Ready Capital Corporation: Q3 2019 Form 10-Q Summary
Business context and reporting period
Ready Capital is an externally managed, Maryland REIT focused on originating, acquiring, financing and servicing small-balance commercial, transitional, SBA, residential mortgage and related real-estate assets. Its segments are Loan Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing and Residential Mortgage Banking. The unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to 2018.
The company completed its stock-for-stock acquisition of Owens Realty Mortgage on March 29, 2019, issuing approximately 12.2 million shares. The transaction had a $179.3 million purchase price and generated a $30.7 million bargain-purchase gain.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $59.7 million | $44.3 million | $165.5 million | $123.3 million |
| Net interest income before loan-loss provision | $20.3 million | $15.4 million | $54.6 million | $45.3 million |
| Provision for loan losses | $0.7 million | $0.8 million | $2.6 million | $0.6 million |
| Total non-interest income | $40.0 million | $42.8 million | $129.2 million | $125.8 million |
| Total non-interest expense | $49.8 million | $38.9 million | $135.7 million | $114.4 million |
| Net income | $12.4 million | $17.6 million | $54.1 million | $52.0 million |
| Net income attributable to Ready Capital | $12.1 million | $16.9 million | $52.5 million | $50.1 million |
| Basic and diluted EPS | $0.27 | $0.53 | $1.29 | $1.57 |
| Core earnings, non-GAAP | $18.2 million | $16.1 million | $46.3 million | $47.4 million |
Net interest income before provisions represented approximately 34.0% of interest income in Q3 2019, compared with approximately 34.7% in Q3 2018. This is a simple ratio and is not the company’s reported net interest margin.
The board declared a $0.40 per-share dividend for Q3 2019, consistent with Q3 2018. The filing states this represented a 10.1% dividend yield based on the September 30 closing share price.
Balance sheet, cash flow, debt and liquidity
- Total assets were $4.123 billion at September 30, 2019, up from $3.037 billion at December 31, 2018.
- Loans, net, were $1.380 billion on the corporate balance sheet; including loans in consolidated VIEs and loans held for sale, the total loan portfolio was approximately $3.515 billion.
- Loans held for sale at fair value increased to $203.1 million from $115.3 million at year-end 2018.
- Total stockholders’ equity was $739.0 million, compared with $564.1 million at December 31, 2018, largely reflecting the ORM share issuance.
- Cash and cash equivalents were $52.7 million and restricted cash was $45.3 million. Including cash in consolidated VIEs, cash, cash equivalents and restricted cash totaled $105.1 million. Restricted cash was not generally available for corporate purposes.
- Debt-like obligations reported on the balance sheet totaled approximately $3.273 billion, including secured borrowings of $1.316 billion and securitized debt obligations of $1.466 billion.
- Secured borrowings increased from $834.5 million at year-end 2018 to $1.316 billion, while securitized debt increased from $905.4 million to $1.466 billion.
- Nine-month operating cash flow was negative $64.9 million, investing cash flow was negative $920.2 million and financing cash flow was positive $995.3 million. Cash, cash equivalents and restricted cash increased by $10.2 million.
- Management reported a 2.3x recourse debt-to-equity leverage ratio and compliance with all debt and financial covenants at September 30, 2019.
Material changes versus comparable periods
- Q3 net income declined $5.1 million, primarily because residential mortgage servicing rights produced a $7.6 million unrealized loss, compared with a $2.3 million unrealized gain in Q3 2018. Core earnings increased $2.2 million to $18.2 million.
- Nine-month net income increased $2.1 million, but the comparison benefited from the $30.7 million ORM bargain-purchase gain. Nine-month core earnings declined $1.1 million.
- Interest income increased substantially as the company expanded acquired and originated loan portfolios. SBC originations generated $32.4 million of Q3 interest income versus $21.7 million in the prior-year quarter.
- Residential mortgage banking revenue increased in Q3, but higher variable expenses and the residential MSR fair-value loss caused the segment to report a $1.3 million pretax loss, compared with $4.2 million of pretax income in Q3 2018.
- The SBA segment’s pretax income declined to $3.4 million in Q3 from $6.0 million, reflecting lower interest income, higher loan-loss provisions and higher operating expenses.
- The company issued $57.5 million of 6.20% senior notes due 2026 in July 2019, generating approximately $55.3 million of net proceeds.
- Residential MSRs declined in fair value to $84.6 million from $93.1 million at December 31, 2018, principally due to $21.0 million of nine-month unrealized losses, partly offset by additions from loan sales.
Guidance, outlook, commentary and risks
Management’s stated objective is to grow the investment portfolio and provide returns primarily through dividends and secondarily through capital appreciation. Q3 loan originations totaled $1.170 billion, including $465.4 million of SBC loans, $48.2 million of SBA loans and $656.8 million of residential loans. The reported pipeline included $236.8 million of SBC loan acquisitions, $487.9 million of SBC originations, $166.9 million of SBA originations and $273.8 million of residential agency commitments. Management cautioned that pipeline opportunities may not close because of capital availability, due diligence, approvals, market conditions and transaction terms.
Key risks include reliance on short-term secured financing and lender renewals, margin calls and collateral haircuts, interest-rate and spread volatility, credit losses, property-value declines, prepayment risk affecting MSRs, counterparty risk, liquidity constraints and dependence on external manager Waterfall Asset Management. A 100-basis-point instantaneous increase in LIBOR was estimated to increase 12-month pretax net interest income by $4.8 million, while a 100-basis-point decrease was estimated to increase it by $1.1 million, based on the filing’s assumptions.
The company reported no material pending or threatened legal proceedings, no defaults on senior securities and effective disclosure controls. It remained in compliance with REIT requirements and debt covenants. On October 25, 2019, after quarter-end, the company acquired Knight Capital LLC for $17.5 million in cash and 658,771 common shares.
Important facts for investors to verify
- Whether the $0.40 quarterly dividend is adequately supported by recurring core earnings and taxable income, rather than one-time gains.
- The sustainability of earnings after excluding the ORM bargain-purchase gain and the effect of residential MSR fair-value volatility.
- Loan delinquency, non-accrual and loss trends: 90-plus-day past-due loans were $43.2 million and non-accrual loans were $71.3 million at September 30, 2019.
- Refinancing and margin-call exposure for repurchase agreements and credit facilities, including facilities with maturities beginning in November 2019 and February 2020.
- Exposure to concentrated collateral and geographic markets, including multifamily collateral at 30.7% of loan UPB and California and Texas at 18.1% and 15.3%, respectively.
- The impact of the forthcoming expected-credit-loss accounting standard, ASU 2016-13, which management was still evaluating.
- Post-quarter-end integration, funding and execution risks associated with the Knight Capital acquisition.