Ready Capital Corporation 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 mortgage-backed securities. The filing covers the three and nine months ended September 30, 2021. Results are reported through Acquisitions, SBC Originations, Small Business Lending, Residential Mortgage Banking and Corporate-Other.
Ready Capital completed the Anworth Mortgage Asset Corporation merger on March 19, 2021, and acquired Red Stone and affiliates on July 31, 2021. The company also realigned Knight Capital into Small Business Lending and recast prior-period segment information.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Interest income | $105.1 million | $61.1 million | $281.6 million | $193.8 million |
| Net interest income before loan-loss provision | $55.0 million | $17.3 million | $125.2 million | $59.7 million |
| Net interest income after loan-loss provision | $53.4 million | $21.5 million | $118.2 million | $24.7 million |
| Non-interest income | $88.5 million | $107.9 million | $253.3 million | $251.4 million |
| Net income | $46.5 million | $35.4 million | $106.4 million | $18.5 million |
| Net income attributable to Ready Capital | $43.8 million | $34.6 million | $99.0 million | $18.0 million |
| Basic diluted EPS | $0.61 / $0.60 | $0.63 / $0.63 | $1.47 / $1.46 | $0.32 / $0.31 |
| Distributable earnings | $49.4 million | $32.1 million | $115.5 million | $72.6 million |
| Distributable earnings per common share | $0.64 | $0.57 | $1.60 | $1.30 |
| Common dividends declared per share | $0.42 | $0.30 | $1.24 | $0.95 |
Q3 net income increased $11.2 million year over year, primarily from higher interest income on commercial and small-business loans, partly offset by lower residential mortgage banking income. Non-interest expense was $88.8 million, compared with $87.5 million in the prior-year quarter. A conventional GAAP net interest margin is not clearly provided in the filing.
Loan originations totaled $2.16 billion in Q3 and $6.59 billion for the first nine months, led by SBC originations of $1.00 billion in Q3 and $2.93 billion year to date. Total investment activity was $2.33 billion in Q3 and $6.76 billion year to date.
Balance sheet, liquidity and debt
- Total assets were $9.26 billion at September 30, 2021, up 72.5% from December 31, 2020.
- Cash and cash equivalents were $209.8 million; cash, cash equivalents and restricted cash totaled $284.8 million.
- Loans, net were $2.38 billion; loans held for sale were $549.9 million; PPP loans were $1.78 billion; and assets of consolidated VIEs were $3.44 billion.
- Total liabilities were $8.03 billion and stockholders’ equity was $1.23 billion.
- Secured borrowings were $2.04 billion, PPPLF borrowings were $1.95 billion, securitized debt obligations were $2.68 billion, and corporate, convertible and senior secured debt totaled approximately $626.9 million on a carrying-value basis.
- The company reported a 2.2x recourse debt-to-equity leverage ratio and compliance with debt and financial covenants, although certain counterparties waived inclusion of PPPLF borrowings in covenant calculations.
- Book value per common share was $15.07 and adjusted net book value per common share was $15.06 at September 30, 2021.
Cash flow and credit quality
- Operating activities used $80.6 million, investing activities used $1.45 billion, and financing activities provided $1.62 billion during the first nine months of 2021.
- Net cash increased $84.3 million, from $200.5 million of cash, cash equivalents and restricted cash at year-end 2020 to $284.8 million at September 30, 2021.
- The allowance for loan losses was $49.2 million, compared with $46.7 million at December 31, 2020. The nine-month provision was $7.1 million, versus $35.0 million in the prior-year period.
- Loans were 97.7% current or less than 30 days past due; 1.9% were 60 or more days past due, and non-accrual loans represented 2.6% of loans.
- Non-accrual loans had a recorded carrying value of $148.9 million and unpaid principal balance of $176.4 million at September 30, 2021.
Material changes versus prior comparable periods
- Interest income rose 72.1% in Q3 and 45.3% year to date, reflecting substantially larger loan balances and PPP activity.
- Net interest income after loan-loss provisions rose 148.7% in Q3 and 378.7% year to date.
- Residential mortgage banking income declined to $37.3 million in Q3 from $75.5 million, and to $115.4 million year to date from $192.8 million, due to lower production volumes and margins.
- Non-interest income was lower in Q3 despite higher realized and unrealized gains in other businesses, primarily because of the residential mortgage banking decline.
- PPP loans increased from $74.9 million at year-end 2020 to $1.78 billion, funded largely through $1.95 billion of PPPLF borrowings.
- Assets and liabilities expanded materially because of the ANH merger, PPP originations, increased loan production and new securitizations.
- Residential mortgage servicing rights increased to $107.6 million from $76.8 million, while total servicing rights increased to $171.1 million from $114.7 million.
Outlook, commentary, risks and unusual items
No formal earnings or dividend guidance is provided. Management’s stated objective is to continue growing the investment portfolio and deploy capital toward asset classes with attractive risk-adjusted returns. The filing emphasizes sensitivity to interest rates, credit spreads, prepayments, real estate values, financing availability, margin calls, counterparty performance and COVID-19-related economic disruption.
- Approximately 0.1% of the commercial real estate loan portfolio was in forbearance at September 30, 2021.
- The company liquidated approximately $2.0 billion of ANH portfolio assets and repaid approximately $1.7 billion of related indebtedness through September 30, 2021.
- ANH merger transaction costs and other non-recurring expenses were $15.7 million for the first nine months and were excluded from distributable earnings.
- On October 20, 2021, after quarter-end, the company issued $350 million of 4.5% senior secured notes due 2026 and redeemed its 7.5% senior secured notes due 2022.
- On November 3, 2021, after quarter-end, Ready Capital announced a proposed acquisition of the Mosaic real estate credit funds, expected to close in the first quarter of 2022, subject to approvals and other conditions.
- Shareholders’ ability to receive future dividends depends on taxable income, liquidity, financing markets and board authorization. The company must generally distribute at least 90% of REIT taxable income to maintain REIT status.
- Pending litigation related to the ANH merger was disclosed; management intends to defend the claims and states that no additional material contingency accrual was required.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with distributable earnings, including the treatment of merger costs, CECL adjustments and fair-value changes.
- Assess the sustainability of the $0.42 quarterly common dividend against distributable earnings, taxable income and cash generation.
- Review PPP loan forgiveness timing, PPPLF repayment requirements and the effect of deferred PPP fees on reported assets and liabilities.
- Analyze refinancing and maturity exposure, particularly secured facilities maturing in late 2021 and 2022 and the post-quarter-end senior-note refinancing.
- Monitor non-accrual loans, delinquency trends, loan-to-value concentrations and exposure to multifamily, lodging, retail and other commercial real estate sectors.
- Evaluate liquidity available after collateral requirements, potential margin calls and covenant adjustments related to PPPLF borrowings.
- Verify the final terms, approvals, dilution and contingent equity obligations associated with the proposed Mosaic acquisition.
- Consider valuation sensitivity for residential mortgage servicing rights, derivatives and other Level 3 assets, which depend on prepayment, discount-rate, servicing-cost and credit assumptions.