution from stock-based distributions.
- Monitor valuation changes in residential MSRs, MBS, derivatives and other Level 3 assets, including the $16.4 million Q1 MSR loss.
- Evaluate the economic contribution, credit risk and funding requirements of the PPP loan facilitation activity disclosed after quarter-end.
- Reconcile GAAP net loss with non-GAAP core earnings and determine whether the adjustments represent recurring or temporary impacts.