Executive Summary / Key Takeaways

• Strategic Reorientation Underway: Ready Capital Corporation is executing a decisive balance sheet repositioning, shedding non-core commercial real estate (CRE) assets and aggressively managing liabilities to enhance portfolio yield and stabilize earnings. This includes significant CECL allowances and a dividend reset to preserve capital and align with cash flow.
• Small Business Lending as a Growth Engine: The Small Business Lending segment, powered by its proprietary LenderAI technology, is a critical differentiator and growth driver, consistently delivering strong earnings and acting as a counterweight to CRE market volatility. It holds a leading market position as the number one non-bank SBA lender.
• Technology as a Competitive Moat: LenderAI provides a significant technological advantage, streamlining loan origination, improving compliance, and enabling scalable, efficient lending services, positioning Ready Capital for sustained growth and potential future value creation through a possible spin-off.
• Liquidity and Debt Management Priority: With $650 million in debt maturing in 2026, the company is prioritizing liquidity generation through asset sales, CLO reissuance, and new debt offerings, aiming for a more conservative leverage profile.
• Outlook for Recovery: Management anticipates a recovery in net interest margin and return on equity through 2025, driven by non-core asset liquidations, accretive reinvestment, operational efficiencies, and continued growth in its Small Business Lending platform.

A Multi-Strategy Foundation in Real Estate Finance

Ready Capital Corporation (NYSE: RC) operates as a multi-strategy real estate finance company, originating, acquiring, financing, and servicing a diverse portfolio of lower-to-middle-market (LMM) commercial real estate loans, Small Business Administration (SBA) loans, construction loans, and USDA loans. Founded in 2007, the company established its Real Estate Investment Trust (REIT) status in 2011, a structure that mandates the distribution of at least 90% of its taxable income to shareholders, thereby avoiding federal corporate income taxes. This foundational structure, coupled with its external management by Waterfall Asset Management, LLC, has shaped its strategic evolution.

The company's overarching strategy is to deliver attractive risk-adjusted returns to stockholders through dividends and capital appreciation. This is achieved by maintaining a full-service real estate finance platform capable of adapting to various market conditions and deploying capital into asset classes with the most compelling risk-adjusted returns. Ready Capital's historical journey, marked by strategic acquisitions and divestitures, directly informs its current focus on portfolio discipline and leveraging its technological edge in lending.

Technological Edge: LenderAI and the Future of Small Business Lending

A cornerstone of Ready Capital's differentiated strategy, particularly within its Small Business Lending segment, is its advanced technology platform, LenderAI, developed by its subsidiary, iBusiness Funding. This proprietary technology is not merely an operational tool; it represents a significant competitive moat and a key driver of future value.

LenderAI is a flagship loan origination and processing technology platform designed to automate and streamline critical components of the loan origination process. Its tangible benefits are clear: it helps improve compliance, significantly reduces manual workload, and enables faster, more accurate, and scalable lending services. To date, LenderAI has been instrumental in processing over $7 billion in SBA loans and more than $4 billion in conventional small and medium-sized business (SMB) loans. The platform's versatility is further demonstrated by its recent expansion to support personal credit products.

The "so what" for investors is substantial. LenderAI enhances Ready Capital's operational efficiency, contributing to better margins and a stronger competitive position. It allows the company to process a high volume of diverse loans with superior speed and accuracy, a critical advantage in the competitive lending landscape. Furthermore, Ready Capital is actively marketing LenderAI as a third-party underwriting model for banks, recognizing that many traditional banks lack the specialized technology to efficiently underwrite smaller SBA loans. This initiative could unlock new revenue streams and establish LenderAI as a leading technology solution in the broader SMB financing ecosystem. Management has even hinted at the potential for a "backdoor IPO via a tax-free spin-off to shareholders" for this capital-light business once it achieves sufficient scale, highlighting its long-term growth strategy and potential for significant shareholder value creation.

Competitive Landscape and Strategic Positioning

Ready Capital operates in a dynamic and competitive real estate finance sector, facing direct competition from other mortgage REITs and finance companies, as well as indirect competition from fintech lenders and private equity firms. The company's market positioning is that of a mid-tier player, leveraging diversification and niche expertise to carve out its space.

Direct competitors like Arbor Realty Trust (ABR), Ladder Capital Corp (LADR), and Blackstone Mortgage Trust (BXMT) each present unique challenges and opportunities. While ABR is a strong player in multifamily lending, RC differentiates itself with a broader segment diversification, including its robust SBA loan offerings. RC's integrated approach across multiple lending segments provides diversified revenue streams and risk mitigation, potentially offering more stable margins compared to ABR's more concentrated focus.

