Business Overview and History
Ready Capital Corporation (RC) is a diversified real estate finance company that has navigated a challenging market environment in recent years. The company's multi-strategy approach, which includes originating, acquiring, financing, and servicing lower-to-middle-market commercial real estate loans, has enabled it to weather the storm and position itself for future growth.
Ready Capital was founded in 2011 and has since established itself as a leading player in the commercial real estate lending space. The company's core business model revolves around providing financing solutions to small and medium-sized businesses, as well as real estate investors, across various property types, including multifamily, office, retail, and industrial.
Ready Capital qualified as a real estate investment trust (REIT) in 2011 and began operations, initially focusing on building its portfolio of commercial real estate loans and expanding its small business lending activities. In 2016, the company made several key acquisitions, including Sutherland Asset Management Corporation, which significantly expanded its commercial real estate lending platform and allowed access to new lending channels.
During the years following the financial crisis, Ready Capital faced challenges as the commercial real estate market experienced significant stress. However, the company successfully navigated this period by focusing on asset quality, maintaining disciplined underwriting standards, and actively managing its portfolio. Despite these challenges, Ready Capital continued to grow its business and generate solid financial results.
The company's growth strategy has included both organic expansion and strategic acquisitions. In 2023, Ready Capital completed two significant acquisitions - Broadmark Realty Capital Inc. and Madison One Capital, M1 CUSO and Madison One Lender Services. The Broadmark merger was particularly transformative, expanding the company's presence in the residential and commercial construction lending markets. These acquisitions further strengthened Ready Capital's commercial real estate and small business lending platforms, providing additional scale and diversification.
Financial Performance and Ratios
Ready Capital's financial performance has been mixed in recent years, reflecting the challenges faced by the broader commercial real estate industry. For the fiscal year 2024, the company reported revenue of $693.01 million, a slight decrease from the previous year's $695.68 million. Net income, however, declined significantly, from $326.56 million in 2023 to $114.48 million in 2024, primarily due to increased provisions for loan losses and valuation allowances.
The company's profitability metrics have also been under pressure, with the net profit margin declining from -0.47 in 2023 to -0.75 in 2024. The return on equity (ROE) followed a similar trend, dropping from 21.7% in 2023 to 7.2% in 2024. This decline can be attributed to the company's strategic decision to increase its allowance for credit losses and write down the value of its non-performing assets, which effectively reset the balance sheet and positioned the company for a potential recovery in the coming years.
For the most recent quarter, Ready Capital reported revenue of $27,004,000 and a net loss of $316,140,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter were both $29,160,000.
Liquidity and Solvency
Ready Capital's balance sheet remains relatively strong, with a current ratio of 0.33 and a quick ratio of 0.33 as of the end of 2024. The company's debt-to-equity ratio stood at 0.24, indicating a moderate level of leverage. However, the company's interest coverage ratio declined from -0.09 in 2023 to -0.54 in 2024, reflecting the pressure on its net interest margins.
To bolster its liquidity position, Ready Capital has been actively managing its liability structure, including the collapse and reissuance of its CRE CLO book and the issuance of $350 million in corporate debt since December 2024. These initiatives are expected to generate additional funding to support the growth of the company's core portfolio and fund its share repurchase program.
As of the most recent quarter, Ready Capital reported cash holdings of $181,310,000, which provides a solid foundation for its operations and future growth initiatives.
Segmental Performance
Ready Capital's business is divided into two primary segments: LMM Commercial Real Estate and Small Business Lending. The LMM Commercial Real Estate segment, which accounts for the majority of the company's assets and revenue, has faced challenges in recent years due to the cyclical nature of the commercial real estate market. The segment's net interest income declined by 11.3% in 2024, as the company grappled with a 7% decrease in portfolio assets and a rise in non-accrual loans.
