Ready Capital Corp. — 2017 First-Quarter SEC Filing Summary
Filing identity: The supplied Form 10-Q is filed by Sutherland Asset Management Corporation, not Ready Capital Corp. The company traded as SLD and later adopted the Ready Capital name. The report covers the three months ended March 31, 2017; financial statements are unaudited and presented in thousands unless otherwise noted.
Business context and reporting period
The company is a specialty-finance REIT that acquires, originates, services and finances small-balance commercial loans, SBA loans, residential mortgage loans and related mortgage-backed securities. It operates through Loan Acquisitions, SBC Conventional Originations, SBA Originations/Acquisitions/Servicing and Residential Mortgage Banking.
The residential mortgage banking segment was added through the October 31, 2016 merger with ZAIS Financial and includes GMFS. The company remains externally managed by Waterfall Asset Management and is structured as an UPREIT.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total interest income | $33.9 million | $37.9 million | Down $4.0 million |
| Interest expense | $16.4 million | $14.3 million | Up $2.1 million |
| Net interest income before loan-loss provision | $17.4 million | $23.6 million | Down $6.1 million |
| Provision for loan losses | $1.2 million | $2.2 million | Down $1.0 million |
| Net interest income after provision | $16.2 million | $21.4 million | Down $5.2 million |
| Net realized gains on financial instruments | $20.3 million | $0.2 million | Up $20.1 million |
| Net unrealized gain/(loss) on financial instruments | $(0.4) million | $(0.3) million | Comparable loss |
| Net income | $9.6 million | $9.1 million | Up $0.4 million |
| Net income attributable to the company | $8.9 million | $8.4 million | Up approximately $0.5 million |
| Basic and diluted EPS | $0.29 | $0.34 | Down $0.05 |
| Core Earnings | $10.9 million, or $0.33 per share | $10.5 million | Up $0.4 million |
| Dividend declared per share | $0.37 | None reported | New quarterly dividend |
Net interest margin calculated on reported interest income was approximately 51.5% before the loan-loss provision, compared with approximately 62.2% in the prior-year quarter. This comparison is not a reported company metric.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $2.528 billion | $2.605 billion |
| Cash and cash equivalents | $40.0 million | $59.6 million |
| Restricted cash | $19.8 million | $20.2 million |
| Short-term investments | $239.9 million | $320.0 million |
| Total loans | $1.807 billion | $1.848 billion |
| Total liabilities | $1.978 billion | $2.053 billion |
| Total stockholders’ equity | $549.9 million | $552.1 million |
Reported debt obligations totaled approximately $1.776 billion, comprising credit facilities, repurchase agreements, securitized debt, guaranteed loan financing, the promissory note and the new senior secured note. The company reported a debt-to-equity leverage ratio of 2.6x, or 2.0x excluding repurchase agreements secured by U.S. Treasury securities, and stated that it was in compliance with all debt covenants.
On February 13, 2017, ReadyCap Holdings issued $75.0 million of 7.50% senior secured notes due February 2022. The notes are guaranteed by the company and certain subsidiaries and secured by specified assets.
Cash and cash equivalents declined by $19.6 million during the quarter to $40.0 million. Operating activities provided $24.2 million, investing activities provided $15.3 million and financing activities used $59.0 million. The company also held $239.9 million of short-term Treasury investments, although these investments were subject to financing and collateral arrangements.
Material changes versus the prior comparable period
- Interest income declined 10.5%, principally because of MBS sales, lower discount accretion, lower average loan balances and lower weighted-average coupons.
- Interest expense increased 15.0%, reflecting higher financing balances and advance rates, the 2016-3 securitization, additional securitization costs and higher LIBOR.
- Loan-loss provision decreased 43.6% as the credit-deteriorated loan portfolio declined and the company shifted toward originations.
- Servicing income increased to $4.4 million from $1.4 million, primarily because of the newly acquired residential mortgage banking platform.
- Other operating expenses increased to $12.5 million from $3.9 million. Employee compensation and benefits rose to $13.5 million from $5.1 million, and origination costs increased substantially with the residential mortgage banking business.