Against LADR, which emphasizes senior secured assets and disciplined underwriting, RC's expanded product suite, including SBA and residential segments, appeals to a wider range of borrowers. RC's operational efficiency in loan servicing, particularly through its subsidiaries like ReadyCap Commercial, allows for greater scalability. However, LADR's focused model often translates to stronger profitability margins. BXMT, with its affiliation to Blackstone Group, benefits from significant scale and resources, enabling rapid deal-making and broader market reach. While BXMT excels in large-scale commercial lending, RC's focus on small to medium balance loans, particularly through its SBA programs, allows it to serve underserved markets, fostering customer loyalty and niche growth.

Ready Capital's SBA lending operations stand out as a significant competitive advantage. The company is the number one non-bank lender and fourth overall SBA 7(a) lender in the country. Its 12-month default rate of 3.2% is below the industry average of 3.4%, and its five-year charge-off rate has consistently declined, reflecting strong credit and servicing practices. The 12-month repair and denial rate has also reached a historic low. This superior performance, coupled with its dual SBA 7(a) strategy (targeting both large loans up to $5 million and small loans below $350,000 via its FinTech iBusiness), provides a stable and growing earnings contribution that acts as an attractive differentiator in the CREIT sector.

The company's REIT status offers tax advantages, enhancing financial flexibility and potentially improving pricing power. However, RC faces vulnerabilities from its broader operational scope, which could lead to higher costs compared to more streamlined competitors. Economic sensitivity also poses a risk, as loan performance is directly tied to market conditions. Barriers to entry in real estate finance, such as stringent regulatory requirements and substantial capital needs, help protect RC's market position by limiting new entrants.

Strategic Evolution and Portfolio Discipline

Ready Capital's history is one of continuous adaptation and strategic growth. Following its founding in 2007 and achieving REIT status in 2011, the company expanded its capabilities through key acquisitions. The 2019 acquisition of iBusiness Funding laid the groundwork for its technological leadership in small business lending. Further bolstering this segment, the 2024 acquisitions of Madison One (USDA and SBA guaranteed loans) and Funding Circle (online small business lending) significantly enhanced its market position.

In response to a challenging commercial real estate cycle, Ready Capital initiated a decisive balance sheet repositioning. This included the disposition of its Residential Mortgage Banking segment, completed on June 30, 2025, to sharpen its focus on LMM CRE and small business loans. A critical action in Q4 2024 was a $284 million combined CECL and valuation allowance, marking 100% of non-performing loans to current values. This aggressive reserving, while reducing book value by 14% to $10.61 per share, established a "bottom" for problem loans and provided asset managers with greater flexibility for accelerated resolutions. Concurrently, the dividend was reset to $0.125 per share for Q1 2025 to align with projected cash earnings and preserve capital.

The company's CRE portfolio is now bifurcated into a "core" segment of high-yield, better-credit bridge loans intended for long-term hold, and a "non-core" segment targeted for aggressive liquidation. This strategy aims to reinvest proceeds into new, higher-yielding core loans, thereby rehabilitating the net interest margin. The acquisition of United Development Funding IV (UDF IV) in March 2025 further exemplifies this strategic evolution, adding $167.1 million of equity and proving 1.3% accretive to book value per share, primarily driven by a bargain purchase gain of $112.56 million.

Financial Performance and Operational Details

Ready Capital's recent financial performance reflects the impact of its strategic repositioning amidst a dynamic market. For Q3 2025, the company reported a GAAP loss from continuing operations of $(0.13) per common share, with distributable earnings at a loss of $(0.94) per common share. Excluding realized losses on asset sales, distributable earnings were $(0.04) per common share. Net interest income declined to $10.5 million, primarily due to a $1.4 billion reduction in the CRE portfolio and $40 million of negative credit migration. The core CRE portfolio's interest yield was 8.1% (cash yield 5.8%), while the noncore portfolio's interest yield was 3.1%.

Operational improvements are evident, with operating costs from normal operations improving 8% to $52.5 million in Q3 2025. This was driven by a $4.1 million reduction in compensation, servicing, and other fixed operating costs, alongside a $5.6 million increased tax benefit. However, these gains were partially offset by a $5 million net operating loss and carry costs from the Portland mixed-use asset. The company's book value per share stood at $10.28 at the end of Q3 2025, a decrease of $0.16 from June 30, primarily due to a dividend coverage shortfall, though partially mitigated by share repurchases.

The Small Business Lending segment continues to be a standout performer. In Q3 2025, it generated $11 million in net income, contributing 280 basis points to the company's return on equity before realized losses. Despite a 50% shortfall in SBA 7(a) loan originations against its quarterly target due to government shutdown pressures, the segment's underlying strength and strategic importance remain clear. USDA production reached $67 million in the quarter.

