Ready Capital Corporation — Q1 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2021, with comparisons to March 31, 2020. Ready Capital is an externally managed REIT and multi-strategy real estate finance company focused on small-to-medium balance commercial loans, SBA loans, residential mortgage banking, servicing, mortgage-backed securities and related investments.
The company reports four operating segments: Acquisitions; SBC Originations; SBA Originations, Acquisitions and Servicing; and Residential Mortgage Banking.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / prior period |
|---|---|---|
| Total assets | $8.017 billion at March 31, 2021 | $5.372 billion at December 31, 2020 |
| Interest income | $73.4 million | $69.6 million |
| Interest expense | $50.8 million | $46.9 million |
| Net interest income before loan-loss provision | $22.6 million | $22.6 million |
| Loan-loss provision or recovery | $0.008 million recovery | $39.8 million provision |
| Non-interest income | $89.0 million | $22.5 million |
| Non-interest expense | $74.0 million | $64.8 million |
| Net income | $28.9 million | $(51.5) million loss |
| Net income attributable to Ready Capital | $28.0 million | $(50.5) million loss |
| Basic and diluted EPS | $0.49 | $(0.98) |
| Distributable earnings | $24.7 million, or $0.41 per share | $1.2 million, or $0.01 per share |
| Common dividend declared | $0.40 per share | $0.40 per share |
| Book value per common share | $14.90 | $14.55 at March 31, 2020 |
| Operating cash flow | $(50.2) million | $(100.0) million |
The filing does not present a single consolidated operating-margin measure. Net interest income before provisions was essentially unchanged year over year, while non-interest income increased substantially and drove the return to profitability.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $308.4 million, and cash, cash equivalents and restricted cash totaled $372.0 million at March 31, 2021.
- Total stockholders’ equity was $1.179 billion, up from $834.2 million at December 31, 2020, primarily due to the ANH merger.
- Loans, net were $1.612 billion; loans held for sale were $473.1 million; PPP loans were $1.293 billion; and mortgage-backed securities were $682.9 million.
- Total liabilities were $6.819 billion, including $2.065 billion of secured borrowings, $1.133 billion of PPPLF borrowings, $2.212 billion of securitized debt, $333.3 million of corporate debt, $179.7 million of senior secured notes and $112.4 million of convertible notes.
- Recourse debt-to-equity leverage was 2.3x at March 31, 2021. Management reported compliance with all debt and financial covenants.
- The company originated approximately $2.113 billion of loans during the quarter, including $823.2 million of SBC loans, $50.2 million of SBA loans and $1.240 billion of residential agency mortgages.
Material changes versus comparable periods
- ANH merger: Completed March 19, 2021, for total consideration of approximately $417.9 million. Ready Capital issued approximately 16.8 million common shares and Series B, C and D preferred shares. ANH contributed approximately $2.3 billion of assets and $1.9 billion of liabilities at acquisition.
- By March 31, 2021, Ready Capital had liquidated approximately $1.4 billion of ANH assets, primarily Agency RMBS, and repaid approximately $1.3 billion of related indebtedness. The remaining ANH Agency RMBS portfolio of $387.4 million was liquidated by April 15, 2021, with $349.5 million of related debt repaid.
- PPP expansion: PPP loans increased from $74.9 million at December 31, 2020 to $1.293 billion at March 31, 2021. The company originated approximately $1.3 billion under the second round of PPP and recognized $13.6 million of PPP-related income in the quarter.
- Debt and funding: Secured borrowings increased 59.5% from year-end, PPPLF borrowings increased to $1.133 billion, and corporate debt increased 120.8%, primarily reflecting the ANH transaction and expanded origination activity. The company issued $201.3 million of 5.75% senior notes due 2026 and redeemed its $50 million 2021 notes in March.
- Profitability recovery: The year-earlier period included $39.8 million of loan-loss provisions, $33.4 million of net unrealized losses on financial instruments and a $3.0 million real-estate impairment. Q1 2021 instead included $21.0 million of net unrealized gains and only a nominal loan-loss recovery.
- Residential mortgage banking activities increased to $41.4 million from $36.7 million. Residential mortgage servicing rights increased to $98.5 million from $76.8 million at year-end, helped by a $15.4 million unrealized gain.
Outlook, commentary, risks and unusual items
- Management intends to continue growing the investment portfolio and deploying capital among asset classes with attractive risk-adjusted returns. No specific earnings or dividend guidance was provided.
- Management expects COVID-19, economic conditions, borrower performance and real-estate-market conditions to remain uncertain. Approximately 1.6% of the commercial real-estate loan portfolio was in forbearance at March 31, 2021.
- Key risks include credit losses, commercial real-estate values, borrower defaults, interest-rate and spread volatility, prepayments, refinancing and extension risk, margin calls, counterparty defaults, liquidity constraints and the renewal of repurchase facilities.
- Most financing is collateralized and includes margin requirements. The company reported $571.0 million of net counterparty exposure on repurchase agreements and credit facilities, equal to 7.1% of total assets. JPMorgan and Citibank each represented more than 5% of stockholders’ equity at risk.
- A hypothetical 100-basis-point increase in LIBOR was estimated to increase 12-month pretax net interest income by $1.1 million; a 100-basis-point decrease was estimated to reduce it by $4.5 million, before considering broader economic effects or management actions.
- Non-accrual loans were $150.6 million, or 3.3% of loans, at March 31, 2021, compared with $134.2 million at December 31, 2020. The allowance for loan losses was $45.6 million, including $18.2 million related to non-accrual loans.
- ANH merger-related costs were $6.3 million in Q1 2021. The manager’s base fee is reduced by $1.0 million per quarter for each of the first four full quarters following the merger.
- Several shareholder lawsuits related to the ANH merger were voluntarily dismissed. Three California state-court actions remained pending at the filing date, and Ready Capital stated that it intends to defend them vigorously.
- The company remains dependent on external manager Waterfall Asset Management and must distribute at least 90% of taxable income annually to maintain REIT status.
Important facts for investors to verify
- Reconcile GAAP net income of $28.9 million with distributable earnings of $24.7 million and assess the recurring versus fair-value, PPP and merger-related components.
- Review the sustainability and credit risk of the $1.293 billion PPP portfolio, including deferred fees, PPPLF funding and expected forgiveness or repayment timing.
- Assess leverage, collateral coverage, upcoming facility maturities, margin-call exposure and the company’s ability to refinance or roll short-term borrowings.
- Monitor non-accrual loans, forbearance exposure, loan-to-value trends and the adequacy of the $45.6 million allowance for loan losses.
- Evaluate the post-merger asset liquidation strategy, redeployment of ANH capital and any final purchase-accounting adjustments, including the $6.6 million of recorded goodwill.
- Review the pending California state-court litigation and any potential effect on the merger or the company’s financial position.
- Confirm future common and preferred dividends against taxable income, distributable earnings, liquidity and REIT distribution requirements.