Ready Capital Corporation Q4 FY2025 earnings call

• Management has a comprehensive balance sheet repositioning strategy with three key priorities: strengthening liquidity to generate free cash flow exceeding 2026 debt maturities, selling underperforming CRE assets to eliminate negative earnings drag, and positioning for sustainable future growth. • Promoted Dominic Scali to Chief Credit Officer and co-president of the CRE operating business. Gary Taylor transitioned to focus on the SBA business. • Progress on the liquidity plan, with approximately $380 million in free cash generated from the start of the fourth quarter to date. The plan aims to generate an additional $500 million in free cash flow by year-end from portfolio runoff and loan sales. • Portfolio repositioning includes an aggressive focus on selling or resolving approximately $1.4 billion of sub- and non-performing loans and REO assets. • Targeted a 25% reduction in operating costs to align with the simplified CRE investment strategy and increased capital allocation to capital light small business lending operations from 10% to 20%. • Portland asset, the largest single equity allocation at 16% of year-end stockholders' equity, has made progress in stabilization, including condominium sales with a phased strategy and hotel occupancy improvement. • SBA business was affected by the government shutdown, but Ready Capital remains a top five lender in the SBA market and anticipates coming to market with its fourth SBA securitization during the second quarter.

The CRE segment is focused on an aggressive asset management strategy to reduce the legacy CRE book by 60% to approximately $2 billion. The SBA business was impacted by the government shutdown, with originations in the quarter dropping to $84 million, a 50% decline from prior levels. However, Ready Capital remains a top five lender in the SBA market.

• Management anticipates generating an additional $500 million in free cash flow by year-end from portfolio runoff and planned $1.5 billion of loan sales. • The liquidity plan ensures free cash significantly exceeds immediate debt maturities, with progress made in retiring the 5.75% February senior unsecured note. • Targeted a 25% reduction in operating costs to align with the simplified CRE investment strategy. • Anticipates refinancing a portion of near-term debt maturities and coming to market with the fourth SBA securitization during the second quarter.

• Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from expectations. • Continued execution of the liquidity plan may result in additional book value pressure depending on specific actions taken to increase cash and reduce debt. • Uncertainty around the refinancing of a portion of near-term debt maturities. • Impact of government actions, such as the shutdown, on the SBA business and related originations.

Q: In light of your comments around looking to reposition the portfolio, can you talk about the thoughts around keeping the Portland asset or whether that makes sense to accelerate the timeframe on that?

A: We're making very strong progress on the stabilization plan. We would likely lean towards an early disposition after stabilization, as we're confident in meeting the stabilization plan on the condos and hotels and see an overall improvement in the Portland market.

Q: Just on the increase on the non-accruals, was there a change in the underlying performance or just a change in the strategy of how long you expect to hold those assets?

A: It's 100% the strategy change. It's related to short-term resolutions via asset sales and strategic asset management to reduce the portfolio, making previous characterizations of core and non-core less relevant.

Q: On the core CRE and non-core CRE loan portfolios, the percentage of non-accruals increased sharply. Do you anticipate needing to reverse previously accrued interest on these loans as a result? If not, why not? And can you just comment on the underlying credit trends in both portfolios?

A: For loans identified for sale in the fourth quarter and settled in the first quarter or anticipated to be sold, we took reversals of accrued interest in the fourth quarter numbers. The accrued interest remaining is related to loans anticipated to be held through maturity. It's a conscious decision as the lender to not execute modification and extension strategies, instead focusing on strategic asset management.

Q: On the Portland asset, the 25 reservation agreements, what percent will convert to contracts, and what's the average price?

A: Of the 25, 16 are in contract with hard deposits, and the remaining nine should convert to contracts with hard deposits in the next few weeks. The average price of the units sold is $737 per square foot.

Q: Tom, in your comments, you indicated that through repositioning the portfolio and dispositions the leverage ratios are going to go down. How much was that again, please?

A: The plan is to reduce leverage to 2.5x from previous levels.

Q: As you guys are focused on liquidity here, are there other monetization strategies that you guys would consider, like selling or spinning off a business line?

A: There are non-core assets not in the current liquidity plan that we're entertaining potential dispositions for. We're committed to the SBA business but are looking at other smaller non-core assets for additional sales.