Ready Capital Corporation: Q2 2019 Form 10-Q Summary
Business context and reporting period
Ready Capital is an externally managed, Maryland REIT focused on originating, acquiring, financing and servicing small-balance commercial, transitional, SBA and residential mortgage loans, plus mortgage-backed securities. Operations are reported through Loan Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing, Residential Mortgage Banking and Corporate-Other.
The filing covers the unaudited three and six months ended June 30, 2019, compared primarily with the corresponding 2018 periods. The March 29, 2019 acquisition of Owens Realty Mortgage, Inc. added approximately 12.2 million shares, $179.3 million of equity consideration and a $30.7 million bargain purchase gain.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $57.0 million | $41.9 million | $105.8 million | $79.0 million |
| Interest expense | $35.8 million | $26.4 million | $71.5 million | $49.1 million |
| Net interest income before loan-loss provision | $21.3 million | $15.5 million | $34.3 million | $29.9 million |
| Loan-loss provision/(recovery) | $1.3 million provision | $0.4 million recovery | $1.9 million provision | $0.2 million recovery |
| Non-interest income | $33.0 million | $40.3 million | $89.2 million | $83.0 million |
| Non-interest expense | $44.6 million | $39.6 million | $85.9 million | $75.6 million |
| Net income | $11.2 million | $15.9 million | $41.7 million | $34.4 million |
| Net income attributable to Ready Capital | $11.0 million | $15.3 million | $40.4 million | $33.2 million |
| Diluted EPS | $0.25 | $0.48 | $1.05 | $1.03 |
| Dividend declared per share | $0.40 | $0.40 | $0.80 | $0.77 |
Q2 net income declined despite higher net interest income because non-interest income fell, including a $7.0 million net unrealized loss on financial instruments, while expenses increased. Management reported Q2 Core Earnings of $16.8 million, or $0.37 per share, compared with $15.8 million in Q2 2018; Core Earnings is a non-GAAP measure.
At June 30, 2019, total assets were $3.84 billion versus $3.04 billion at December 31, 2018. Total stockholders’ equity was $747.4 million versus $564.1 million, while Ready Capital equity was $728.0 million. Cash and cash equivalents were $41.9 million and restricted cash was $38.0 million.
Total loan portfolio carrying value, including loans in consolidated VIEs and loans held for sale, was approximately $3.24 billion, compared with $2.53 billion at year-end 2018. Loans held for investment were 97.3% current or less than 30 days past due; 90-plus-day delinquencies were 1.4% of outstanding balances and non-accrual loans were $69.4 million before general allowance adjustments.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $58.0 million, compared with positive $58.2 million in the prior-year period.
- Six-month investing cash flow was negative $674.6 million, primarily reflecting $1.07 billion of loan originations and purchases, partially offset by loan repayments and sales.
- Six-month financing cash flow was positive $739.7 million, including $667.9 million of net proceeds from securitized debt and $142.4 million of net secured-borrowing proceeds.
- Cash, cash equivalents and restricted cash increased $7.1 million to $102.0 million during the first six months.
- Secured borrowings were $988.9 million; securitized debt obligations were $1.57 billion; senior secured notes, convertible notes and corporate debt totaled $338.4 million on a carrying-value basis.
- Recourse debt-to-equity leverage was 1.8x. Management stated that the company was in compliance with all debt covenants as of June 30, 2019.
- The company had $81.8 million of unfunded held-for-investment loan commitments, $9.1 million of unfunded held-for-sale commitments and $261.6 million of residential loan commitments to originate.
Material changes versus comparable periods
- Interest income increased 36% in Q2 and 34% for the first six months, principally from growth in SBC originations and acquired-loan balances.
- Interest expense increased 35% in Q2 and 46% for the first six months, reflecting increased borrowings and securitization activity.
- Residential Mortgage Banking Q2 income before taxes decreased to a $3.0 million loss from $2.9 million of income, primarily because residential mortgage servicing rights generated a $6.3 million unrealized loss versus a $0.3 million gain in Q2 2018.
- Six-month net income benefited from the $30.7 million ORM bargain purchase gain. Excluding this and other unusual items, six-month Core Earnings declined to $28.1 million from $31.3 million.
- Residential mortgage banking activities increased to $21.0 million in Q2 from $17.3 million, but related variable expenses increased to $13.5 million from $7.5 million.
- The company completed the 2019-FL3 and 2019-SBC8 securitizations during the second quarter, contributing to higher consolidated VIE assets and securitized debt.
- Real estate acquired in settlement of loans increased substantially year over year to $65.8 million, including $59.1 million of ORM-acquired real estate.
Guidance, outlook, commentary and risks
Management did not provide quantified earnings guidance. It expects to continue growing SBC, SBA and residential originations, acquiring loans and expanding servicing, subject to capital availability, financing terms, market conditions and investment opportunities. Management stated that improving commercial real estate values had generally increased payoffs and reduced credit exposure and that the economic environment should support 2019 loan origination volumes.
Key risks include credit losses, borrower defaults, commercial real estate values, interest-rate and spread volatility, prepayment speeds, fair-value changes in mortgage servicing rights and other assets, short-term funding and margin calls, counterparty defaults, warehouse-line renewals, securitization cash-flow performance and the ability to maintain REIT and Investment Company Act status.
The company relies substantially on secured borrowings, repurchase agreements, warehouse facilities and securitizations. Repurchase borrowings were $988.9 million at quarter-end, and financing is subject to collateral haircuts, margin calls and lender renewal decisions. The filing states that certain warehouse facilities had maturities in August and September 2019.
In July 2019, after quarter-end, the company issued $57.5 million of 6.2% senior notes due 2026 and entered into a $100 million residential mortgage master repurchase agreement expiring July 22, 2020.
Management stated that no material legal proceedings were pending or threatened, and that disclosure controls were effective. The company was evaluating the future impact of the expected-loss accounting standard ASU 2016-13.
Important facts for investors to verify
- Reconcile GAAP net income, Core Earnings and dividend coverage, particularly excluding the ORM bargain purchase gain and residential MSR valuation losses.
- Review the sustainability of the $0.40 quarterly dividend against taxable income, operating cash flow and financing-dependent liquidity.
- Monitor secured borrowing, repurchase-agreement and warehouse-line maturities, collateral haircuts, margin-call exposure and covenant headroom.
- Assess credit quality trends, including non-accrual loans, 90-plus-day delinquencies, impaired loans, troubled debt restructurings and the allowance for loan losses.
- Evaluate sensitivity to LIBOR, prepayments, commercial property values and residential MSR assumptions; management estimated a $1.37 million pretax annual net-interest-income benefit from an immediate 25-basis-point rate increase.
- Confirm the final purchase accounting for ORM, as the measurement period remained open at June 30, 2019.
- Verify post-quarter-end financing activity and whether the new senior notes and repurchase agreement materially improve liquidity or increase leverage.