Ready Capital Corporation: Q3 2022 Form 10-Q Summary
Business context and reporting period
Ready Capital is an externally managed, multi-strategy real estate finance company that originates, acquires, finances and services small-to-medium balance commercial loans, construction loans, SBA loans, residential mortgage loans, mortgage-backed securities and related investments. The filing covers the three and nine months ended September 30, 2022, with comparative periods ended September 30, 2021.
The company operates through SBC Lending and Acquisitions, Small Business Lending, Residential Mortgage Banking and Corporate-Other. Ready Capital qualifies as a REIT and conducts substantially all operations through its operating partnership.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Interest income | $186.0 million | $105.1 million | $464.1 million | $281.6 million |
| Interest expense | $115.5 million | $50.1 million | $257.3 million | $156.3 million |
| Net interest income before loan-loss provision | $70.5 million | $55.0 million | $206.8 million | $125.2 million |
| Provision for loan losses | $3.4 million | $1.6 million | $0.6 million | $7.1 million |
| Net income | $66.3 million | $46.5 million | $189.5 million | $106.4 million |
| Net income attributable to Ready Capital | $61.2 million | $43.8 million | $176.8 million | $99.0 million |
| Basic/diluted EPS | $0.53/$0.50 | $0.61/$0.60 | $1.66/$1.56 | $1.47/$1.46 |
| Distributable earnings | $58.2 million | $49.4 million | $167.2 million | $115.5 million |
| Distributable earnings per diluted share | $0.44 | $0.64 | $1.38 | $1.60 |
| Common dividend declared per share | $0.42 | $0.42 | $1.26 | $1.24 |
Net interest income before provisions represented approximately 37.9% of interest income in Q3 2022, compared with approximately 52.3% in Q3 2021, reflecting materially higher funding costs. Net income increased despite lower EPS because the share count expanded substantially following the Mosaic transaction and equity issuance.
- Q3 net income increased 42.4% year over year, while diluted EPS declined 16.7% to $0.50.
- Q3 distributable earnings increased 17.9%, but diluted distributable earnings per share declined 31.3% to $0.44.
- Book value per common share was $15.40 at September 30, 2022, versus $15.07 at September 30, 2021.
- Q3 return on equity was 14.5%; nine-month return on equity was 15.1%.
Balance sheet, liquidity and leverage
| Balance sheet item | September 30, 2022 | December 31, 2021 | Change |
|---|---|---|---|
| Total assets | $11.86 billion | $9.53 billion | +24.4% |
| Loans, net | $4.16 billion | $2.92 billion | +42.6% |
| Total loan portfolio, including VIE loans and PPP loans | $10.52 billion | $8.42 billion | +24.9% |
| Cash and cash equivalents | $208.0 million | $229.5 million | -9.4% |
| Cash, cash equivalents and restricted cash | $319.3 million | $323.3 million | -1.2% |
| Total liabilities | $9.88 billion | $8.25 billion | +19.8% |
| Total stockholders’ equity | $1.97 billion | $1.28 billion | +53.7% |
- Reported total leverage was 4.9x and recourse leverage was 1.6x at September 30, 2022.
- Secured borrowings were $3.35 billion; securitized debt obligations were $4.43 billion; corporate debt was $662.2 million; and senior secured notes were $342.9 million.
- PPPLF borrowings declined to $305.8 million from $941.5 million as PPP loans were forgiven.
- The company reported compliance with all debt and financial covenants at quarter-end.
- Loan originations totaled $1.50 billion in Q3 and $6.04 billion for the first nine months. Total loan investment activity was $6.70 billion for the first nine months.
Cash flow and capital allocation
For the nine months ended September 30, 2022, operating activities provided $142.2 million, investing activities used $1.58 billion and financing activities provided $1.44 billion. Cash, cash equivalents and restricted cash decreased by $4.0 million from year-end 2021.
Financing sources included secured borrowings, securitizations, corporate debt and equity issuance. The company paid $136.7 million of dividends, repurchased $3.8 million of common stock and raised $123.5 million from equity issuance during the nine-month period.
Material changes versus prior comparable periods
- Interest income grew primarily from higher loan balances, loan originations and higher interest rates, while interest expense rose sharply with increased borrowings and rising benchmark rates.
- SBC Lending and Acquisitions benefited from substantially higher loan balances and generated $47.1 million of Q3 pretax income versus $36.2 million in the prior-year quarter.
