Ready Capital Corporation 9.00% Senior Notes due 2029 Q3 FY2024 earnings call

Key Points

• CRE market stabilization driven by rate cuts, reduced multi-family starts, and strong occupant demand. Originated portfolio credit metrics stabilizing, with 60-day plus delinquencies at 6.2%.
• Small Business Lending achieved record growth, generating $21 million of pre-tax distributable income. Acquisitions of Madison One and Funding Circle expected to be accretive once ramped.
• Progress on strategic portfolio initiatives: $331 million in loan and REO sales, reducing negative carry by $0.08 per share. Pipeline for originated CRE grew 34% to $730 million.
• Leverage position remains conservative at 3.3 times, below long-term target of 4 times. Exit from residential mortgage banking progresses well, with MSRs marketing and platform sale expected soon.

The company's CRE portfolio consists of originated and M&A segments. The originated portfolio was $7.3 billion, representing 90% of the total, and declined 6% in the quarter. The M&A portfolio was $850 million, 10% of the total, and saw a 17% improvement. The Small Business Lending segment had record quarterly originations of $440 million, including $355 million of SBA 7(a) loans, $39 million of USDA loans, and $46 million of small-business working capital loans, exceeding the $1 billion annual SBA target.

Forward-Looking

• Expect benefits of improving CRE market conditions over coming quarters. Small Business Lending segment scale and high ROE provide differentiator. Anticipate continued growth in Small Business Lending and normalization of CRE business to historical levels supporting longer-term ROE premium.

Risks

• Potential impairment of deferred tax assets, accrued interest, and goodwill. Market rate fluctuations could impact loan takeouts and debt service coverage ratios. Uncertainty around settlement of remaining loans and their impact on earnings.

Q: Can you give more detail on loan sales in the quarter and remaining loans?

A: We settled $331 million in the quarter with $55 million in proceeds, EPS impact of $0.11 loss. Remaining loans on balance sheet are $218 million with increased valuation allowances impacting EPS.

Q: How much interest income was from PIK and expectations for next few quarters?

A: A little over 20% of interest income was PIK or accrued. PIK from construction loans acquired in Mosaic transaction expected to clear in fourth quarter with majority turning to cash-paying.

Q: Thoughts on CRE cycle and rate impact?

A: CRE cycle near bottom, multi-family sector stabilizing. Short rate cuts benefit modified loans, while long rate elevation may impact takeout from GSEs. New private debt capital in multi-family is a tailwind.

Q: Risk of write-down or impairment of deferred loan fees, accrued interest, goodwill?

A: Deferred tax assets not expected to impair. Accrued interest only recoverable, minimal write-off expected. Goodwill not impaired as both Broadmark and Mosaic were bargain purchase gains.

Q: Balance of non-performing loans and REO?

A: Originated portfolio delinquency north of $400 million, M&A portfolio $150 million, REO $160 million all in sale process.

Q: CECL reserve build and outlook?

A: CECL reserve over 1%, 32% in journal bucket. Reserve build almost entirely in M&A portfolio across property types. Confidence in sustainability as CRE recovers.

Q: CLO relationship and asset management?

A: Relationship with special servicer healthy, progress made in executing market modifications to help projects navigate challenging environment.

Q: Outlook for 10% distributable ROE target?

A: Distributable earnings ex-losses in mid-8s, march towards 10% target as CRE recovers and Small Business Lending grows.

Q: Cadence of loan sales and cash freeing?

A: MSRs sale expected to generate ~$40 million, platform sale ~$10 million, remaining assets settlement to flow into next year clearing ~$40 million. Plans to address debt maturity and consider share buybacks.