For the third quarter of 2024, the LMM Commercial Real Estate segment reported interest income of $193.25 million, a decrease of $26.16 million compared to the prior year period. This decrease was primarily due to decreased loan balances, partially offset by increases in interest rates. Interest expense for this segment was $150.49 million, a decrease of $18.53 million, driven by decreased debt balances, partially offset by increases in interest rates. The provision for loan losses increased by $63.70 million to $49.24 million, primarily due to an increase in asset-specific reserves.
In contrast, the Small Business Lending segment has been a bright spot, with originations growing by 70% in 2024 to $1.2 billion, including $1.1 billion in SBA 7(a) loans. This segment now represents only 8% of the company's capital but contributes $0.08 per share, or 290 basis points, to Ready Capital's ROE. The recent acquisitions of Funding Circle and Madison One have further strengthened the company's small business lending capabilities, positioning it for continued growth in this area.
In the third quarter of 2024, the Small Business Lending segment had interest income of $33.28 million, an increase of $3.99 million compared to the prior year period, primarily due to increases in interest rates and increased loan balances. Interest expense for this segment was $25.08 million, an increase of $4.31 million, driven by increases in interest rates. The provision for loan losses increased by $1.61 million to $3.93 million, due to increased loan originations.
The Corporate-Other segment, which primarily consists of unallocated activities, reported a non-interest income increase of $47.42 million to $33.39 million in the third quarter of 2024, primarily due to a gain on bargain purchase recognized from the Funding Circle Acquisition.
Guidance and Outlook
Ready Capital has provided a detailed outlook for 2025, outlining a multi-faceted strategy to navigate the current market environment and drive a recovery in its financial performance. The key elements of this plan include:
- Aggressive liquidation of the company's $1.2 billion non-core portfolio, which is expected to generate an annual benefit of $0.18 per share, or 165 basis points, on ROE.
- Liability management initiatives, such as the collapse and reissuance of its CRE CLO book, which are projected to provide $0.05 per share, or 45 basis points, in additional earnings.
- Continued growth in the Small Business Lending segment, with anticipated originations of $1.5 billion in SBA 7(a) loans and $300 million in USDA loans, contributing an incremental $0.10 per share, or 90 basis points, to ROE.
- The completion of the UDF IV merger, which is expected to add $0.17 per share, or 150 basis points, to ROE.
These strategic initiatives, combined with the company's efforts to strengthen its balance sheet and improve its credit quality, are expected to drive a recovery in Ready Capital's ROE to a stabilized level of 10% by the end of 2025.
For 2025, Ready Capital expects to originate between $1 billion and $1.5 billion of new production in lower middle market CRE loans, with an increased pace as the year progresses. The serial disposition of the Ritz project's three components over 10 quarters is expected to result in an annual benefit of $0.31 per share or 275 basis points to ROE.
It's worth noting that in 2024, Ready Capital's core portfolio contracted $1.3 billion as loans matured, with new production limited to $485 million, resulting in an 840 basis point contribution to distributable ROE, which was below their long-term target of 11-13%.
Risks and Challenges
Despite the company's efforts to navigate the current market environment, Ready Capital faces several risks and challenges that investors should be aware of. These include:
- Continued volatility in the commercial real estate market, which could impact the performance of the company's loan portfolio and the valuation of its assets.
- Potential regulatory changes or government policy shifts that could affect the company's government-backed lending programs, such as the SBA 7(a) and USDA loan programs.
- Execution risk associated with the company's ongoing strategic initiatives, including the liquidation of its non-core portfolio and the integration of recent acquisitions.
- Heightened competition in the commercial real estate lending space, which could put pressure on the company's margins and market share.
Conclusion
Ready Capital Corporation has demonstrated resilience in the face of a challenging market environment, leveraging its diversified business model and strategic initiatives to position the company for a potential recovery. While the company's recent financial performance has been mixed, the outlined plan to address its non-performing assets, optimize its liability structure, and capitalize on growth opportunities in its small business lending segment suggests a path forward. Investors should closely monitor the company's execution on these strategies and its ability to navigate the evolving commercial real estate landscape.