Ready Capital Corporation: Q3 2018 Form 10-Q Summary
Business Context and Reporting Period
Ready Capital Corporation, formerly Sutherland Asset Management Corporation, filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company changed its name and NYSE ticker from “SLD” to “RC” on September 26, 2018. It is an externally managed REIT advised by Waterfall Asset Management and operates through four segments: Loan Acquisitions, SBC Originations, SBA Originations, Acquisitions and Servicing, and Residential Mortgage Banking.
The company acquires, originates, services and finances small-balance commercial, transitional, SBA 7(a), residential mortgage loans and related mortgage-backed securities.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Interest income | $44.3 million | $35.0 million | $123.3 million | $102.2 million |
| Net interest income before loan-loss provision | $15.4 million | $15.1 million | $45.3 million | $48.6 million |
| Provision for loan losses | $0.8 million | $0.5 million | $0.6 million | $1.9 million |
| Total non-interest income | $19.0 million | $18.7 million | $63.9 million | $52.7 million |
| Total non-interest expense | $30.5 million | $29.7 million | $96.3 million | $82.7 million |
| Net realized gains on financial instruments | $6.9 million | $5.7 million | $27.8 million | $13.2 million |
| Net unrealized gains on financial instruments | $8.5 million | $2.7 million | $16.0 million | $4.9 million |
| Net income | $17.6 million | $12.4 million | $52.0 million | $33.1 million |
| Net income attributable to Ready Capital | $16.9 million | $11.8 million | $50.1 million | $31.2 million |
| Basic and diluted EPS | $0.53 | $0.37 | $1.57 | $1.00 |
| Dividends declared per share | $0.40 | $0.37 | $1.17 | $1.11 |
Management reported Q3 Core Earnings of $16.1 million, or $0.48 per share, compared with $12.9 million in Q3 2017. Core Earnings is a non-GAAP measure that excludes selected unrealized and realized gains or losses, including certain MBS and MSR items, and other specified nonrecurring items.
The filing does not provide a clearly defined consolidated revenue figure or a single operating margin denominator. Accordingly, a consolidated revenue margin cannot be determined directly from the filing text.
Balance Sheet, Liquidity and Capitalization
- Total assets were $2.90 billion at September 30, 2018, up from $2.52 billion at December 31, 2017.
- Loans, net were $1.26 billion on the corporate balance sheet; including loans in consolidated VIEs, total net loans were approximately $2.30 billion. The total loan portfolio, including loans held for sale, was approximately $2.42 billion.
- Mortgage-backed securities increased to $94.3 million from $39.9 million at year-end 2017.
- Total stockholders’ equity was $569.0 million, compared with $555.5 million at December 31, 2017.
- Cash and cash equivalents were $47.8 million, with restricted cash of $18.9 million; combined cash, cash equivalents and restricted cash were $66.7 million at quarter-end.
- Secured borrowings were $817.1 million, compared with $631.3 million at year-end 2017. The reported recourse debt-to-equity leverage ratio was 2.1x.
- Additional debt included $752.4 million of securitized debt, $178.8 million of senior secured notes, $109.7 million of convertible notes, $48.3 million of corporate debt and $246.2 million of guaranteed loan financing.
- The company stated that it was in compliance with all debt and financial covenants as of September 30, 2018.
Cash Flow and Material Changes
- For the nine months ended September 30, 2018, operating activities provided $135.2 million, investing activities used $467.5 million and financing activities provided $323.9 million.
- Cash, cash equivalents and restricted cash decreased $8.4 million during the nine-month period, compared with an increase of $6.9 million in the comparable 2017 period.
- Investing outflows reflected $695.5 million of loan originations, $360.9 million of loan purchases and $67.3 million of MBS purchases, partly offset by $621.0 million of loan dispositions and principal payments.
- Financing inflows included $398.7 million from securitized debt issuance, approximately $50.0 million from corporate debt and $185.8 million of net secured borrowings, offset by debt repayments and $38.0 million of dividend payments.
- The loan portfolio expanded substantially, with total net loans and loans in consolidated VIEs increasing from $1.85 billion at December 31, 2017 to $2.30 billion at September 30, 2018.
- Loan originations during Q3 totaled $814.4 million, including $291.2 million of SBC loans, $51.1 million of SBA loans and $472.1 million of residential loans. The company also acquired $86.4 million of SBC loans.
- Residential mortgage banking gains declined to $8.7 million from $10.7 million in Q3 2017, although servicing income increased.
- Interest expense rose materially, reflecting higher borrowings and increased financing costs, limiting the growth in net interest income despite higher interest income.
Outlook, Risks and Unusual Items
- Management intended to continue growing SBC, SBA and residential loan originations, acquiring SBC and SBA loans and expanding servicing activities. It also discussed possible expansion into Europe and other markets, but provided no firm timetable or quantitative guidance.
- Management expected the U.S. economic environment, improving commercial real estate values and loan demand to support origination volumes through the remainder of 2018. No formal earnings or dividend guidance was provided.
- Key risks include rising funding costs, interest-rate and spread volatility, margin calls, dependence on repurchase facilities and warehouse lines, refinancing and rollover risk, credit losses, property-value declines, loan extensions, prepayment speeds, fair-value measurement uncertainty and counterparty defaults.
- At September 30, 2018, 97.7% of loans were current or less than 30 days past due; 1.6% were 90 or more days past due. Non-accrual loans totaled $45.4 million, or approximately 2.0% of loans.
- Unfunded commitments included $163.5 million related to loans, net, $14.2 million related to loans held for sale and $156.9 million of commitments to originate residential agency loans.
- The company had $156.9 million of total residential loan-origination commitments and reported $14.2 million of unfunded commitments related to loans held for sale.
- Residential mortgage servicing rights were carried at a $91.7 million fair value. The filing identifies sensitivity to prepayment rates, discount rates and servicing costs.
- On November 7, 2018, after quarter-end, the company agreed to acquire Owens Realty Mortgage in a stock-for-stock transaction with estimated consideration of $182.6 million. Closing was expected in the first quarter of 2019, subject to shareholder, regulatory and other approvals.
- On November 8, 2018, after quarter-end, the company completed a securitization of $262.7 million of acquired SBC loans and issued $217.0 million of senior bonds.
- No material legal proceedings were pending or threatened according to the filing, and management reported no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile GAAP net income and EPS with Core Earnings and assess the contribution of unrealized gains, particularly MSR and MBS fair-value changes.
- Review the effect of higher secured borrowings and floating-rate financing on future net interest income and liquidity.
- Examine loan delinquency, non-accrual, foreclosure and allowance trends as the portfolio grows.
- Verify available borrowing capacity, maturity dates, haircuts, collateral requirements and potential margin-call exposure under repurchase and warehouse facilities.
- Assess the sustainability of the $0.40 quarterly dividend relative to taxable income, Core Earnings and cash generation.
- Evaluate the assumptions supporting Level 3 fair values, especially residential MSRs, loans carried at fair value and contingent consideration.
- Monitor the proposed Owens Realty Mortgage merger, related dilution, approvals, integration risks and expected effect on leverage and liquidity.