Ready Capital Corporation: Q1 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, construction, SBA, residential mortgage and related real estate investments. The company qualifies as a REIT and is managed by Waterfall Asset Management, LLC. This unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021, and the balance sheet is compared with December 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 / Dec. 31, 2021 | Change |
|---|---|---|---|
| Interest income | $124.4 million | $73.4 million | +69.5% |
| Net interest income before loan-loss provision | $63.4 million | $22.6 million | +$40.8 million |
| Net interest income after provision | $61.8 million | $22.6 million | +$39.2 million |
| Non-interest income | $87.8 million | $89.0 million | -$1.2 million |
| Non-interest expense | $67.5 million | $74.0 million | -$6.4 million |
| Net income | $64.3 million | $28.9 million | +121.9% |
| Net income attributable to Ready Capital | $61.5 million | $28.0 million | +119.6% |
| Basic/diluted EPS | $0.70 / $0.66 | $0.49 / $0.49 | Improved |
| Distributable earnings | $48.9 million | $24.7 million | +97.8% |
| Distributable earnings per diluted share | $0.48 | $0.41 | +$0.07 |
| Common dividend declared per share | $0.42 | $0.40 | +$0.02 |
| Return on equity | 18.0% | 12.8% | +5.2 percentage points |
| Distributable return on equity | 13.6% | 10.9% | +2.7 percentage points |
| Book value per common share | $15.22 | $14.90 | +2.1% |
Results benefited from higher loan volumes, PPP interest income, unrealized gains on financial instruments and substantially lower residential mortgage banking variable expenses. Q1 2022 included $45.3 million of net unrealized gains on financial instruments, including $32.6 million from residential mortgage servicing rights and $26.9 million from derivatives. These fair-value items contributed materially to GAAP earnings.
Balance sheet, liquidity and leverage
- Total assets were $11.48 billion at March 31, 2022, up 20.4% from year-end 2021.
- Total stockholders’ equity was $1.96 billion, up 53.0%, primarily reflecting the Mosaic transaction, a January common-stock offering and Equity ATM issuance.
- Cash and cash equivalents were $211.4 million; cash, cash equivalents and restricted cash totaled $300.1 million, down from $323.3 million at year-end.
- Total loan portfolio was approximately $10.07 billion, up from $8.42 billion. Loans, net increased 39.3% to $4.06 billion, while PPP loans decreased 36.3% to $554.7 million.
- Secured borrowings were $3.27 billion, up 30.1%; securitized debt obligations were $3.86 billion, up 20.2%; and PPPLF borrowings declined 33.4% to $627.4 million.
- Total leverage was 4.4x and recourse leverage was 1.4x. Segment recourse leverage was 0.6x for SBC Lending and Acquisitions, 7.1x for Small Business Lending and 2.0x for Residential Mortgage Banking.
- The company reported compliance with debt and financial covenants as of March 31, 2022 and stated that it had satisfied all margin calls historically.
Cash flow and capital activity
- Operating activities provided $14.7 million, compared with cash used of $50.2 million in Q1 2021.
- Investing activities used $1.12 billion, primarily for loan originations and purchases.
- Financing activities provided $1.08 billion, primarily from secured borrowings, securitized debt issuance and equity issuance.
- Loan originations totaled $3.06 billion, including $2.19 billion of SBC loans, $101.0 million of SBA loans and $769.1 million of residential agency mortgage loans.
- The company issued 7.0 million common shares in January for approximately $106.6 million of net proceeds and sold 1.1 million shares through its Equity ATM for approximately $16.8 million of net proceeds.
Material changes versus the prior comparable period
- Net income more than doubled, while distributable earnings nearly doubled. Net interest income increased sharply due to portfolio growth and higher interest income.
- Residential mortgage banking revenue declined to $8.4 million from $41.4 million as originations and gains on residential loans decreased; however, related variable expenses fell to $1.0 million from $15.5 million.
- Residential agency mortgage originations decreased to $769.1 million from $1.24 billion, while SBC originations increased to $2.19 billion from $823.2 million.
- Non-accrual loans increased to $183.9 million from $99.5 million at year-end 2021. Loans 60 or more days past due increased to $205.3 million from $110.9 million.
