Ready Capital Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
Ready Capital is an externally managed REIT and multi-strategy real estate finance company that originates, acquires, finances and services small-to-medium balance commercial, construction, SBA, residential mortgage and related investments. The filing covers the quarter and six months ended June 30, 2022; financial statements are unaudited.
Reportable segments are SBC Lending and Acquisitions, Small Business Lending and Residential Mortgage Banking. On March 16, 2022, Ready Capital completed the Mosaic acquisition, adding a construction-lending platform and approximately $736 million of assets. Class B common stock issued in the transaction converted one-for-one into common stock on May 11, 2022.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $153.7 million | $103.0 million | $278.1 million | $176.4 million |
| Net interest income before loan-loss provision/recovery | $72.8 million | $47.6 million | $136.2 million | $70.2 million |
| Loan-loss provision/(recovery) | $4.4 million recovery | $5.5 million provision | $2.8 million recovery | $5.5 million provision |
| Net interest income after provision/recovery | $77.2 million | $42.1 million | $139.1 million | $64.7 million |
| Non-interest income | $50.8 million | $75.9 million | $138.6 million | $164.8 million |
| Net income | $59.0 million | $30.9 million | $123.2 million | $59.9 million |
| Net income attributable to Ready Capital | $54.1 million | $27.2 million | $115.6 million | $55.2 million |
| Distributable earnings | $60.1 million | $41.4 million | $109.0 million | $66.1 million |
| Basic/diluted EPS | $0.47/$0.45 | $0.38/$0.38 | $1.13/$1.07 | $0.85/$0.85 |
| Common dividend declared per share | $0.42 | $0.42 | $0.84 | $0.82 |
Net interest income after loan-loss recovery increased substantially, while non-interest income declined because residential mortgage banking activity weakened and net unrealized gains on financial instruments turned negative in Q2. Book value per common share was $15.28 at June 30, 2022, compared with $14.88 at June 30, 2021. Reported total leverage was 4.9x and recourse leverage was 1.5x.
Balance sheet, liquidity and debt
- Total assets were $11.94 billion at June 30, 2022, up 25.2% from December 31, 2021.
- Loans, net were $3.91 billion, up 34.0%; total loan portfolio exposure, including consolidated VIEs, loans held for sale and PPP loans, was approximately $10.57 billion.
- Assets of consolidated VIEs increased to $6.00 billion, primarily from the RCMF 2022-FL8, RCMT 2022-7 and RCMF 2022-FL9 securitizations.
- Cash and cash equivalents were $127.9 million, with restricted cash of $64.7 million. Cash, cash equivalents and restricted cash, including amounts in consolidated VIEs, totaled $245.1 million.
- Total stockholders’ equity was $2.0 billion, up 53.2% from year-end, primarily due to Mosaic-related equity issuance and additional common equity offerings.
- Secured borrowings were $3.21 billion; securitized debt obligations were $4.53 billion; PPPLF borrowings were $427.8 million; and corporate debt, convertible notes and senior secured notes totaled approximately $1.02 billion on a carrying-value basis.
- Six-month operating cash flow was $79.2 million, investing cash flow was negative $1.67 billion and financing cash flow was positive $1.52 billion. Ending cash, cash equivalents and restricted cash declined by $78.3 million from year-end.
- Management reported compliance with debt and financial covenants at June 30, 2022 and stated that it had satisfied all margin calls to date.
Material changes versus prior comparable periods
- Q2 net income rose 90.8% year over year, while six-month net income rose 105.9%.
- Interest income increased 49.1% in Q2 and 57.6% year to date, primarily from higher loan balances and greater SBC activity.
- Non-interest income declined 33.1% in Q2 and 15.9% year to date. Residential mortgage banking income fell to $2.9 million in Q2 from $36.7 million, and to $11.4 million year to date from $78.1 million.
- Residential mortgage loan originations declined to $746.4 million in Q2 from $1.07 billion and to $1.52 billion year to date from $2.31 billion.
- SBC loan originations increased to $3.41 billion year to date from $1.92 billion, reflecting expansion of the commercial and construction platform.
- PPP loans declined 55.3% from year-end to $389.2 million as borrowers received principal forgiveness; related PPPLF borrowings declined 54.6% to $427.8 million.
- Non-accrual loans increased to $243.7 million from $99.5 million at December 31, 2021. Loans 60 or more days past due represented 2.3% of loans at June 30, compared with 1.6% at year-end.
- Real estate owned held for sale increased to $119.6 million from $42.3 million, and contingent consideration increased to $92.5 million from $16.4 million, largely reflecting Mosaic-related obligations.
Guidance, outlook, commentary and risks
The filing does not provide quantitative full-year earnings or dividend guidance. Management emphasizes continued portfolio growth, capital deployment into commercial and construction lending, and the use of securitizations, secured financing, equity and debt markets to fund originations.
- Management expects results to remain sensitive to interest rates, credit spreads, prepayments, loan extensions, real estate values, borrower defaults and financing availability.
- Approximately 84% of portfolio loans were adjustable-rate and 16% fixed-rate based on unpaid principal balance. Management estimates that an immediate 100-basis-point increase in rates would increase projected 12-month pretax net interest income by approximately $16.2 million, before considering broader economic effects.
- Approximately 0.4% of commercial real estate loans were in forbearance plans at June 30, 2022. COVID-19 effects, particularly on hospitality, retail and other commercial real estate, remain uncertain.
- Liquidity is exposed to repurchase-agreement renewals, margin calls, collateral haircuts, counterparty performance and potential declines in asset values. JPMorgan and Credit Suisse represented 12.9% and 19.4%, respectively, of stockholders’ equity at risk under repurchase agreements.
- Unfunded commitments included $762.6 million for loans, $22.8 million for loans held for sale and $338.3 million of residential agency loan commitments.
- The Company remains dependent on its external manager, Waterfall Asset Management. Base management fees were $5.5 million in Q2 and $8.7 million year to date; no incentive fee was recorded in 2022 periods presented.
- Pending litigation includes the Anworth merger shareholder litigation and the CAIS action related to the Mosaic transaction. The Mosaic investor arbitration was dismissed with prejudice in June 2022.
- Subsequent events included a European commercial real estate lending joint venture, a commitment to a Waterfall-managed fund and an $80 million 7.375% senior unsecured notes issuance on July 25, 2022.
Investor verification checklist
- Verify the sustainability of distributable earnings and the $0.42 quarterly common dividend, including the effect of non-GAAP adjustments.
- Reconcile reported 4.9x total leverage and 1.5x recourse leverage to secured borrowings, securitized debt and consolidated VIE treatment.
- Monitor non-accrual loans, 60-plus-day delinquencies, construction exposure, REO balances and the allowance for credit losses.
- Assess refinancing and margin-call exposure for repurchase facilities, including maturities beginning in 2022 and 2023.
- Evaluate the sensitivity of earnings and book value to rising rates, wider credit spreads, real estate weakness and changes in prepayment speeds.
- Review the final economic cost of Mosaic contingent equity rights and other contingent consideration.
- Follow the Anworth and CAIS legal proceedings, REIT qualification, external management agreement and related-party obligations.