Ready Capital Corporation — Q1 2024 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 lower-to-middle-market commercial real estate loans, SBA 7(a) loans, construction loans and related investments. The unaudited results cover the three months ended March 31, 2024, compared primarily with the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2023.
The company reports LMM Commercial Real Estate and Small Business Lending segments. Its Residential Mortgage Banking segment was classified as held for sale and reported as discontinued operations following a strategic decision to focus on LMM commercial real estate and government-backed small-business lending.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 / Dec. 31, 2023 |
|---|---|---|
| Interest income | $232.4 million | $216.0 million |
| Interest expense | $183.8 million | $158.9 million |
| Net interest income before loan-loss recovery | $48.5 million | $57.1 million |
| Recovery of loan losses | $26.5 million | $6.7 million |
| Net interest income after loan-loss recovery | $75.1 million | $63.8 million |
| Non-interest income | $(102.6) million | $31.6 million |
| Non-interest expense | $78.3 million | $56.1 million |
| Net loss attributable to Ready Capital | $(76.3) million | Net income of $33.1 million |
| Total diluted EPS | $(0.44) | $0.29 |
| Distributable earnings | $54.0 million | $38.1 million |
| Distributable earnings per diluted share | $0.29 | $0.30 |
| Common dividend declared per share | $0.30 | $0.40 |
| Book value per common share | $13.44 | $15.07 |
| Total assets | $12.04 billion | $12.44 billion |
| Total stockholders’ equity | $2.50 billion | $2.64 billion |
The filing does not present a conventional net interest margin. Net interest income before loan-loss recovery was approximately 20.9% of interest income in Q1 2024, versus approximately 26.4% in Q1 2023, reflecting higher funding costs.
Liquidity, debt and cash flow
- Cash and cash equivalents were $166.0 million at March 31, 2024; cash, cash equivalents and restricted cash totaled $235.5 million, down $27.0 million during the quarter.
- Operating activities provided $23.5 million of cash, including $15.9 million from continuing operations.
- Investing activities provided $304.8 million, including $499.4 million of loan dispositions and principal repayments, partially offset by $206.1 million of loan originations.
- Financing activities used $359.7 million, including $309.9 million of repayments of securitized debt, $827.6 million of secured-borrowing repayments, $19.1 million of common-stock repurchases and $54.4 million of dividend payments.
- Debt included $2.20 billion of secured borrowings, $4.77 billion of securitized debt obligations, $345.6 million of senior secured notes, $766.1 million of corporate debt and $814.8 million of guaranteed loan financing.
- Management reported a total leverage ratio of 3.4x and recourse leverage ratio of 0.9x at March 31, 2024. The company stated that it was in compliance with all debt, financial and senior-note covenants.
- Contractual principal maturities for senior secured notes and corporate debt total $120.0 million in 2025 and $760.9 million in 2026. These amounts exclude secured borrowings, securitized debt and other financing obligations.
Material changes versus the prior comparable period
- Interest income increased $16.4 million, but interest expense increased $24.9 million, reducing pre-recovery net interest income by $8.6 million.
- Non-interest income shifted from $31.6 million of income to a $102.6 million loss, primarily because the company recorded a $146.2 million valuation allowance on loans transferred to held-for-sale status.
- The company also recorded $17.0 million of real estate impairment expense, compared with $3.4 million in the prior-year quarter.
- Net non-accrual loan carrying value declined to $455.7 million from $634.0 million at year-end 2023; loans 60 or more days past due declined to $615.0 million from $916.6 million.
- Loans held for sale increased to $584.1 million from $81.6 million, while loans, net declined to $3.40 billion from $4.02 billion, primarily reflecting transfers to held-for-sale status.
- Total loan investment activity was $456.8 million, including $259.7 million of LMM originations and $197.2 million of SBA originations, compared with $502.8 million in Q1 2023.
- Common shares outstanding declined to 170.4 million from 172.3 million, reflecting 2.24 million shares repurchased or withheld during the quarter. The company repurchased 2.14 million shares under its public program for $19.1 million.
- Distributable earnings increased despite the GAAP loss because management excludes the valuation allowance, non-recurring REO impairment, certain credit-loss adjustments, stock compensation and other non-recurring items. Distributable earnings is a non-GAAP measure and is not equivalent to GAAP net income.
Guidance, outlook, commentary and unusual items
- No formal quantitative earnings or dividend guidance is provided in the filing. Management states that its objective is to generate risk-adjusted returns primarily through dividends and capital appreciation.
- Management expects continued uncertainty from commercial real estate conditions, inflation, interest rates, credit spreads, geopolitical tensions and capital-market volatility.
- The company is executing the planned divestiture of Residential Mortgage Banking and expects the transaction to close during 2024. At March 31, 2024, assets held for sale totaled $439.3 million and liabilities held for sale totaled $316.0 million.
- The Broadmark acquisition expanded construction lending. The updated purchase-price allocation reduced acquired net assets and the related bargain-purchase gain by $21.9 million, leaving a preliminary bargain-purchase gain of $208.0 million. The measurement period remained open.
- On April 12, 2024, the company borrowed $75.0 million under a delayed-draw term loan with aggregate capacity of up to $115.25 million and scheduled maturity in April 2029. The initial borrowing bears interest at SOFR plus 5.50%, subject to higher pricing if rated below investment grade.
- During April 2024, the company acquired approximately 1.6 million additional shares at an average price of $8.57 per share.
- The company remains externally managed by Waterfall Asset Management. Q1 management fees were $6.6 million, compared with $5.1 million in Q1 2023; no incentive fee was recorded in Q1 2024.
Principal risks and contingencies
- Credit risk remains significant: 6.3% of the loan portfolio was 60 or more days past due, 4.7% was on non-accrual status, and the portfolio is concentrated in multifamily collateral and certain geographic markets.
- Approximately 82% of the loan portfolio was floating rate, while 18% was fixed rate. Rising rates may increase borrowing costs, although the filing’s modeled sensitivity indicates a positive pretax net-interest-income effect from an immediate 100-basis-point increase, before broader economic effects.
- Liquidity is exposed to margin calls, collateral haircuts, lender renewal decisions and refinancing conditions. The company had $1.998 billion of repurchase-agreement borrowings at quarter-end, with some maturities in 2024.
- Commercial real estate valuations, construction-loan performance, defaults, extensions, prepayments and recovery values could materially affect earnings, book value and liquidity.
- The company reported $700.8 million of unfunded commitments, comprising $566.5 million for loans, net, $134.0 million for loans held for sale and $0.3 million for a preferred equity investment.
- One repurchase-agreement counterparty, JPMorgan Chase Bank, represented $583.3 million of risk, or 23.3% of stockholders’ equity, based on the filing’s collateral analysis.
- Management stated that no material legal proceedings were pending or threatened and that there were no material changes to previously disclosed risk factors.
Facts investors should verify
- Whether the $146.2 million held-for-sale valuation allowance represents a one-time adjustment or signals further deterioration in the affected LMM portfolio.
- The sustainability and cash conversion of $54.0 million of distributable earnings relative to the $0.30 common dividend.
- Performance of construction and bridge loans, including non-accrual trends, collateral values, loan-to-value ratios and foreclosure outcomes.
- Funding availability and refinancing plans for 2024–2026 maturities, including repurchase agreements and $760.9 million of senior and corporate debt maturities in 2026.
- Progress, valuation and final accounting for the Residential Mortgage Banking divestiture and the Broadmark acquisition measurement period.
- Post-quarter-end leverage, liquidity and the impact of the April 2024 $75.0 million term-loan borrowing and additional share repurchases.