Ready Capital Corporation: FY2021 Form 10-K Summary
Business context and reporting period
Ready Capital Corporation is an externally managed mortgage REIT advised by Waterfall Asset Management, LLC. It originates, acquires, finances and services small-to-medium balance commercial loans, transitional loans, SBA 7(a) loans, residential mortgage loans, mortgage-backed securities and other real-estate-related investments. The filing covers the fiscal year ended December 31, 2021, including fourth-quarter results. The company reports three segments: SBC Lending and Acquisitions, Small Business Lending and Residential Mortgage Banking.
At December 31, 2021, the loan portfolio had $8.575 billion of unpaid principal balance and $8.466 billion of carrying value, excluding real estate owned, held-for-sale loans and mortgage servicing rights. Approximately 89.0% of equity allocation was associated with SBC Lending and Acquisitions.
Financial performance and key metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Interest income | $403.5 million | $258.6 million | +$144.9 million |
| Interest expense | ($213.6 million) | ($175.5 million) | ($38.1 million) |
| Net interest income before loan-loss provision | $189.9 million | $83.2 million | +$106.8 million |
| Provision for loan losses | ($8.0 million) | ($34.7 million) | Improved by $26.7 million |
| Net income | $160.0 million | $46.1 million | +$113.9 million |
| Net income attributable to Ready Capital | $150.2 million | $44.9 million | +$105.4 million |
| GAAP EPS, basic and diluted | $2.17 | $0.81 | +$1.36 |
| Distributable earnings | $168.0 million | $101.4 million | +$66.7 million |
| Distributable earnings per common share | $2.29 | $1.82 | +$0.47 |
| Common dividends declared per share | $1.66 | $1.30 | +$0.36 |
| Book value per common share | $15.36 | $15.00 | +$0.36 |
Fourth-quarter 2021 net income was $53.6 million, or $0.69 basic EPS, compared with $27.6 million and $0.51 distributable earnings per share in the fourth quarter of 2020. Fourth-quarter distributable earnings were $52.5 million, or $0.67 per share, and the common dividend was $0.42 per share.
Net interest income after loan-loss provisions increased to $181.9 million from $48.4 million. Non-interest income was $319.8 million, down from $334.8 million, primarily because residential mortgage banking revenue declined. Non-interest expense decreased to $312.6 million from $328.7 million, primarily because residential mortgage banking variable expenses declined.
Balance sheet, cash flow, debt and liquidity
| Metric | December 31, 2021 | December 31, 2020 | Change |
|---|---|---|---|
| Total assets | $9.534 billion | $5.372 billion | +77.5% |
| Total liabilities | $8.245 billion | $4.538 billion | +81.7% |
| Total stockholders’ equity | $1.281 billion | $834.2 million | +53.5% |
| Cash and cash equivalents | $229.5 million | $139.0 million | +65.2% |
| Cash, cash equivalents and restricted cash | $323.3 million | $200.5 million | +$122.8 million |
| Loans, net | $2.915 billion | $1.551 billion | +88.0% |
| PPP loans | $870.4 million | $74.9 million | +1,061.5% |
| Securitized debt obligations | $3.214 billion | $1.906 billion | +68.7% |
| Secured borrowings | $2.518 billion | $1.294 billion | +94.5% |
Net cash used in operating activities was $34.4 million, net cash used in investing activities was $1.718 billion, and net cash provided by financing activities was $1.876 billion. The increase in cash and restricted cash was principally funded by securitized debt, PPPLF borrowings and other financing activities.
Recourse debt-to-equity leverage was 2.7x at year-end, comprising 1.8x warehouse and repurchase borrowings, 0.7x corporate debt and 0.2x agency secured borrowings. Management’s stated target ranges are 4.0x to 5.0x total debt-to-equity and 1.5x to 2.5x recourse debt-to-equity. The company reported compliance with debt and financial covenants, although certain counterparties waived inclusion of PPPLF borrowings in covenant calculations.
Contractual obligations totaled $4.265 billion, including $2.347 billion due within one year. This included $2.046 billion of repurchase-agreement borrowings, $471.9 million of credit-facility borrowings, $350.0 million of senior secured notes, $452.9 million of corporate debt and $115.0 million of convertible notes.
Material changes versus the prior comparable period
- Loan investment activity increased to $10.158 billion from $5.836 billion, including $9.961 billion of originations.
- SBC loan originations increased to $5.272 billion from $1.160 billion; bridge lending exceeded $3.7 billion for the year.
