Ready Capital Corporation — Q3 2020 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 loans, SBA 7(a) loans, residential mortgage loans and mortgage-backed securities. Its reportable segments are Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing and Residential Mortgage Banking. The filing covers the unaudited three and nine months ended September 30, 2020, compared primarily with the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Interest income | $61.1 million | $59.7 million | $193.8 million | $165.5 million |
| Interest expense | $43.8 million | $39.4 million | $134.2 million | $110.9 million |
| Net interest income before loan-loss provision/recovery | $17.3 million | $20.3 million | $59.7 million | $54.6 million |
| Non-interest income | $107.9 million | $40.0 million | $251.4 million | $129.2 million |
| Non-interest expense | $87.5 million | $49.8 million | $253.4 million | $135.7 million |
| Net income | $35.4 million | $12.4 million | $18.5 million | $54.1 million |
| Net income attributable to Ready Capital | $34.6 million | $12.1 million | $18.0 million | $52.5 million |
| Basic EPS | $0.63 | $0.27 | $0.32 | $1.29 |
| Core earnings | $32.1 million | $18.2 million | $72.6 million | $46.3 million |
| Core earnings per share | $0.57 | $0.40 | $1.30 | $1.10 |
| Dividends declared per share | $0.30 | $0.40 | $0.95 | $1.20 |
The filing presents a $4.2 million third-quarter loan-loss recovery in the detailed allowance and segment disclosures, while the consolidated income statement labels the amount as a provision. Nine-month loan-loss expense was $35.0 million, including the impact of CECL adoption and COVID-19-related economic assumptions.
Balance sheet, liquidity and debt
- Total assets were $5.32 billion at September 30, 2020, compared with $4.98 billion at December 31, 2019.
- Total stockholders’ equity was $824.2 million, including $805.3 million attributable to Ready Capital, versus $844.8 million at year-end 2019. Book value was $14.86 per common share, compared with $16.20 at September 30, 2019.
- Cash and cash equivalents were $149.8 million; restricted cash was $46.2 million. Cash, cash equivalents and restricted cash totaled $223.7 million at quarter-end.
- The total loan portfolio was $4.36 billion, including $4.01 billion of loans held for investment, net, and $348.7 million of loans held for sale at fair value.
- Loans 60 or more days past due represented 3.4% of loans before the general allowance, compared with 1.4% at December 31, 2019. Non-accrual loans totaled $110.5 million, compared with $78.1 million at year-end 2019.
- Debt included $1.18 billion of secured borrowings, $2.06 billion of securitized debt obligations, $421.2 million of guaranteed loan financing, $179.6 million of senior secured notes, $111.9 million of convertible notes and $150.7 million of corporate debt.
- Contractual principal maturities of senior secured, convertible and corporate debt included $50.0 million in 2021, $180.0 million in 2022, $115.0 million in 2023 and $104.3 million thereafter.
- Management reported compliance with debt and financial covenants at September 30, 2020. Recourse debt-to-equity leverage was 2.0x.
Cash flow and operating activity
- For the first nine months, operating activities used $0.3 million, investing activities used $7.7 million and financing activities provided $103.7 million.
- Cash, cash equivalents and restricted cash increased by $95.8 million during the first nine months, from $128.0 million to $223.7 million.
- Loan originations totaled $4.04 billion of investment activity for the first nine months, including $3.07 billion of residential agency mortgage originations, $750.2 million of SBC originations and $149.3 million of SBA originations.
- Residential mortgage banking generated $192.8 million of revenue in the first nine months, up from $64.6 million, but incurred $87.5 million of variable expenses.
Material changes versus the prior comparable period
- Third-quarter net income increased $22.9 million to $35.4 million, primarily because residential mortgage banking activity net of variable costs increased by approximately $32.9 million.
- Third-quarter core earnings increased $13.9 million to $32.1 million, while core EPS increased to $0.57 from $0.40.
- First-nine-month GAAP net income declined $35.6 million to $18.5 million, primarily because 2019 included a $30.7 million bargain purchase gain from the Owens Realty Mortgage merger and 2020 included substantial CECL-related credit provisions and unrealized MSR losses.
- First-nine-month core earnings increased $26.3 million to $72.6 million, supported by $25.8 million of PPP-related revenue and strong residential mortgage banking activity.
- The Company adopted CECL on January 1, 2020, recording an $11.1 million increase in the allowance for loan losses and a $6.8 million after-tax reduction to opening retained earnings.
- Residential mortgage servicing rights declined to $74.4 million from $91.2 million at year-end 2019, reflecting $33.2 million of nine-month unrealized losses, partly offset by $31.8 million of additions from loans sold with servicing retained.
- The quarterly common dividend declined from $0.40 to $0.30 per share; the first-nine-month dividend declined from $1.20 to $0.95 per share. The Company also repurchased 932,433 shares for $9.2 million at an average price of $9.96.
Guidance, outlook, commentary and risks
- The filing does not provide quantitative full-year earnings or dividend guidance. Management stated that the ultimate effects of COVID-19 remain uncertain and that financial performance, revenue, cash flow and profitability could materially deteriorate in later 2020 periods.
- COVID-19 affected commercial real estate, small businesses, borrower cash flows, property values, financing markets and valuation assumptions. Approximately 1.8% of the commercial real estate loan portfolio was in forbearance plans at September 30, 2020.
- Key risks include higher delinquencies and credit losses, declining collateral values, margin calls, inability to renew or obtain financing, covenant pressure, short-term borrowing dependence, interest-rate volatility, prepayment and extension risk, fair-value losses and counterparty failures.
- Approximately 59% of the loan portfolio was adjustable-rate and 41% fixed-rate based on unpaid principal balance. Management uses interest-rate swaps and other derivatives to manage exposure.
- At September 30, 2020, unfunded SBC and SBA loan commitments were $288.0 million, loans held for sale commitments were $5.4 million, and residential mortgage origination commitments were $692.0 million.
- The Company remained qualified as a REIT and reported no material pending or threatened legal proceedings. The filing states that disclosure controls were effective.
Important facts for investors to verify
- Reconcile the consolidated presentation of the third-quarter $4.2 million loan-loss provision/recovery and assess the effect of CECL assumptions on future reserves.
- Monitor non-accrual loans, delinquency trends, forbearance activity and exposure to retail, lodging, office and other COVID-sensitive collateral.
- Review liquidity cushions, margin-call requirements, borrowing renewals and the maturities of secured facilities and corporate debt, particularly the $50.0 million 2021 notes.
- Assess the sustainability of residential mortgage banking and PPP-related earnings, including the $13.0 million of unearned PPP fees at quarter-end.
- Compare dividends with recurring core earnings, taxable income and available cash, including the possibility of future cash-and-stock distributions.
- Evaluate the sensitivity of MSR and other Level 3 fair values to prepayment rates, discount rates, defaults, loss severity and real estate prices.