- Realized gains rose to $20.3 million from $0.2 million, primarily from residential mortgage loan sales and servicing-rights-related income.
- Loan originations totaled $637.9 million, including $148.4 million of SBC loans, $28.5 million of SBA loans and $461.0 million of residential loans, compared with $227.6 million originated in Q1 2016.
- The company originated or acquired approximately $629.4 million of loans based on unpaid principal balance and acquired $11.5 million of loans during the quarter.
Guidance, outlook, commentary and risks
No formal earnings or revenue guidance was provided. Management stated that it intends to grow the portfolio through SBC, SBA and residential originations, third-party loan acquisitions and expansion of servicing activities. The reported pipeline included $128 million of SBC loan acquisitions, $192.3 million of SBC originations, $80.0 million of SBA originations and $248.7 million of residential agency-loan commitments.
Management expects recent economic growth, improving commercial real-estate values and loan demand to support 2017 origination volumes, while noting that banks may be entering a tighter credit cycle. Pipeline amounts are not commitments to fund and may not close.
- Funding and liquidity: Repurchase agreements and credit facilities are generally short-term, renewable at lender discretion and subject to haircuts, margin calls and collateral requirements.
- Interest-rate risk: A 100-basis-point instantaneous LIBOR increase was estimated to increase 12-month pretax net interest income by approximately $4.0 million; a 100-basis-point decrease was estimated to reduce it by approximately $1.8 million, before considering broader economic effects.
- Credit and real-estate risk: Defaults, delinquencies, falling collateral values and higher loss severities could reduce earnings and asset values. Loans with a carrying value of $40.4 million were 90 or more days delinquent, and $34.97 million were 30–89 days delinquent at March 31, 2017.
- Fair-value risk: Approximately $242.4 million of recurring fair-value assets were classified as Level 3, including loans, mortgage-backed securities and residential mortgage servicing rights, making results sensitive to management and third-party valuation assumptions.
- Servicing-rights risk: Residential mortgage servicing rights were carried at $64.6 million and depend on prepayment rates, discount rates, servicing costs and defaults.
- Counterparty risk: The filing identified approximately $208.5 million of net exposure related to repurchase-agreement and credit-facility counterparties, equal to 8.3% of total assets.
- REIT requirements: The company must generally distribute at least 90% of taxable income to retain REIT status. Failure to qualify could result in corporate-level taxation and other penalties.
Unusual items and contingencies
After quarter-end, the company and GMFS reached a settlement of legacy mortgage-loan representation and warranty claims. The company paid $6.0 million in cash and issued 275,862 shares valued at approximately $4.0 million. The filing recognized a $10.0 million settlement payable as of March 31, 2017, funded in part by a $4.0 million escrow receivable and a $5.8 million reduction in contingent consideration. Management stated that the settlement did not reduce reported earnings.
The counterparty received customary resale rights and may, beginning approximately 24 months after the settlement, require repurchase of its remaining shares at 65% of the then-current reported book value per share. The company noted that indemnification recovery from former GMFS sellers is uncertain.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. No other material legal proceedings were reported.
Most important facts for investors to verify
- Confirm the issuer and corporate-name history because the supplied filing is for Sutherland Asset Management Corporation rather than the current Ready Capital name.
- Reconcile the filing’s differing references to net income attributable to the company, including $8.856 million in the financial statements and approximately $8.886 million in MD&A.
- Assess whether the large increase in realized gains and the new residential mortgage banking contribution are sustainable versus recurring net interest income.
- Review short-term refinancing exposure, repurchase-agreement haircuts, margin-call requirements and facility maturities.
- Evaluate delinquency, non-accrual, troubled-debt-restructuring and loan-to-value trends, particularly in SBA and commercial portfolios.
- Analyze the valuation sensitivity of Level 3 assets and mortgage servicing rights to prepayments, defaults, discount rates and real-estate values.
- Monitor the GMFS settlement, potential indemnification recovery and the future share-repurchase right.
- Verify the sustainability of the $0.37 quarterly dividend relative to Core Earnings, taxable income, leverage and available liquidity.