- Small Business Lending interest income increased substantially because of higher balances, including PPP loans; PPP-related net income was $56.1 million.
- Residential mortgage banking activities declined to $137.3 million from $252.7 million as origination volumes and related revenue decreased.
- The company completed the Anworth acquisition on March 19, 2021 for approximately $417.9 million of consideration, including approximately 16.8 million common shares and $60.6 million of cash. It liquidated approximately $2.0 billion of acquired assets and repaid approximately $1.7 billion of related indebtedness by year-end.
- The company acquired Red Stone on July 31, 2021 for approximately $63 million of cash, $7 million of executive retention payments and 128,533 common shares, with additional contingent consideration possible.
- Four securitizations closed during 2021, and company disclosures state that total securitizations reached $2.4 billion for the year and $8.8 billion across 31 transactions since inception.
- The company issued $201.3 million of 5.75% senior notes due 2026, $110.0 million of 5.50% senior notes due 2028 and $350.0 million of 4.50% senior secured notes due 2026. It used the latter to redeem all $180.0 million of 7.50% senior secured notes due 2022.
- The allowance for loan losses decreased modestly to $45.4 million from $46.7 million, while reported non-accrual loans declined to $99.5 million from $134.2 million.
Guidance, outlook, commentary, risks and unusual items
Management provided no formal numerical earnings or dividend guidance. Management expressed confidence in continued growth, citing strong demand, expanded origination capabilities, the Anworth and Red Stone acquisitions, a $3.085 billion current pipeline and the company’s diversified platform. A pending Mosaic transaction was expected to expand the portfolio into construction lending and produce a pro forma equity base exceeding $1.8 billion, subject to approvals and customary closing conditions.
On January 14, 2022, the company completed a public offering of 7.0 million common shares at $15.30 per share, generating approximately $106.6 million of net proceeds for originations, acquisitions and general corporate purposes.
Key risks include credit losses on SBC, transitional and SBA loans; commercial real estate and small-business weakness; concentration in Texas, California, Arizona, New York and Georgia; reliance on short-term repurchase and warehouse financing; margin calls and collateral requirements; interest-rate and credit-spread volatility; prepayment and extension risk; securitization availability; the transition from LIBOR; valuation risk in Level 3 assets, particularly residential MSRs; dependence on Waterfall and related-party conflicts; REIT qualification and 1940 Act exclusion requirements; regulatory and licensing requirements; cybersecurity and operational risks; and acquisition-integration risk.
Approximately 0.8% of the commercial real estate loan portfolio was in forbearance at year-end. The company identified $202.6 million of loan unpaid principal balance subject to delinquent principal or interest, and $479.3 million of loan funding commitments remained outstanding. Litigation related to the Anworth merger was in discovery, and shareholder litigation and arbitration claims related to the proposed Mosaic mergers were disclosed after year-end.
Reported results include material non-recurring and valuation-sensitive items. Distributable earnings excluded, among other items, unrealized residential MSR gains, certain credit-loss adjustments, REO items and merger-related expenses. Net unrealized gains on financial instruments were $39.4 million in 2021 compared with a $48.1 million loss in 2020, including a $16.9 million unrealized gain on residential MSRs.
Most important facts for investors to verify
- Reconcile distributable earnings of $168.0 million and dividends declared of $117.4 million with taxable income and future dividend capacity; distributable earnings is non-GAAP.
- Review the maturity, advance rates, haircuts and covenant requirements for $2.046 billion of repurchase borrowings and other short-term facilities.
- Assess the effect of rising rates, LIBOR replacement and funding-cost changes; management’s sensitivity shows a $2.1 million pretax net-interest-income decline under an immediate 25-basis-point increase but a $0.5 million increase under a 100-basis-point increase.
- Evaluate credit quality, including the $99.5 million of non-accrual loans, $45.4 million allowance, 79% average LTV for originated SBC loans and geographic and multifamily concentration.
- Scrutinize the valuation sensitivity of $120.1 million of residential MSRs and other Level 3 assets, which rely on prepayment, discount-rate and servicing-cost assumptions.
- Confirm the closing status, consideration, integration costs and leverage impact of the Mosaic transaction and the outcome of related litigation and arbitration.
- Review Waterfall management fees, incentive distributions, expense reimbursements and termination provisions, including the externally managed structure and related-party conflicts.
- Verify continued REIT qualification, 1940 Act exclusion, financing covenant compliance and the ability to fund required distributions during periods of asset or financing-market stress.