Ready Capital Corp quarterly report, Q2 FY2018

Business Context and Reporting Period

The filing is a Form 10-Q for the quarter and six months ended June 30, 2018, filed August 8, 2018, by Sutherland Asset Management Corporation, which operated the ReadyCap businesses. The company was an externally managed REIT focused on acquiring, originating, servicing and financing small-balance commercial, SBA, transitional and residential mortgage loans, plus related mortgage-backed securities.

The filing identifies 32,051,989 common shares outstanding at June 30, 2018. Results were reported across Loan Acquisitions, SBC Originations, SBA Originations/Acquisitions/Servicing, Residential Mortgage Banking and Corporate-Other.

Financial Metrics

Metric	Three months ended June 30, 2018	Six months ended June 30, 2018	Comparable prior period
Interest income	$41.9 million	$79.0 million	$33.2 million / $67.1 million
Net interest income before loan-loss provision	$15.5 million	$29.9 million	$16.0 million / $33.5 million
Non-interest income	$19.7 million	$44.9 million	$18.2 million / $34.0 million
Net realized and unrealized gains on financial instruments	$13.1 million	$28.3 million	$5.5 million / $9.7 million
Net income	$15.9 million	$34.4 million	$11.2 million / $20.7 million
Net income attributable to the company	$15.3 million	$33.2 million	$10.5 million / $19.4 million
Basic and diluted EPS	$0.48	$1.03	$0.34 / $0.63
Core earnings, non-GAAP	$15.8 million, or $0.47 per share	$31.3 million	$11.2 million / $22.0 million

Net income increased 42% year over year in the second quarter and 66% for the six-month period. Core earnings increased 41% and 42%, respectively. Net interest income before provisions declined despite higher interest income because interest expense increased more rapidly.

Declared dividends were $0.40 per share for the second quarter and $0.77 per share for the first six months, compared with $0.37 and $0.74 in the respective 2017 periods.

Balance Sheet, Portfolio and Liquidity

Total assets were $2.813 billion at June 30, 2018, up from $2.524 billion at December 31, 2017 and $2.641 billion at March 31, 2018.
Total stockholders’ equity was $564.6 million, including $545.3 million attributable to the company.
Cash and cash equivalents were $105.8 million; restricted cash was $15.1 million, for total cash and restricted cash of $120.9 million.
Total loan portfolio, including loans in consolidated VIEs and loans held for sale, was $2.330 billion at carrying value, up from $2.070 billion at year-end 2017.
Loans, net, including consolidated VIE loans, were $2.141 billion. Loans held for sale were $188.8 million.
Loan delinquency was 1.8% for loans 90 or more days past due; non-accrual loans represented 2.2% of total loans. The allowance for loan losses was $9.7 million.
Secured borrowings were $678.9 million, securitized debt obligations were $795.5 million, guaranteed loan financing was $263.9 million, senior secured notes were $178.7 million, convertible notes were $109.5 million and corporate debt was $48.2 million.
The company reported 1.8x debt-to-equity leverage and compliance with all debt covenants at June 30, 2018.
Six-month cash flow from operating activities was $58.2 million, investing activities used $278.2 million and financing activities provided $265.8 million. Cash, cash equivalents and restricted cash increased $45.9 million.

Material Changes Versus Prior Comparable Period

Interest income rose $8.6 million in the second quarter and $11.9 million for the six months, driven primarily by growth in acquired and originated loan balances, especially transitional loans and SBC originations.
Interest expense increased $9.2 million in the quarter and $15.4 million for the six months, reflecting greater secured financing, securitized debt and the 2017 convertible and senior secured notes.
Non-interest income increased $1.5 million in the quarter and $10.9 million for the six months, including $7.2 million of six-month income from a newly acquired unconsolidated joint venture.
Non-interest expense increased $4.8 million in the quarter and $12.8 million for the six months, including higher compensation, servicing, professional and origination costs.
Residential mortgage banking gains were $9.8 million in the quarter, down from $11.0 million, while six-month gains were essentially unchanged at $21.5 million. Higher servicing income and favorable residential MSR fair-value changes partly offset lower loan sales.
The company completed the $278.3 million RCMF 2018-FL2 transitional-loan CLO and sold $217.1 million of senior bonds. Consolidated securitized debt increased $197.4 million from year-end 2017.
On April 27, 2018, the company issued $50.0 million of 6.50% senior notes due 2021.
The allowance for loan losses declined from $11.7 million at year-end 2017 to $9.7 million, while total loans increased. The filing attributes this partly to paydowns and sales of credit-deteriorated portfolios and a greater focus on newer vintages.

Guidance, Outlook, Risks and Unusual Items

Management expected loan origination volumes to remain supported through the remainder of 2018 by improving commercial real estate values, economic growth and loan demand, despite a possible bank credit-tightening cycle. The company intended to continue growing SBC, SBA and residential originations, acquiring SBC and SBA loans and expanding servicing. It was also considering expansion into Europe and potentially other markets, but provided no formal earnings or dividend guidance.

Second-quarter originations totaled $899.3 million: $352.4 million SBC, $48.3 million SBA and $498.6 million residential. Acquisitions totaled $131.5 million of SBC loans and $11.3 million of SBA loans.
Reported pipelines included $109.1 million of SBC and $37.5 million of SBA acquisitions, plus $326.5 million of SBC, $166.0 million of SBA and $213.6 million of residential origination commitments. Management cautioned that pipeline transactions may not close.
Major risks include rising funding costs, interest-rate and spread volatility, margin calls, refinancing and rollover risk on repurchase agreements, declining collateral values, credit losses, delinquencies, prepayments, extension risk and illiquidity.
Repurchase and credit-facility borrowings were collateralized by $812.6 million of assets, creating reported counterparty exposure of $133.7 million. Citibank represented $47.3 million of risk, or 8.4% of stockholders’ equity.
Unfunded commitments included $125.9 million related to loans, net, $4.9 million related to loans held for sale and $213.6 million of residential loan commitments to originate.
The company relies on external manager Waterfall Asset Management. Second-quarter management fees were $2.0 million and incentive fees were $0.3 million; the incentive fee was a new expense relative to the 2017 comparable quarter.
Fair-value results were sensitive to prepayment, discount-rate, default, loss-severity and real-estate assumptions. Residential MSRs at fair value were $85.6 million, and total servicing rights were $111.3 million.
The company remained qualified as a REIT and was required generally to distribute at least 90% of taxable income. It reported no material legal proceedings, no material changes to risk factors and effective disclosure controls.
In July 2018, after quarter-end, the company entered into a new East West Bank SBA warehouse facility of up to $50.0 million.

Important Facts for Investors to Verify

Confirm the issuer and corporate-name history: the supplied filing is for Sutherland Asset Management Corporation, although the request identifies Ready Capital Corp.
Reconcile GAAP net income and non-GAAP Core Earnings, particularly the treatment of MSR, MBS, fair-value and other unrealized gains.
Assess whether higher origination volumes and securitizations are producing sufficient net interest spreads after the substantial increase in financing costs.
Review collateral haircuts, margin-call provisions, facility maturities and counterparty concentrations supporting the $678.9 million of secured borrowings.
Monitor loan delinquencies, non-accruals, foreclosure activity, TDRs and the adequacy of the $9.7 million allowance relative to the growing $2.141 billion held loan portfolio.
Evaluate the sustainability of the $0.40 quarterly dividend against taxable income, Core Earnings, leverage and the REIT distribution requirement.
Review the effect of MSR valuation assumptions and rising interest rates on reported earnings and book value.