Ready Capital Corporation — Q2 2023 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, SBA loans, residential mortgage loans, construction loans and related investments. The filing covers the unaudited three and six months ended June 30, 2023, compared with the same periods in 2022; balance-sheet comparisons are primarily with December 31, 2022.
The company completed its merger with Broadmark Realty Capital on May 31, 2023. The transaction expanded its residential and commercial construction-lending platforms and added 62.2 million Ready Capital shares. The preliminary purchase accounting generated a $229.9 million bargain-purchase gain.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $232.9 million | $153.7 million | $450.5 million | $278.1 million |
| Interest expense | ($172.5 million) | ($80.8 million) | ($332.9 million) | ($141.8 million) |
| Net interest income before loan losses | $60.4 million | $72.8 million | $117.5 million | $136.2 million |
| Provision for loan losses | $19.4 million | Recovery of $4.4 million | $12.7 million | Recovery of $2.8 million |
| Total non-interest income | $304.2 million | $50.8 million | $348.3 million | $138.6 million |
| Net income | $253.4 million | $59.0 million | $290.4 million | $123.2 million |
| Net income attributable to Ready Capital | $246.9 million | $54.1 million | $280.0 million | $115.6 million |
| Diluted EPS | $1.76 | $0.45 | $2.17 | $1.07 |
| Distributable earnings | $51.3 million | $60.1 million | $89.4 million | $109.0 million |
| Distributable earnings per diluted share | $0.35 | $0.46 | $0.65 | $0.94 |
| Common dividend declared per share | $0.40 | $0.42 | $0.80 | $0.84 |
Reported GAAP earnings were heavily affected by the Broadmark bargain-purchase gain. Distributable earnings, which excludes the bargain-purchase gain and other specified non-recurring or unrealized items, declined year over year.
Balance sheet, cash flow and liquidity
- Total assets were $12.38 billion at June 30, 2023, up 6.6% from year-end 2022. Total stockholders’ equity was $2.70 billion, up 43.0%, primarily from shares issued in the Broadmark merger.
- Cash and cash equivalents were $227.5 million; cash, cash equivalents and restricted cash totaled $388.9 million, up from $297.0 million at year-end 2022.
- Six-month operating cash flow was $37.2 million, compared with $79.2 million in the prior-year period. Investing cash flow was $333.6 million, while financing cash flow was negative $278.9 million.
- Loan investments, including consolidated VIE loans and loans held for sale, totaled approximately $10.79 billion. The allowance for loan losses was $112.2 million, compared with $90.5 million at year-end 2022.
- Loans 60 or more days past due represented 4.1% of loans before the general allowance, compared with 2.4% at December 31, 2022. Recorded non-accrual loans increased to $521.4 million from $242.8 million.
- Secured borrowings were $2.40 billion, PPPLF borrowings were $110.8 million, securitized debt was $5.40 billion, corporate debt was $762.7 million and senior secured notes were $344.2 million. Total carrying amount of senior secured, convertible and corporate debt was $1.22 billion.
- Total leverage was 3.5x and recourse leverage was 1.0x at June 30, 2023. Management reported compliance with debt, financial and ISDA covenants.
- The company had $1.04 billion of unfunded loan commitments, $15.1 million of unfunded loans held for sale commitments and $153.3 million of commitments to originate residential agency loans.
Material changes versus prior comparable periods
- Interest income increased 51.5% in Q2 and 62.0% for the first six months, mainly from higher loan balances and higher interest rates. Interest expense increased substantially faster, reducing net interest income before loan losses by 17.2% in Q2 and 13.7% year to date.
- Credit costs worsened materially. Q2 included a $19.4 million provision versus a $4.4 million recovery in Q2 2022, primarily reflecting lower commercial real estate price-index assumptions. The company also recorded $27.6 million of purchased-credit-deteriorated reserves from Broadmark-acquired construction loans.
- Non-interest income increased primarily because of the $229.9 million Broadmark bargain-purchase gain. Merger-related transaction expenses were $14.0 million in Q2 and $14.9 million year to date.
- Residential mortgage banking activity increased to $9.9 million in Q2 from $2.9 million, while variable mortgage-banking expenses shifted to a $6.6 million expense from $4.5 million of income.
- Loan originations were $1.06 billion in Q2 and $1.88 billion year to date, down from $2.09 billion and $5.16 billion, respectively, in the comparable 2022 periods. SBC originations declined substantially, while residential and SBA originations also decreased.
- The common dividend declined to $0.40 per share in Q2 from $0.42. Book value per common share was $14.52 versus $15.28 in the prior-year comparable period.
Outlook, management commentary, risks and unusual items
The filing does not provide formal numerical earnings or dividend guidance. Management stated that results will depend on interest rates, financing costs, credit losses, real estate values, prepayment speeds, credit spreads, loan originations, market liquidity and the availability of attractive risk-adjusted investments.
- Management expects to use the broader platform and increased scale following the Broadmark merger to pursue construction and other real estate finance opportunities, but cautions that integration may be delayed or fail to produce expected synergies and cost savings.
- Approximately 79% of the loan portfolio was floating rate and 21% fixed rate at June 30, 2023. A modeled immediate 100-basis-point rate increase was estimated to increase 12-month pretax net interest income by $21.1 million; a 100-basis-point decrease was estimated to reduce it by $20.6 million, before considering broader economic effects.
- Key risks include rising funding costs, credit deterioration, commercial real estate price declines, construction-loan execution risk, loan extensions, margin calls, counterparty failures, refinancing and repo-renewal risk, fair-value volatility and reduced liquidity.
- Residential MSRs carried at fair value were $201.5 million and total servicing rights were $296.4 million. These valuations are sensitive to prepayment rates, discount rates and servicing costs.
- The company remains subject to REIT distribution requirements and reported compliance with REIT requirements. Its externally managed structure creates dependence on Waterfall Asset Management; the management agreement’s current term expires October 31, 2023, subject to renewal provisions.
- An Anworth-related shareholder settlement received preliminary court approval but remained subject to final approval. Several Broadmark merger-related lawsuits were voluntarily dismissed; the filing states that no additional material contingency required disclosure.
Most important facts for investors to verify
- Whether the $229.9 million Broadmark bargain-purchase gain is excluded from performance assessments and whether the preliminary purchase-price allocation changes during the measurement period.
- Trends in non-accrual loans, 60-plus-day delinquencies, construction-loan performance and the $112.2 million allowance for loan losses.
- Whether distributable earnings can support the $0.40 quarterly common dividend, given Q2 distributable earnings per diluted share of $0.35.
- The August 15, 2023 maturity of the $115.0 million 7.00% convertible notes and the company’s refinancing or repayment plan.
- Repo and secured-borrowing maturities, collateral requirements, potential margin calls and the availability of unpledged liquidity.
- Progress integrating Broadmark, realization of projected synergies and the performance of the acquired construction portfolio.
- Exposure to commercial real estate values, interest rates, prepayments, fair-value assumptions and counterparty risk.