Ready Capital Corporation: Q3 2023 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 small-to-medium balance commercial loans, SBA loans, construction loans and residential mortgage loans, with a smaller mortgage-backed securities portfolio. The company qualifies as a REIT and is managed by Waterfall Asset Management, LLC.
The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The statements are unaudited and prepared under U.S. GAAP.
Ready Capital completed its Broadmark Realty Capital merger on May 31, 2023, issuing approximately 62.2 million common shares. The transaction expanded the company’s residential and commercial construction lending platforms.
Financial Highlights
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Interest income | $250.6 million | $186.0 million | $701.0 million | $464.1 million |
| Interest expense | $191.6 million | $115.5 million | $524.5 million | $257.3 million |
| Net interest income before loan losses | $59.0 million | $70.5 million | $176.5 million | $206.8 million |
| Recovery of/(provision for) loan losses | $12.2 million recovery | $3.4 million provision | $0.5 million provision | $0.6 million provision |
| Net income | $47.2 million | $66.3 million | $337.5 million | $189.5 million |
| Net income attributable to Ready Capital | $43.7 million | $61.2 million | $323.7 million | $176.8 million |
| Basic EPS | $0.25 | $0.53 | $2.33 | $1.66 |
| Diluted EPS | $0.25 | $0.50 | $2.30 | $1.56 |
| Distributable earnings | $52.2 million | $58.2 million | $141.6 million | $167.2 million |
| Distributable earnings per diluted share | $0.28 | $0.44 | $0.92 | $1.38 |
| Common dividend declared per share | $0.36 | $0.42 | $1.16 | $1.26 |
Q3 net income declined 28.8% year over year, while nine-month net income increased 78.1%, largely because of the $215.0 million Broadmark bargain purchase gain recognized in the first nine months. Excluding the effects of unusual items, distributable earnings declined 10.4% in Q3 and 15.3% for the nine-month period.
Q3 pretax income was $51.2 million, equivalent to an approximately 20.4% pretax margin on total revenue before taxes. Nine-month pretax income was $347.1 million, but the margin benefited materially from the Broadmark bargain purchase gain and is not representative of recurring operating performance.
Balance Sheet, Portfolio and Credit Metrics
- Total assets were $12.8 billion at September 30, 2023, up 10.1% from December 31, 2022.
- Total stockholders’ equity was $2.7 billion, up 42.4%, primarily reflecting equity issued in the Broadmark merger.
- Total loan portfolio, including consolidated VIE loans, loans held for sale and PPP loans, was $11.2 billion, up from $10.3 billion at year-end 2022.
- Loans, net were $4.2 billion on the company’s balance sheet; loans in consolidated VIEs, net were $6.8 billion.
- Real estate owned and held for sale increased to $281.9 million from $117.1 million, primarily due to assets acquired in the Broadmark merger.
- Non-accrual loans increased to $518.6 million from $242.8 million at year-end 2022. Non-accrual loans represented 4.7% of loans outstanding, compared with 2.4% at December 31, 2022.
- Loans 60 or more days past due increased to $520.9 million from $238.6 million. Total loans 30 or more days past due represented 6.8% of loans before the general allowance.
- The allowance for loan losses was $100.4 million, including $53.4 million of general reserves, $20.6 million of specific reserves and $26.5 million of PCD reserves.
- Approximately 69.8% of loan balances were in the 60.1% to 80.0% loan-to-value range; 4.3% exceeded 100% loan-to-value.
- Multi-family properties represented 60.8% of collateralized loan UPB, down from 67.0% at year-end 2022. Texas was the largest geographic concentration at 19.1% of UPB.
Liquidity, Cash Flow and Debt
- Cash, cash equivalents and restricted cash totaled $312.0 million at September 30, 2023, compared with $297.0 million at December 31, 2022. Unrestricted cash and cash equivalents were $181.9 million.
- Operating activities provided $80.8 million of cash during the first nine months, compared with $142.2 million in the prior-year period.
- Investing activities provided $590.3 million, primarily from loan dispositions and principal repayments, compared with $1.6 billion of cash used in the prior-year period.
- Financing activities used $656.1 million, primarily for repayments of secured borrowings, PPPLF borrowings and the convertible notes.
- Total leverage was 3.4x and recourse leverage was 0.9x at September 30, 2023.
- Secured borrowings were $2.4 billion, down 16.2% from year-end. Securitized debt obligations were $5.3 billion, up 7.4%.
