Ready Capital Corporation: Q2 2020 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 and related mortgage-backed securities. The filing covers the three and six months ended June 30, 2020, with comparative periods ended June 30, 2019. The company operates through acquisitions, SBC originations, SBA originations/acquisitions/servicing and residential mortgage banking.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Interest income | $63.2 million in 2020 vs. $57.0 million in 2019 | $132.8 million vs. $105.8 million |
| Net interest income before loan-loss provision | $19.8 million vs. $21.3 million | $42.4 million vs. $34.3 million |
| Loan-loss provision | $0.6 million recovery vs. $1.3 million provision | $39.2 million provision vs. $1.9 million |
| Net income | $34.7 million vs. $11.2 million | $(16.9) million vs. $41.7 million |
| Net income attributable to Ready Capital | $33.9 million vs. $11.0 million | $(16.6) million vs. $40.4 million |
| Basic and diluted EPS | $0.62 vs. $0.25 | $(0.33) vs. $1.05 |
| Core earnings, non-GAAP | $39.2 million vs. $16.8 million | $40.4 million vs. $28.1 million |
| Core earnings per share | $0.70 vs. $0.37 | $0.73 vs. $0.70 |
| Dividends declared per share | $0.25 vs. $0.40 | $0.65 vs. $0.80 |
Second-quarter net income benefited materially from approximately $23.1 million of net PPP-related income and a $23.1 million increase in total PPP-related revenue. Residential mortgage banking activities generated $80.6 million of revenue, compared with $21.0 million in the prior-year quarter, while related variable expenses increased to $36.4 million from $13.5 million.
For the six-month period, GAAP results were pressured by the $39.2 million loan-loss provision, including the impact of CECL adoption, and $47.2 million of net unrealized losses on financial instruments. Residential mortgage servicing rights generated $28.5 million of unrealized losses in the first six months.
Cash, cash equivalents and restricted cash totaled $349.4 million at June 30, 2020, including $257.0 million of unrestricted cash and $91.5 million of restricted cash. Six-month operating cash flow was $48.0 million, investing cash flow was $(137.4) million and financing cash flow was $310.8 million, producing a $221.4 million increase in cash, cash equivalents and restricted cash.
Total assets were $5.46 billion, compared with $4.98 billion at December 31, 2019. Total stockholders’ equity was $813.0 million, compared with $844.8 million at year-end. Book value per common share was $14.48 and adjusted net book value per share was $14.46 at June 30, 2020.
Debt, liquidity and portfolio indicators
- Secured borrowings were $1.254 billion; securitized debt obligations were $2.140 billion; guaranteed loan financing was $436.5 million; convertible notes were $111.6 million; senior secured notes were $179.5 million; and corporate debt was $150.4 million.
- Recourse debt-to-equity leverage was 2.1x at June 30, 2020. Management reported compliance with all debt and financial covenants.
- Weighted-average rates were 3.2% on credit-facility borrowings and 3.7% on repurchase agreements, compared with 4.0% and 4.2%, respectively, at December 31, 2019.
- The total loan portfolio was $4.46 billion at carrying value, including $4.15 billion of loans, net, and $301.3 million of loans held for sale at fair value.
- Loan delinquencies increased: 90.7% of loan balances were current or less than 30 days past due, 7.3% were 30–89 days past due and 2.0% were 90 or more days past due. Non-accrual loans totaled $88.1 million.
- Allowance for loan losses totaled $57.1 million, including the CECL-related increase. The company recorded a $6.8 million after-tax cumulative-effect reduction to opening retained earnings upon CECL adoption.
- Approximately 8% of the commercial real estate portfolio was in forbearance plans at June 30, 2020.
Material changes versus prior comparable periods
- Second-quarter GAAP net income rose $23.4 million year over year, primarily because of PPP-related revenue, while core earnings increased $22.4 million.
- Six-month GAAP results declined by $58.5 million to a net loss, largely reflecting CECL adoption, higher credit-loss provisions, unrealized MSR losses and the absence of the $30.7 million bargain-purchase gain recognized in the 2019 ORM merger period.
- Loan originations increased to $1.37 billion in the second quarter and $2.58 billion for the six months, driven by residential agency mortgage originations of $1.19 billion and $1.88 billion, respectively. SBC and SBA originations declined from the prior-year periods.
- Cash increased substantially during the second quarter as management focused on liquidity preservation, reduced origination activity and completed the 2020-FL4 and 2020-SBC9 securitizations.
- Secured borrowings decreased by $445.0 million from March 31, 2020, while securitized debt increased by $447.9 million, reflecting the second-quarter securitizations and a shift toward non-recourse financing.
- The quarterly dividend declined from $0.40 to $0.25 per share. The prior quarterly dividend was paid partly in common stock, resulting in approximately 2.8 million shares issued.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or dividend guidance. Management expects COVID-19 to negatively affect business activity, financial performance, revenues, cash flow and profitability in one or more remaining 2020 periods, but states that the magnitude and duration remain uncertain.
- COVID-19 has affected commercial real estate occupancy, borrower cash flows, loan performance, property values, financing markets and collateral requirements. Hospitality and retail assets were identified as particularly affected.
- Potential risks include additional margin calls, asset sales at losses, reduced access to debt or equity capital, covenant pressure, higher defaults and lower recovery rates.
- The company suspended originations of purchased future receivables during the second quarter and reported a $22.0 million decline in that asset balance from March 31, 2020.
- PPP activity was an unusual and significant contributor: the company facilitated approximately $2.7 billion of PPP loan fundings, sourced and underwrote approximately $2.5 billion under a lender-service-provider arrangement, and held $105.2 million of PPP loans at fair value at quarter-end.
- Management’s estimates for CECL reserves, asset fair values, servicing rights and collateral values are especially sensitive to economic forecasts and COVID-19 developments.
- The board authorized an additional $5.0 million for the stock repurchase program on August 4, 2020, increasing total authorization and availability to $25.0 million.
- The company remains externally managed by Waterfall Asset Management. Second-quarter management fees were $2.7 million and incentive fees were $3.5 million, both reported as payable to the manager.
Most important facts for investors to verify
- Whether PPP-related revenue is repeatable and how much of second-quarter core earnings remains after excluding PPP activity.
- Subsequent trends in delinquencies, forbearance, non-accrual loans, CECL reserves and commercial real estate collateral values.
- Liquidity available after restricted cash, pledged collateral and near-term financing maturities, including repurchase facilities maturing in 2020 and 2021.
- Future dividend capacity given the reduction to $0.25 per share, REIT distribution requirements and the possibility of stock-based distributions.
- Residential mortgage banking volumes, margins and the sensitivity of MSR fair values to elevated prepayments and changing interest rates.
- Compliance with debt covenants and exposure to margin calls, counterparty failures and refinancing risk.
- The effect of the 2020-FL4 and 2020-SBC9 securitizations on recourse leverage, retained risks and future earnings.