Ready Capital Corporation — FY2019 Form 10-K Summary
Business context and reporting period
Ready Capital is an externally managed Maryland REIT focused on originating, acquiring, financing and servicing small-to-medium balance commercial loans, SBA 7(a) loans, residential mortgage loans and related mortgage-backed securities. The filing covers the fiscal year ended December 31, 2019, with quarterly information for the fourth quarter of 2019.
The company operates through Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing and Residential Mortgage Banking. Waterfall Asset Management provides external management and advisory services.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Interest income | $229.9 million | $169.5 million | +35.6% |
| Interest expense | $151.9 million | $109.2 million | +39.0% |
| Net interest income before loan losses | $78.0 million | $60.3 million | +29.5% |
| Provision for loan losses | $3.7 million | $1.7 million | Higher by $2.0 million |
| Net interest income after loan losses | $74.4 million | $58.6 million | +27.0% |
| Non-interest income | $174.6 million | $147.9 million | +18.1% |
| Non-interest expense | $184.5 million | $143.6 million | +28.4% |
| Net income | $75.1 million | $61.5 million | +22.1% |
| Net income attributable to Ready Capital | $73.0 million | $59.3 million | +23.1% |
| Basic and diluted EPS | $1.72 | $1.84 | Down $0.12 |
| Core earnings | $67.3 million | $58.7 million | +14.6% |
| Core earnings per share | $1.54 | $1.76 | Down $0.22 |
| Dividends declared per share | $1.60 | $1.57 | +1.9% |
| Book value per common share | $16.14 | $16.97 | Down $0.83 |
| Total assets | $5.0 billion | $3.0 billion | +63.9% |
| Total stockholders’ equity | $844.8 million | $564.1 million | +49.8% |
The reported net income benefited from a $30.7 million bargain purchase gain related to the Owens Realty Mortgage acquisition. Core earnings exclude this gain and other specified non-recurring or fair-value items.
Portfolio, origination and operating activity
- Total loan portfolio, including consolidated securitization vehicles, was approximately $4.25 billion of carrying value and $4.29 billion of unpaid principal balance at year-end 2019.
- Loan investment activity totaled $4.75 billion, including $4.02 billion of originations and $722.5 million of acquisitions.
- SBC originations increased to $1.70 billion from $1.19 billion in 2018, a 43% increase.
- SBA originations were $216.3 million, broadly comparable with 2018.
- Residential agency mortgage originations reached a record $2.11 billion, up from $1.78 billion.
- At year-end, approximately 97.0% of loans were current or less than 30 days past due; 1.9% were 30–89 days past due and 1.1% were 90 or more days past due.
- Non-accrual loans represented approximately 2.1% of loan carrying value, compared with 2.0% at year-end 2018.
- Loan-to-value concentration was primarily in the 60.1%–80.0% range, representing 44.2% of loan balances. California and Texas represented 16.9% and 15.2% of real-estate-secured loan UPB, respectively.
Cash flow, debt and liquidity
| Metric at or for FY2019 | Amount |
|---|---|
| Cash and cash equivalents | $67.9 million |
| Restricted cash | $51.7 million |
| Net cash used in operating activities | $52.4 million |
| Net cash used in investing activities | $1.21 billion |
| Net cash provided by financing activities | $1.30 billion |
| Secured borrowings | $1.19 billion |
| Securitized debt obligations | $1.82 billion |
| Senior secured notes, net | $179.3 million |
| Corporate debt, net | $150.0 million |
| Convertible notes, net | $111.0 million |
| Recourse debt-to-equity leverage | 1.9x |
Committed secured borrowing capacity was $2.55 billion, of which $1.36 billion was available at December 31, 2019. Total recourse debt carrying value was $1.63 billion, while non-recourse securitized debt was $1.82 billion. The company reported compliance with all debt covenants and had satisfied all historical margin calls without selling assets in response to a margin call.
Financing activity included approximately $1.4 billion of securitized debt issuance, $102.3 million of corporate debt issuance and $91.8 million of net common equity proceeds. The company also issued $45.0 million of additional 6.20% senior notes due 2026 in December 2019.
Material changes versus prior comparable period
- Assets expanded substantially through higher SBC originations and acquisitions, the ORM merger and the Knight Capital acquisition.
- Interest income increased faster than the portfolio in part because the originated transitional and SBC loan balances grew materially.
