Ready Capital Corporation: FY2023 Form 10-K Summary
Business context and reporting period
Ready Capital is an externally managed mortgage REIT focused on lower-to-middle-market commercial real estate lending and SBA 7(a) small-business lending. The filing covers the fiscal year ended December 31, 2023, with comparative information for 2022 and 2021. The company is managed by Waterfall Asset Management, LLC and operates primarily through its operating partnership.
In the fourth quarter of 2023, the Board approved a strategic shift toward LMM commercial real estate lending and government-backed small-business loans. The Residential Mortgage Banking segment was classified as held for sale and presented as discontinued operations for all periods. Management expected the disposition to close in the first half of 2024, but had not signed a definitive agreement as of the filing date.
Key financial metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Interest income | $945.8 million | $663.2 million | +$282.6 million |
| Interest expense | $716.5 million | $392.4 million | +$324.1 million |
| Net interest income before loan-loss provision | $229.3 million | $270.9 million | -$41.5 million |
| Provision for loan losses | $7.2 million | $34.4 million | -$27.2 million |
| Non-interest income | $408.5 million | $155.0 million | +$253.5 million |
| Non-interest expense | $272.2 million | $216.3 million | +$55.8 million |
| Net income from continuing operations | $351.2 million | $159.6 million | +$191.7 million |
| Net income | $348.4 million | $203.2 million | +$145.2 million |
| Distributable earnings | $190.1 million | $218.7 million | -$28.6 million |
| Distributable earnings per diluted common share | $1.17 | $1.79 | -$0.62 |
| Dividends declared per common share | $1.46 | $1.66 | -$0.20 |
| Book value per common share | $14.10 | $15.20 | -$1.10 |
Fourth-quarter 2023 net income from continuing operations was $24.6 million, or $0.12 per diluted share. Distributable earnings were $48.5 million, or $0.26 per diluted share, compared with $51.6 million and $0.40 per diluted share, respectively, in the fourth quarter of 2022. The company declared a fourth-quarter common dividend of $0.30 per share.
FY2023 GAAP results benefited materially from a $208.0 million bargain-purchase gain related to the Broadmark merger. Excluding this and other specified reconciling items, distributable earnings declined year over year.
Balance sheet, portfolio and liquidity
- Total assets were $12.4 billion at December 31, 2023, up 7.1% from $11.6 billion.
- Total stockholders’ equity was $2.6 billion, up 39.6%, primarily due to equity issued in the Broadmark merger.
- The loan portfolio was approximately $10.7 billion carrying value, representing approximately 5,500 loans across 50 states and Europe. Approximately 98% of loans were secured by senior liens.
- Portfolio composition by carrying value included approximately $6.8 billion of bridge loans, $1.2 billion of construction loans, $1.3 billion of SBA 7(a) loans and $1.0 billion of fixed-rate or CMBS-related loans.
- Approximately 81% of portfolio UPB was floating rate and 19% fixed rate. About 72% of fixed-rate loans were match-funded through securitizations.
- Total leverage was 3.3x and recourse leverage was 0.8x at year-end, compared with a stated target of 4.0x to 4.5x total leverage and 1.0x to 1.5x recourse leverage.
- Cash, cash equivalents and restricted cash totaled $262.5 million at year-end, down $11.1 million from 2022. Net cash provided by operating activities was $51.1 million, while investing activities provided $1.0 billion and financing activities used $1.1 billion.
- Secured borrowings were $2.1 billion, securitized debt obligations were $5.1 billion, guaranteed loan financing was $844.5 million, senior secured notes were $345.1 million and corporate debt was $764.9 million.
- Contractual obligations totaled $4.85 billion, including $1.04 billion due within one year. This included $1.95 billion of repurchase-agreement borrowings and $765.5 million of unfunded loan commitments.
Credit performance and risk indicators
- Loans 60 or more days past due totaled $916.6 million, or 8.6% of loans before the general allowance, compared with $237.0 million, or 2.4%, in 2022.
- Non-accrual loans increased to $634.0 million from $241.5 million. The related allowance was $50.8 million.
- Construction loans had $348.8 million 60 or more days past due, and bridge loans had $522.6 million in that category.
- The allowance for loan losses was $101.6 million at year-end, including $44.5 million of general reserves, $35.7 million of specific reserves and $21.4 million of purchased-credit-deteriorated reserves.
- Average LTV was 66.4% for originated loans and 56.1% for acquired loans. Approximately 66.8% of loans fell within the 60.1% to 80.0% LTV range.