- The allowance for loan losses increased to $51.2 million from $45.4 million, and the company recorded a $1.5 million provision for loan losses versus an immaterial recovery in Q1 2021.
- Real estate owned, held for sale increased to $119.2 million from $42.3 million, including $79.6 million of multifamily REO acquired or recognized during the period.
- Servicing rights increased to $244.1 million from $204.6 million, principally due to the increase in residential MSR fair value.
- Q1 2022 included $5.7 million of transaction-related expenses associated with the Mosaic Mergers and a $1.8 million impairment on real estate owned.
Acquisitions, outlook and management commentary
On March 16, 2022, Ready Capital completed the Mosaic Mergers, acquiring construction-focused real estate structured finance funds. The acquisition added $826.1 million of assets, including $432.8 million of loans, and was funded primarily with Class B common stock, OP units and contingent equity rights. The acquired portfolio and construction lending platform expanded the company’s origination and investment capabilities but also introduced integration, construction lending, valuation and contingent-equity risks.
The filing does not provide quantitative earnings guidance. Management expects results to depend on loan volume, asset yields, financing costs, interest rates, prepayment speeds, credit performance, property values, capital-market access and the availability of attractive risk-adjusted investments. The company expects to use securitizations, repurchase agreements, warehouse facilities, debt and equity offerings and operating cash flow to fund growth.
Interest-rate sensitivity analysis indicated that an immediate 100-basis-point increase could increase projected 12-month pretax net interest income by approximately $9.1 million, while a 100-basis-point decrease could reduce it by approximately $4.8 million, assuming no change in capital structure or management actions. The company reported that approximately 0.6% of its commercial real estate loans were in forbearance plans at March 31, 2022.
Subsequent to quarter-end, the company securitized $276.8 million of fixed-rate SBC loans and issued $204.5 million of senior bonds. It also issued $120.0 million of 6.125% senior unsecured notes due 2025 on April 18, 2022.
Risks, contingencies and unusual items
- Key risks include rising financing costs, widening credit spreads, declining real estate values, borrower defaults, higher delinquencies, extension and prepayment risk, margin calls and the inability to renew or replace repurchase facilities.
- Much of the financing is secured and subject to haircuts, collateral requirements and floating rates. JPMorgan, Credit Suisse and Deutsche Bank represented more than 5% of stockholders’ equity at risk under repurchase arrangements.
- Fair-value measurements include substantial Level 3 assets and liabilities, including residential MSRs, certain loans, investments and Mosaic contingent consideration. Valuations are sensitive to prepayment, default, discount-rate, servicing-cost and portfolio-performance assumptions.
- Contingent consideration increased to $92.1 million from $16.4 million at year-end, including Mosaic contingent equity rights and other acquisition-related obligations.
- The company remains exposed to COVID-19-related effects on commercial real estate, small businesses, occupancy, borrower cash flows and capital markets, although the filing states that activity had become more normalized.
- Pending matters include shareholder litigation related to the Anworth merger, investor arbitration claims related to Mosaic disclosures and a CAIS lawsuit concerning the Mosaic Manager’s relationship with CAIS. The company intends to vigorously defend these matters; the filing does not identify a material accrued loss.
- The company is externally managed. Management fees were $3.2 million in Q1 2022, and reimbursable expenses payable to the Manager were $3.5 million for the quarter. The management agreement’s current term expires October 31, 2022, subject to renewal and termination provisions.
Important facts for investors to verify
- Whether the sharp increase in GAAP earnings and book value is sustained after excluding fair-value gains, MSR gains and merger-related items.
- Trends in non-accrual loans, 30-to-59-day and 60-plus-day delinquencies, REO balances and the allowance for credit losses.
- The integration and credit performance of the Mosaic construction portfolio, including potential future shares issuable under the contingent equity rights.
- Liquidity available after considering secured borrowing capacity, collateral haircuts, margin-call requirements and upcoming facility maturities.
- The effect of higher interest rates on asset yields, funding costs, fair values, prepayments and borrower credit performance.
- Coverage of the $0.42 common dividend by distributable earnings, taxable income and recurring cash generation.
- The outcome and potential financial exposure of the Anworth-related litigation, Mosaic arbitration and CAIS litigation.
- Compliance with REIT distribution and qualification requirements and the company’s continued ability to access debt and equity capital markets.