Ready Capital Corporation Q3 FY2025 earnings call

• Balance sheet repositioning: Completed 2 portfolio sales, reduced CRE loan exposure. Core portfolio has denominator effect with payoffs accelerating, noncore portfolio liquidations. - Small Business Lending: Growth opportunities despite government shutdown, $175M SBA 7(a) loans, $67M USDA production. - 2026 debt maturities: Prioritize refinancing, $650M maturing, unencumbered assets $830M, $150M unrestricted cash. - Portland mixed-use asset: Hotel occupancy 48%, RevPAR up, office/retail 28% leased, Ritz residences sold 11, near breakeven.

The core portfolio, making up 94% of the total, had an interest yield of 8.1% and cash yield of 5.8%. Levered yields in the portfolio increased 10 basis points to 11%. Delinquencies in the core portfolio increased to 5.9% of the total, with $40 million of new core net delinquencies and $131 million of core migrated to 60-day-plus. The noncore portfolio, at 6% of the total, liquidated $503 million in the quarter, leaving 31 loans marked to 79% of UPB and had an $8 million drag on earnings. In Small Business Lending, $175 million of SBA 7(a) loans were originated (50% below quarterly target), $67 million of USDA production, and the platform generated $11 million in net income, adding 280 basis points return on equity before realized losses.

• Aim for pro forma leverage turn less than 3.5x. - Plan to refinance 2026 debt via asset sales, new debt issuance. - Dividend to be evaluated in December based on business plan progress and liquidity.

• CRE market risks: Delinquencies, negative migration, REO value fluctuations. - Capital markets risks: Slow SBA 7(a) volume, access to capital. - Interest rate risks: Impact on net interest income.

Q: You talked about having a more conservative posture for the company going forward. Can you talk about where you think the right level of leverage to run the business, and so in thinking about how much debt do you need to refinance versus pay down?

A: Yes. Doug, right now, our current gross leverage is around 3.5x. I think we're looking at a turn less than that on a pro forma basis.

Q: Can you tell me what the current covenant is on the unencumbered asset ratio?

A: So the unencumbered asset test, we are well covered within that 1.2x range. So the covenant is well in excess of that.

Q: The comment about the restoration of financial health is well taken. The dividend cost, as you know, around, I think, $80 million a year, seems unjustifiable to continue paying it, and also spending money to buy back stock in the face of these corporate maturities and the company's plans to reduce leverage. So it just doesn't seem justifiable to continue to pay dividend and to also buy back stock. Can you please explain the rationale and what the plan is going forward?

A: Yes. So, Jade, the company is adopting a very aggressive approach to repositioning the balance sheet. And in the context of your question, we think about it in terms of the rank order of liquidity. We currently have $150 million of cash, $150 million of warehouse lines, and organic projected maturities of about $425 million, $450 million. We're going to supplement that with -- we have $800 million of unencumbered assets. That will be supplemented by additional senior and unsecured issuance as well as asset sales to plug the gap. In that context, we're going to evaluate, obviously, the dividend in December to determine the appropriate policy in that context. But the rank order of liquidity will be to: a, reduce leverage; b, exit low-yielding assets and regenerating the resulting liquidity with a prioritization on the debt; and then subsequently, the potential for asset repurchases; and then reinvestment of ultimate free cash flow into new loans to rehabilitate the net interest margin.

Q: On the Portland property, is that being carried at fair value or at cost?

A: Fair value-- the current fair value of $425 million.

Q: And would the Portland property be categorized as one of the unencumbered assets that Tom alluded to earlier?

A: No, there's currently leverage on that asset.

Q: I saw somewhere where there's a large office building in Portland, the Big Pink, I think it's called, I think it was the U.S. Bancorp headquarters. And they recently sold for $45 million. It was originally -- prior value was $373 million, like 5 or 10 years ago. And given that, and apparently it's a marquee property in Portland, doesn't that for -- as nice as this property seems, doesn't it seem like the valuations on these things is really going to take a dive? Just like your comments.

A: Yes. No, appreciate it, Chris. It really is an apples and oranges comparison. And as you're probably well aware, the office sector, especially for -- I think the Big Pink was an [ 80s-ish ] property, maybe a B, B minus, and it had very large tenant concentrations, and there was an outflow from the poor-quality, the B/C space, into newer space. Actually, we're benefiting from that with the small amount of office we have in the Ritz. But the Ritz is really a hospitality asset, a luxury hospitality asset. And it's the only -- in the Portland market, it's the only luxury-branded hotel. And most of what you have in Portland on the luxury end is more on the boutique side. So this is a one-of-a-kind property. So I think the economic forces that are driving the loss of tenancy in the Big Pink are actually benefiting a brand-new Class A office like the small amount we have. And then the hospitality is completely different. It's really not affected by the office trend. And as we noted, RevPAR has increased sequentially. And with the new Lincoln Property, they're best-in-class and they've had a lot of experience, not only just in the Portland market, but globally in these hospitality properties. And so we're 2 years into the stabilization, and we continue to see positive trends in the hospitality -- in the RevPAR at the hotel, which ultimately will drive condo sales, where we've hired a national firm that has experience with Ritz Residences to drive a different pricing policy there to get some momentum on the heels of the stabilization of hotels. So anyways, duly noted on the Big Pink. But it is really an apples and oranges comparison.