Ready Capital Corp. (filed as Sutherland Asset Management Corporation) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period ended March 31, 2017. The filing was signed May 10, 2018. The company operated as an externally managed REIT focused on small-balance commercial loans, SBA loans, residential mortgage banking, servicing, MBS and related real-estate finance activities.
Business context and financial position
- Operating segments were Loan Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing, Residential Mortgage Banking and Corporate-Other.
- Total assets were $2.641 billion, up 4.7% from December 31, 2017; total stockholders’ equity was $561.8 million.
- Loans, net, including loans in consolidated securitization entities, were $1.9999 billion; loans held for sale were $161.0 million.
- Cash and cash equivalents were $86.8 million, and restricted cash was $14.0 million, for combined cash and restricted cash of $100.7 million.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Interest income | $37.2 million | $33.9 million | +$3.3 million |
| Interest expense | $(22.7) million | $(16.4) million | $(6.2) million |
| Net interest income before loan-loss provision | $14.5 million | $17.4 million | $(3.0) million |
| Provision for loan losses | $0.2 million | $1.2 million | $(1.1) million |
| Total non-interest income | $25.2 million | $15.8 million | +$9.4 million |
| Total non-interest expense | $(33.7) million | $(25.7) million | $(8.0) million |
| Income before taxes | $21.1 million | $10.6 million | +$10.5 million |
| Net income | $18.5 million | $9.6 million | +$9.0 million |
| Net income attributable to common stockholders | $17.9 million | $8.9 million | +$9.0 million |
| Basic and diluted EPS | $0.56 | $0.29 | +$0.27 |
| Core earnings, non-GAAP | $15.5 million | $10.9 million | +$4.6 million |
| Core earnings per share | $0.47 | Not clearly provided | Not clearly provided |
| Dividend declared per share | $0.37 | $0.37 | Unchanged |
The filing does not provide a single consolidated operating margin or net interest margin. Net income represented approximately 7.0% of total assets at March 31, 2018, but this is a balance-sheet return measure rather than a reported margin.
Cash flow, debt and liquidity
- Operating cash flow was $48.2 million, compared with $15.5 million in Q1 2017.
- Investing cash flow was $(146.4) million, primarily reflecting loan originations and purchases.
- Financing cash flow was $123.9 million, including securitized debt issuance and the January 2018 senior secured note issuance.
- Cash, cash equivalents and restricted cash increased by $25.6 million during the quarter.
- Secured borrowings were $657.2 million; securitized debt obligations were $679.9 million; guaranteed loan financing was $278.5 million; senior secured notes were $178.7 million; and convertible notes were $109.2 million.
- Management reported a debt-to-equity leverage ratio of 1.7x and compliance with all debt covenants as of March 31, 2018.
- Repurchase agreements and credit facilities were collateralized by approximately $858.4 million of assets against $657.2 million of borrowings. Margin calls and collateral requirements remain important liquidity exposures.
Material changes versus the prior comparable period
- Net income increased 94%, while core earnings increased 43%, primarily due to higher origination activity, securitization-related earnings and income from a joint venture.
- Interest expense increased 38%, largely because of greater secured borrowing and newly issued senior secured and convertible notes. Consequently, net interest income before provisions declined 17% despite higher interest income.
- Non-interest income increased 60%, supported by a $5.7 million contribution from the unconsolidated joint venture, higher realized financial-instrument gains and stronger residential mortgage banking results.
- Non-interest expense increased 31%, reflecting higher employee compensation, professional fees, loan servicing expense and other operating costs.
- The loan portfolio expanded, with total loans, net, including consolidated VIEs, increasing from $1.854 billion to $1.9999 billion. Loans held for sale declined 25.5% to $161.0 million.
- Portfolio credit metrics were broadly stable: 97.2% of loans were current or less than 30 days past due at March 31, 2018, compared with 96.5% at December 31, 2017. Non-accrual loans were $36.4 million, or 1.8% of carrying value.
- The allowance for loan losses declined to $10.5 million from $11.7 million, while the quarterly provision declined to $0.2 million from $1.2 million.
Guidance, outlook, risks and unusual items
- Management intended to grow SBC, SBA and residential mortgage originations, acquire additional SBC and SBA loans, expand servicing and use securitization and other financing channels.
- Management expected the improving commercial real-estate environment and continued loan demand to support 2018 origination volumes, while noting potential credit tightening by banks.
- Q1 originations totaled $698.9 million, including $211.6 million of SBC loans, $48.3 million of SBA loans and $439.0 million of residential loans. The company also acquired $142.2 million of SBC loans.
- The company completed the securitization of $165.0 million of acquired SBC owner-occupied loans and sold $148.5 million of senior bonds at a weighted-average pass-through rate of 3.8%.
- Management disclosed acquisition and origination pipelines, but emphasized that pipeline transactions were subject to capital availability, due diligence, investment committee approval, market conditions and final documentation; historically, less than a majority of pipeline assets were acquired or originated.
- Key risks include rising funding costs, interest-rate and spread volatility, credit losses, declining collateral values, prepayment and extension risk, dependence on short-term repurchase financing, margin calls, counterparty defaults, fair-value estimation risk and reliance on external manager Waterfall Asset Management.
- The company remained subject to REIT distribution requirements and reported compliance with REIT requirements. It declared a $0.37 per-share dividend for the quarter.
- In April 2018, after quarter-end, the company issued $50.0 million of 6.5% senior notes due April 2021.
- No material legal proceedings or material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Confirm the registrant identity and historical corporate-name relationship: the filing is for Sutherland Asset Management Corporation, although the operating platform includes ReadyCap entities.
- Reconcile GAAP net income of $18.5 million with non-GAAP core earnings of $15.5 million, particularly the $4.9 million unrealized gain on residential mortgage servicing rights.
- Assess whether higher origination volumes and securitization activity adequately offset the increase in funding costs and non-interest expenses.
- Review debt maturities, facility renewal terms, haircuts, collateral requirements and sensitivity to margin calls and rising LIBOR.
- Evaluate loan credit quality, including non-accrual loans, 90-plus-day delinquencies, TDRs, LTV concentrations and the reduced allowance for loan losses.
- Review the sustainability of the $0.37 dividend against taxable income, core earnings, operating cash flow and required REIT distributions.
- Examine the assumptions supporting Level 3 fair values, especially residential MSRs, loans held at fair value and other assets sensitive to prepayment, default and loss-severity assumptions.