- Residential Mortgage Banking revenue declined as residential originations slowed. Q3 residential mortgage banking revenue fell to $12.1 million from $37.3 million, although lower origination costs improved segment profitability.
- Residential MSRs increased to $192.2 million from $120.1 million at year-end 2021, including a $16.6 million Q3 unrealized gain.
- Non-accrual loans increased to $249.8 million from $99.5 million at December 31, 2021. Non-accrual loans represented 2.5% of loans before the general allowance, compared with 1.4% at year-end 2021.
- The loan portfolio became more concentrated in multifamily collateral, which represented 66.8% of unpaid principal balance versus 54.4% at year-end 2021. Texas represented the largest geographic concentration at 20.9%.
Acquisition, unusual items and management commentary
- On March 16, 2022, Ready Capital completed the Mosaic Mergers, acquiring a construction-focused real estate structured finance platform. The transaction added approximately $762.1 million of assets under the updated purchase price allocation and increased goodwill to $4.6 million for Mosaic.
- During September 2022, measurement-period adjustments reduced acquired net assets by $62.7 million, reduced the fair value of Mosaic contingent equity rights by $59.3 million and increased goodwill by $3.4 million. The company also recorded a $33.9 million reduction in acquired real estate values and a $6.3 million reduction in acquired held-to-maturity investments.
- Mosaic-related non-recurring transaction expenses were $1.5 million in Q3 and $8.6 million for the first nine months.
- In July 2022, the company issued $80.0 million of 7.375% senior notes due 2027 and issued an additional $20.0 million of the notes in September.
- The company committed $125.0 million to a Waterfall-managed fund, had contributed $36.6 million by September 30, 2022 and retained an $88.4 million remaining commitment.
- In October 2022, the company repurchased approximately 3.6 million shares at an average price of $10.34. It also completed an $860.1 million SBC loan securitization and sold $656.9 million of senior bonds at a weighted average cost of SOFR plus 3.0%.
Outlook, risks and contingencies
- Management highlighted persistent inflation, macroeconomic uncertainty, geopolitical developments and further expected Federal Reserve rate increases as important operating factors.
- Higher rates can increase floating-rate funding costs, reduce asset values and increase defaults, although variable-rate loan coupons and hedging arrangements may offset part of the effect. The filing estimates a $4.7 million pretax annual increase in net interest income from an immediate 25-basis-point rate increase, assuming no balance-sheet changes.
- Liquidity is exposed to margin calls, collateral haircuts, financing renewals and the availability of repurchase agreements and warehouse facilities. JPMorgan and Credit Suisse represented 21.7% and 20.4%, respectively, of stockholders’ equity at risk from repurchase-agreement counterparties.
- Credit risk increased as non-accrual loans, construction exposure and multifamily concentration expanded. The allowance for loan losses was $60.3 million at September 30, 2022, including $16.0 million of PCD reserves associated with Mosaic.
- Approximately 0.4% of commercial real estate loans were in forbearance plans at quarter-end.
- The company remains subject to REIT qualification requirements, external-manager dependence, fair-value volatility, prepayment risk, real estate valuation risk and risks associated with integrating the Mosaic construction lending platform.
- The Anworth merger litigation remained in discovery. A separate CAIS lawsuit related to Mosaic was settled and dismissed with prejudice in September 2022. Management reported no other contingencies requiring accrual.
Most important facts for investors to verify
- Whether rising funding costs and additional rate increases continue to compress net interest spreads.
- Trends in non-accrual loans, delinquency rates, construction assets, foreclosures and the adequacy of CECL reserves.
- The sustainability of the $0.42 quarterly common dividend relative to distributable earnings per diluted share of $0.44 in Q3.
- The effect of significant share issuance and the Mosaic contingent equity rights on future per-share earnings and book value.
- Liquidity cushions, repurchase-agreement maturities, collateral requirements and counterparty exposure, particularly to JPMorgan and Credit Suisse.
- Performance and integration of the Mosaic construction lending platform, including the effect of the measurement-period valuation adjustments.
- Near-term debt maturities, including $115.0 million of convertible notes due in 2023 and $120.0 million of corporate debt due in 2025.
- Valuation sensitivity of residential MSRs, other Level 3 assets and real estate owned, especially under higher rates, slower prepayments or weaker property values.