- Net income increased, but EPS and core EPS declined because the share count grew significantly following merger-related and public equity issuances.
- Book value per share declined from $16.97 to $16.14 despite higher total equity.
- Residential mortgage banking activity increased, but the segment reported a $4.3 million pretax loss versus $14.7 million of pretax income in 2018. Higher origination volume increased variable expenses, while residential MSRs recorded an $18.6 million unrealized loss.
- Provision for loan losses increased to $3.7 million from $1.7 million, driven primarily by higher SBA provisions and the larger portfolio.
- Securitized debt doubled to $1.82 billion from $905.4 million, reflecting multiple 2019 securitizations.
- Operating cash flow changed from $140.3 million of inflow in 2018 to $52.4 million of outflow in 2019 as investment and origination activity accelerated.
Guidance, outlook, commentary and unusual items
- Management intends to continue expanding SBC, SBA and residential mortgage originations, acquiring SBC assets and increasing securitization capacity.
- The reported pipeline totaled approximately $1.68 billion, including $820.7 million of SBC originations, $116.1 million of SBC acquisitions, $177.7 million of SBA originations and $566.8 million of residential agency originations. The filing cautions that pipeline assets may not close.
- Management expects to expand its European presence after acquiring a $50 million pool of Irish transitional loans in the fourth quarter.
- ORM was acquired on March 29, 2019 for approximately $179.3 million of common stock and produced a $30.7 million bargain purchase gain. Knight Capital was acquired on October 25, 2019 for $27.8 million, including $17.5 million of cash and $10.3 million of stock.
- The company adopted the current expected credit loss standard on January 1, 2020. Management estimated an increase in the allowance for loan losses of approximately $8.9 million to $11.7 million, subject to refinement.
- Subsequent to year-end, several repurchase and credit facilities were extended, including facilities with maturities extending into 2020 and 2021.
- The filing identifies COVID-19 as a forward-looking risk, noting potential effects on borrower defaults, asset values, financing availability, liquidity and operations. The filing does not provide a quantified COVID-19 impact for FY2019.
- The company remains dependent on Waterfall, its external manager. The management agreement was scheduled to expire October 31, 2020, subject to automatic one-year renewals and specified termination provisions.
Principal risks and contingencies
- Credit losses, delinquency and declining collateral values, particularly in transitional, SBA, non-performing and small-business loans.
- Reliance on short-term repurchase agreements and warehouse facilities, including refinancing risk, margin calls, collateral requirements and counterparty risk.
- Interest-rate, credit-spread, prepayment, extension and LIBOR-transition risk.
- Valuation risk for Level 3 assets, including residential MSRs, certain loans, derivatives and MBS.
- Liquidity risk because many commercial loans and real estate assets are illiquid and may need to be sold at discounts.
- Integration and execution risk associated with ORM and Knight Capital, including the realization of expected synergies.
- REIT qualification and exemption from the Investment Company Act depend on compliance with complex asset, income, ownership and operational tests.
- Regulatory, licensing, servicing, loan repurchase, indemnification and SBA-guarantee risks.
- The company reported no material pending or threatened legal proceedings and no off-balance-sheet arrangements as of the filing date, although it disclosed $128.7 million of unfunded SBC loan commitments, $7.0 million of SBC loans held for sale commitments and $190.8 million of residential agency loan commitments.
Important facts for investors to verify
- Reconcile GAAP EPS of $1.72 with core EPS of $1.54 and assess the sustainability of earnings excluding the $30.7 million ORM bargain purchase gain.
- Review the effect of the 2020 CECL adoption and compare the estimated $8.9 million–$11.7 million allowance increase with subsequent reported results.
- Monitor delinquency, non-accrual, TDR, charge-off and allowance trends as the portfolio continues to grow.
- Assess the maturity schedule and renewal terms of secured borrowings, repurchase agreements and warehouse facilities, particularly those maturing in 2020.
- Evaluate the impact of leverage, financing costs, margin requirements and securitization performance on dividend coverage and liquidity.
- Track residential MSR fair values, prepayment assumptions and the profitability of the residential mortgage banking segment.
- Determine whether ORM and Knight Capital deliver the expected earnings, cost savings and strategic benefits.
- Review compliance with REIT and Investment Company Act requirements, debt covenants, SBA requirements and mortgage seller/servicer obligations.