Ready Capital Corporation 9.00% Senior Notes due 2029 Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Credit Metrics: Originated CRE loan book credit metrics improved, with 60-day-plus billing paces, risk score loans, and non-accrual loans showing positive changes. Office underperforms multifamily.
• Asset Management: Modified 25 loans in originated CRE bridge portfolio and sold underperforming assets, transferring $720 million of loans to held for sale.
• Origination Activity: CRE loan origination and small business lending growth, including acquisitions to expand the platform.
• Earnings Initiatives: Focus on reallocating low-yield assets, adding accretive leverage, exiting residential mortgage banking, and growing small business lending platform, with potential $0.56 per share annual earnings impact.

Segment Performance

• Originated CRE Loan Book: All credit metrics improved quarter-over-quarter. 60-day-plus billing paces at 5.2% (270 basis points improvement). Office (4% of portfolio) has 16% of delinquencies (60-day plus at 26%) vs multifamily at 6%. 25 loans totaling $801 million modified in originated CRE bridge portfolio, with average in-place debt yield 5%, term extension 12 months, 25% spread reduction 170 basis points, 50% sponsors contributed fresh equity. $720 million of loans transferred to held for sale, $576 million under contract or closed, expected to generate incremental annual earnings $0.24 per share. Origination activity in CRE loan business totaled $256 million in the quarter.
• Small Business Lending Segment: SBA 7(a) loan origination grew 80% YOY to $217 million, on pace to $1 billion run rate. Acquired Madison One (USDA lender, forward 12-month originations $300 million, adds $0.10 to EPS) and Funding Circle US platform (expected to increase 7(a) small loan production, integration complete by year-end, 2024 drag $0.04, 2025 profitability $0.05 EPS accretion).

Guidance

• Reallocation of low-yield assets expected to generate incremental annual earnings $0.24 per share.
• Adding accretive leverage could contribute $0.08 per share annually.
• Exit of residential mortgage banking expected to add approximately $0.04 per share.
• Small business lending platform growth expected to add $0.20 per share annualized.
• Aim to return to the 10% annual return target.

Risks

• Negative migration in existing CRE portfolio, especially in multifamily if there are peak deliveries in certain markets.
• Execution risk with new investments and integration of acquisitions like Funding Circle.
• Minimal exposure to rent regulation risks in multifamily, but still a consideration.

Question and Answer

Q: Can you just give a little bit more detail on the loan sales that occurred in the quarter? If I'm thinking about it right, you made roughly $450 million of sales, took the $20 million of realized losses on those. First, just how that compared to initial expectations? Were there multiple buyers there? Curious kind of like non-bank asset managers? And then how would you feel on the progress I think it should be probably about additional $100 million or so that to be sold, that's not committed and then timing there?

A: Adam Zausmer on buyers: got back roughly 15 individual buyers for the pools, mainly regional investors and some local groups. Andrew Ahlborn on financial effects: cumulative EPS impact for the year was $0.70, quarter impact $0.26, remaining balance under $130 million mostly 60-plus days delinquent loans.

Q: Just on the core earnings trajectory going into the back half of the year. I know you gave a lot of detail in the prepared remarks. But just curious on how you would expect core earnings to trend to the back half of the year, what the main drivers are and then narrowing the gap between earnings and the dividend to get closer to that 10% ROE target. Do you think that 10% target is probably not attainable sometime in 2025?

A: Andrew Ahlborn on core earnings: starting point more in low 20s, bridge to dividend coverage includes reduction in carry cost, reinvestment proceeds, and growth of small business platform, path to 10% return by 2025.

Q: What is your appetite and what would be the opportunity to continue to kind of roll up other originators in the SBA channel?

A: Tom Capasse on M&A: limited M&A opportunities as most participants are banks, focus on acquiring specialist origination teams for large loans and fintech products on the smaller side.

Q: As you think about the different drivers of the earnings ramp, where is the biggest risk in executing that strategy? Is it returns on new investments? Is it credit issues in the existing portfolio? Can you talk about the execution risk around getting back to a 10%-plus return?

A: Tom Capasse on risk: negative migration in existing multifamily portfolio, especially in markets with peak deliveries, but multifamily fundamentals are improving.

Q: It would be helpful to hear what was earnings excluding the tax gain? And how long do you expect the tax gains to continue for? And on that note, what do you estimate as the current economic run rate of distributable earnings?

A: Andrew Ahlborn on tax activity: tax benefits related to loan sales, path to 10% target through 2025.

Q: Is it fair to say that the allowance -- valuation allowance volumes are really a function of how much you're transferring to held for sale? And given that's trending down and given the comments on the call saying that you think you saw the peak in terms of multifamily, should we expect the valuation allowance charges to go down in the second half?

A: Andrew Ahlborn on valuation allowance: majority reduction related to held for sale, not expecting drastic reduction in second half due to uncertainty.

Q: Given your comments on the focus on workforce housing and so forth, all you said was true. The one point that you're missing though is that's a segment of multifamily, which is really vulnerable to rent regulation -- rent stabilization, rent control, things like that. Given that you guys have a nationwide portfolio, are you keeping an eye for that? And any comments you can make on that?

A: Tom Capasse on rent regulation: very little exposure to rent regulation in portfolio, focus on middle income suburban areas.

Q: On Funding Circle, given that's a fintech company, and I presume it's sort of populated by guys who are very sharp on current trends in terms of online lending and so forth. Strategically, what does that imply in terms of how Ready Capital can utilize that platform for other things? Any thoughts on that?

A: Tom Capasse on Funding Circle: complementary platform, cross-selling borrowers, reducing OpEx, potential bolt-on products like unsecured loans and equipment leasing.