Business Overview and History Ready Capital Corporation (RC) is a multi-strategy real estate finance company that has demonstrated remarkable resilience in navigating the ever-evolving commercial real estate (CRE) landscape. With a diversified portfolio spanning lower-to-middle-market (LMM) investor and owner-occupied CRE loans, as well as government-backed small business lending, Ready Capital has consistently adapted its strategies to capitalize on market opportunities.
Incorporated in 2011, Ready Capital has established itself as a prominent player in the real estate finance industry. The company was initially founded as a real estate investment trust (REIT) focused on originating, acquiring, financing, and servicing lower-to-middle-market (LMM) commercial real estate loans. In its early years, Ready Capital concentrated on acquiring and managing a portfolio of performing and non-performing LMM loans.
The company's growth trajectory took a significant turn in 2016 when it expanded its business model by adding small business administration (SBA) loan origination and servicing capabilities through the acquisition of ReadyCap Lending. This strategic move allowed Ready Capital to diversify its asset base and revenue streams, positioning itself as a leading non-bank SBA lender in the following years.
In 2018, Ready Capital faced challenges with its legacy LMM loan portfolio acquired through mergers and acquisitions. This led to an increase in non-performing loans and credit losses, putting pressure on the company's financial performance. However, the company worked diligently to resolve these problem loans through workout and restructuring strategies, demonstrating its ability to navigate difficult market conditions.
Despite these challenges, Ready Capital maintained its focus on disciplined underwriting and portfolio management. In 2021, the company made another strategic move by acquiring Broadmark Realty Capital, a specialty real estate finance company specializing in originating and servicing residential and commercial construction loans. This acquisition further diversified Ready Capital's business and expanded its lending capabilities.
Today, Ready Capital operates through two primary segments: LMM Commercial Real Estate and Small Business Lending. The LMM Commercial Real Estate segment focuses on originating, acquiring, financing, and servicing LMM loans across the full life cycle of CRE properties, including construction, bridge, and stabilized financing. Meanwhile, the Small Business Lending segment specializes in acquiring, originating, and servicing loans guaranteed by the U.S. Small Business Administration (SBA) under the SBA Section 7(a) Program, as well as government-guaranteed loans from the U.S. Department of Agriculture (USDA).
Over the years, Ready Capital has demonstrated a knack for strategic acquisitions, further diversifying its business and expanding its capabilities. In 2024, the company made two significant acquisitions: Funding Circle, an online lending platform that originates and services small business loans, and Madison One, a leading originator and servicer of USDA and SBA guaranteed loan products. These acquisitions have strengthened Ready Capital's position in the small business lending space, providing synergies and enhancing its technological capabilities.
Financial Performance and Ratios As of the latest reporting period, Ready Capital's total assets stood at $11.25 billion, showcasing the scale and breadth of its operations. The company's net income for the most recent fiscal year was $339.45 million, with a net profit margin of 87.12%. Additionally, Ready Capital's return on equity (ROE) and return on assets (ROA) for the same period were 21.70% and 2.90%, respectively, indicating strong profitability and efficient utilization of its capital.
For the most recent quarter, Ready Capital reported revenue of $56,252,000 and a net loss of $24,281,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter both stood at $312,684,000, demonstrating strong cash generation despite the reported loss.
Looking at the performance of individual segments for the nine months ended September 30, 2024, the LMM Commercial Real Estate segment generated $596.06 million in interest income and $467.72 million in interest expense, resulting in net interest income before provision for loan losses of $128.34 million. The Small Business Lending segment recorded $96.95 million in interest income and $74.83 million in interest expense, leading to net interest income before provision for loan losses of $22.12 million.
The LMM Commercial Real Estate segment reported a $227.47 million loss in non-interest income, primarily due to net realized losses on financial instruments and real estate owned, partially offset by a decrease in the valuation allowance related to the transfer of loans from held-for-investment to held-for-sale. In contrast, the Small Business Lending segment generated $82.19 million in non-interest income, mainly from net realized gains on financial instruments.
In terms of non-interest expense, the LMM Commercial Real Estate segment incurred $95.79 million, while the Small Business Lending segment reported $65.74 million. The increase in the LMM Commercial Real Estate segment's non-interest expense was driven by higher charge-offs of real estate acquired in settlement of loans and increased loan servicing expenses, partially offset by a decrease in employee compensation and benefits.
Liquidity and Solvency Ready Capital's liquidity position remains robust, with $181.31 million in cash and cash equivalents and $31.33 million in restricted cash as of the latest quarter. The company's current ratio, a measure of short-term liquidity, stands at 0.41, while its debt-to-equity ratio is 2.83, suggesting a moderately leveraged capital structure. The interest coverage ratio, a metric that assesses the company's ability to meet its interest obligations, is 0.64, indicating the need for close monitoring of its debt servicing capabilities.
Risks and Challenges Like any real estate finance company, Ready Capital faces various risks, including interest rate fluctuations, credit risk, and market volatility. The company's exposure to the CRE market and government-backed lending programs also makes it susceptible to changes in economic conditions and regulatory environments. Additionally, the company's reliance on acquisitions and strategic partnerships to drive growth introduces integration and execution risks.
Recent Developments and Outlook In the third quarter of 2024, Ready Capital reported a GAAP loss per common share from continuing operations of $0.07 and distributable earnings per common share of $0.25, excluding realized losses. The company's small business lending operations continued to demonstrate strong growth, contributing a record $21 million in pre-tax distributable income. However, the quarter also saw $110 million in loan sales, resulting in a $0.11 per share impact on earnings.
Ready Capital's CRE portfolio showed stabilizing credit metrics in Q3 2024, with 60-day plus delinquencies increasing marginally by $53 million to 6.2% of the total portfolio. The company's small business lending operations reached record quarterly originations of $440 million, exceeding their $1 billion annual target. This included $355 million of SBA 7(a) loans, $39 million of USDA loans, and $46 million of small-business working capital loans.
The company continues to execute on initiatives to navigate the CRE credit cycle, with 72% of their portfolio repositioning efforts complete. Looking ahead, Ready Capital expects continued growth in their small business lending operations to support longer-term ROE premium to their peer group. The company sees three key drivers contributing to future earnings growth: stabilizing CRE platform, continued turnover of M&A portfolio, and sustained growth in Small Business Lending platform.
Ready Capital is well positioned to capitalize on tailwinds in the CRE market, though it will take a few more quarters to fully realize the benefits. The company expects to generate approximately $40 million in net proceeds from the sale of their remaining mortgage servicing rights (MSRs) in late November.
Conclusion Ready Capital Corporation has proven its resilience in the face of a dynamic CRE market and evolving economic conditions. Its strategic acquisitions, diversified portfolio, and focus on small business lending have enabled the company to adapt and thrive. While challenges persist, Ready Capital's experienced management team, strong liquidity position, and commitment to disciplined growth suggest that the company is well-equipped to continue delivering value to its shareholders. The company's ability to navigate the current CRE environment, coupled with its strong performance in small business lending, positions it favorably for future growth and profitability.