A notable operational focus is the Portland mixed-use asset, which represents 14% of quarter-end equity. The Ritz-branded hotel component is nearing stabilization, with Q3 2025 occupancy at 48%, ADR at $504, and RevPAR at $240, both showing sequential and quarter-over-quarter improvements. The office and retail spaces are 28% leased and have reached breakeven. While the asset incurred a total net operating loss of $1.3 million plus $3.7 million in interest carry in Q3 2025, management is actively working on stabilization and sequential disposition of its components, with office and hospitality expected to exit first, followed by condos over two to three years.

Liquidity, Capital Management, and Forward Outlook

Ready Capital is acutely focused on strengthening its liquidity and optimizing its capital structure, particularly with $650 million of debt maturing in 2026. The company possesses $830 million of unencumbered assets, including $150 million of unrestricted cash, and anticipates $425 million in net liquidity from portfolio maturities and pending asset resolutions over the next 12 months. Accelerated asset sales of non-performing loans and real estate owned (REO) are also planned to generate further liquidity.

The company's total leverage ratio was 3.10x and recourse leverage ratio was 1.40x as of September 30, 2025, with LMM CRE and Small Business Lending segments maintaining recourse leverage ratios of 0.4x and 0.2x, respectively. Strategic liability management includes collapsing and reissuing CRE CLOs. In Q1 2025, three CRE CLOs totaling $1.2 billion in loan collateral were collapsed, generating $78 million in net liquidity. This strategy aims to improve collateral efficiency and reduce liability costs. The company also successfully raised $350 million in corporate financing between December 2024 and April 2025, including senior secured notes, to address upcoming maturities.

Management's outlook signals a path to recovery and enhanced profitability. They expect to reduce the non-core portfolio to approximately $270 million through an additional $470 million of liquidations in Q2 2025, targeting a further reduction to $210 million by year-end 2025. The cumulative go-forward earnings impact from these non-core sales is projected to be $0.24 per share, primarily from reduced negative carry and reinvestment. For 2025, the company anticipates originating between $1 billion and $1.5 billion of new LMM CRE loans and expects SBA 7(a) originations to reach $1 billion to $1.2 billion (short-term) or under $1.5 billion (full-year), with USDA volume at $300 million. The UDF IV merger is estimated to provide annual incremental earnings of 17% per share or 150 basis points on ROE.

Ready Capital expects to cover its $0.125 dividend approximately 1.5 times over 2025, with earnings ramping up after Q1 2025, supported by OpEx savings of $0.05 per share annually. The company maintains a conservative posture regarding new investments and dividend policy as it works through its maturities, with the dividend level to be re-evaluated in December based on business plan progress and liquidity.

Risks and Challenges

Despite a clear strategic direction, Ready Capital faces several risks. Credit risk remains paramount, particularly from LMM loans, with potential for increased defaults in a rising interest rate environment. The company's liquidity risk is influenced by its ability to fund acquisitions and meet collateral requirements, especially with PIK interest loans and loan modifications potentially increasing reliance on financing. Interest rate risk affects the spread between investment income and financing costs, and prepayment risk can impact returns on assets.

The Portland mixed-use asset carries inherent real estate risk, with its valuation sensitive to local market conditions and the success of stabilization and disposition efforts. Litigation, including several class action and derivative lawsuits related to past mergers and securities, poses potential financial and reputational risks. Furthermore, capital market risk affects the company's ability to raise debt and equity, a critical function for a REIT. While management is actively mitigating these risks through diversification, disciplined underwriting, and proactive liability management, these factors warrant close monitoring by investors.

Conclusion

Ready Capital Corporation is undergoing a significant strategic reorientation, aiming to solidify its financial foundation and unlock long-term value. By aggressively repositioning its CRE portfolio, leveraging its technologically advanced Small Business Lending segment, and proactively managing its debt maturities, the company is charting a course towards enhanced profitability and stability. The LenderAI platform, in particular, stands out as a powerful competitive advantage, driving efficiency and offering a unique growth trajectory.

While the company has faced recent headwinds, management's decisive actions, including substantial credit allowances and a dividend reset, signal a commitment to financial health. The outlook for improved net interest margin and return on equity is supported by concrete guidance on asset liquidations, accretive reinvestment, and continued growth in its diversified lending platforms. For discerning investors, Ready Capital presents a compelling narrative of a company actively transforming its business model, poised to capitalize on market tailwinds and its technological leadership to deliver sustainable shareholder returns.