- Loans modified for borrowers experiencing financial difficulty totaled approximately $469.2 million, or 4.4% of total loans, and substantially all were performing under modified terms at year-end.
Material changes versus the prior comparable period
- The Broadmark merger closed on May 31, 2023. It added approximately $845.2 million of net assets, 62.2 million common shares and construction-lending exposure. The transaction generated the $208.0 million bargain-purchase gain.
- Loan originations declined sharply to $2.18 billion from $5.02 billion, consisting of $1.68 billion of LMM originations and $493.9 million of SBA originations. No loan acquisitions were reported in 2023, compared with $659.6 million in 2022.
- Interest income increased 42.6%, but interest expense increased 82.7% because of higher rates and financing costs. Consequently, net interest income before provisions declined 15.3%.
- Non-interest income increased primarily because of the Broadmark bargain-purchase gain and higher other income, including employee retention credit consulting income. Non-interest expense increased 25.8%, partly due to merger-related costs.
- Distributable earnings declined 13.1%, and dividends declared per common share declined from $1.66 to $1.46.
- Secured borrowings declined by $561.7 million, while securitized debt increased by $165.1 million and guaranteed loan financing increased by $579.7 million. The $115.0 million convertible note was repaid in full in August 2023.
- Real estate owned held for sale increased to $252.9 million from $117.1 million, and assets classified as held for sale increased to $454.6 million.
Guidance, outlook, commentary and unusual items
Management did not provide formal earnings guidance in the filing. The company reported a current investment pipeline of approximately $741.9 million, including $450.8 million of LMM originations and $291.1 million of SBA originations, primarily for 2024 funding.
Management expects to continue using securitizations, repurchase agreements, credit facilities and corporate debt to fund portfolio growth. The company emphasized the potential for attractive risk-adjusted returns in fragmented LMM markets but noted that elevated interest rates, inflation, commercial real estate weakness, credit spreads and funding availability could materially affect results.
Interest-rate sensitivity analysis estimated that an immediate 100-basis-point increase in rates would increase projected 12-month pretax net interest income by approximately $19.4 million, while a 100-basis-point decrease would reduce it by approximately $19.1 million, assuming no changes in balance sheet structure or economic activity.
Key unusual or non-recurring items included the Broadmark bargain-purchase gain, $25.8 million of merger transaction and other non-recurring expenses in the distributable-earnings reconciliation, $8.6 million of real estate impairment, and $53.6 million of employee retention credit consulting income.
Principal risks and contingencies
- Credit deterioration, particularly in construction, bridge and commercial real estate loans, could increase provisions, charge-offs and realized losses.
- Higher short-term rates can increase funding costs faster than asset yields, while property-value declines can cause margin calls and reduce collateral value.
- Repurchase agreements and other short-term financing are subject to renewal, haircut and collateral requirements. The company reported satisfying all margin calls to date and no forced asset sales, but future liquidity needs remain sensitive to market conditions.
- Loan and servicing-right valuations rely partly on Level 3 models and assumptions regarding defaults, prepayments, discount rates, collateral values and loss severity.
- The pending residential mortgage banking disposition may not close on the expected timetable or at all; no definitive purchase agreement had been signed as of the filing date.
- The company depends on Waterfall for management, investment decisions and key personnel. The management agreement runs through October 31, 2024 and includes potentially significant termination payments.
- Ready Capital must maintain REIT qualification and its exclusion from registration under the Investment Company Act. Failure could create tax liabilities, force asset sales or restrict the business model.
- The company remains exposed to counterparty, securitization, repurchase, derivative, foreign-currency, cybersecurity and regulatory risks. At year-end, repurchase-agreement counterparty exposure exceeded 5% of equity for JPMorgan Chase and Wells Fargo.
Important facts for investors to verify
- Progress, terms and expected proceeds of the residential mortgage banking sale.
- Whether the elevated 60-plus-day delinquency and non-accrual levels stabilize, decline or require materially higher reserves.
- Broadmark integration results, cost savings, construction-loan performance and any further purchase-price allocation adjustments.
- 2024 refinancing and maturity exposure, particularly the $120.0 million due in 2025 and approximately $760.9 million due in 2026 under senior secured notes and corporate debt.
- Sustainability of distributable earnings and the $0.30 quarterly common dividend relative to funding costs, credit losses and taxable-income requirements.
- Actual conversion, redemption or expiration outcomes for approximately 7.4 million common-share equivalents represented by outstanding warrants expiring in November 2024 unless redeemed earlier.
- Changes in commercial real estate values, construction-loan recoveries, interest rates, securitization execution and repurchase-agreement collateral requirements.