- Corporate debt was $763.8 million and senior secured notes were $344.7 million. Contractual principal amounts of senior secured notes and corporate debt totaled $1.1 billion, with $760.9 million scheduled for 2026.
- Guaranteed loan financing rose to $886.9 million from $264.9 million, primarily due to the RCLT 2023-3 securitization.
- The company repaid its $115.0 million convertible notes in full on August 15, 2023.
- Management stated that the company was in compliance with its debt, financial and senior secured note covenants at September 30, 2023.
Material Changes and Unusual Items
- The Broadmark merger contributed approximately $852.3 million of updated net assets and resulted in a $215.0 million bargain purchase gain for the nine months ended September 30, 2023. The purchase price allocation remains preliminary and may change during the measurement period.
- Broadmark added approximately $153.8 million of real estate owned, $764.4 million of loans and $98.0 million of corporate debt based on the updated purchase price allocation.
- Q3 non-interest income included a $14.9 million loss related to the Broadmark bargain purchase adjustment, compared with the $215.0 million gain recorded for the nine-month period.
- Q3 net interest income before loan losses declined despite higher interest income because interest expense grew faster, reflecting higher rates and increased funding costs.
- Residential mortgage banking revenue declined to $7.1 million in Q3 from $12.1 million, while nine-month revenue increased modestly to $26.1 million from $23.4 million. Lower MSR valuation gains and mortgage banking activity weighed on results.
- Common dividends declared decreased to $0.36 per share in Q3 from $0.42 per share in Q3 2022. Nine-month dividends were $1.16 per share compared with $1.26 per share.
- The company repurchased 87,242 common shares during Q3 at an average price of $11.21. Approximately $82.0 million remained available under the $100.0 million repurchase authorization at quarter-end.
Outlook, Commentary and Risks
Management described the quarter as characterized by market volatility, inflationary pressures, macroeconomic concerns, geopolitical tensions and elevated interest rates. The company expects results to remain sensitive to interest-rate movements, credit spreads, prepayment speeds, property values, borrower defaults and financing availability.
- Approximately 81% of the loan portfolio was floating rate and 19% fixed rate based on UPB. Approximately 73% of fixed-rate loans were match-funded in securitizations.
- Management’s sensitivity analysis indicated that an immediate 100-basis-point increase in rates would increase projected 12-month pretax net interest income by approximately $20.9 million, while a 100-basis-point decrease would reduce it by approximately $20.6 million, assuming no balance-sheet changes.
- Higher interest rates may increase borrowing costs, reduce fixed-rate asset values and increase borrower defaults, although floating-rate loan coupons and certain hedges provide partial protection.
- Liquidity risk includes potential margin calls, higher collateral requirements, lender decisions not to renew repurchase agreements and the need to sell illiquid assets at discounts.
- Construction lending, expanded through Broadmark and the Mosaic acquisition, carries additional risks related to completion delays, construction costs, collateral values and borrower execution.
- Only 0.1% of the commercial real estate portfolio was in forbearance plans at September 30, 2023, but non-accrual loans and foreclosure activity increased materially.
- Unfunded commitments included $842.8 million for loans, $14.2 million for loans held for sale and $123.2 million of residential agency loan commitments.
- The company remains dependent on its external manager, Waterfall, and must distribute at least 90% of REIT taxable income to maintain REIT status, which can limit retained liquidity.
- The filing states that the Anworth-related litigation had a settlement preliminarily approved, subject to final court approval. Broadmark merger-related stockholder actions were voluntarily dismissed.
Most Important Facts for Investors to Verify
- Whether the elevated non-accrual, delinquency and foreclosure levels stabilize or continue to rise, particularly in bridge and construction portfolios.
- The final Broadmark purchase price allocation and whether additional adjustments affect reported earnings, book value or reserves.
- Recurring distributable earnings and dividend coverage, excluding the non-recurring bargain purchase gain and other adjustments.
- Refinancing and rollover requirements for 2024-2026 secured borrowings, repurchase agreements and corporate debt.
- Exposure to margin calls, collateral haircuts and lender renewal decisions under volatile commercial real estate and credit markets.
- The adequacy of the $100.4 million loan-loss allowance relative to $518.6 million of non-accrual loans and the company’s concentration in multi-family, bridge and construction assets.
- The filing presents PPPLF borrowings as $76.3 million on the balance sheet but approximately $73.3 million in the MD&A discussion; investors should reconcile this apparent inconsistency.