Ready Capital Corporation (RCC) is a multi-strategy real estate finance company that has weathered a challenging market environment in recent years. The company has demonstrated resilience, adapting its strategies to navigate headwinds and position itself for future growth.
Business Overview and History Incorporated in 2011, Ready Capital has established itself as a leading player in the lower-to-middle-market (LMM) commercial real estate lending space. The company's origins trace back to the formation of Sutherland Asset Management Corporation in 2011, which later merged with ZAIS Financial Corp. in 2016 to create the entity known as Ready Capital.
Ready Capital began operations in 2011 and qualified as a real estate investment trust (REIT) that same year. Initially, the company focused on acquiring and managing a portfolio of LMM loans and LMM asset-backed securities. Over time, RCC expanded its business model to include originating LMM loans across the full life-cycle of LMM properties, including construction, bridge, and stabilized loans, as well as agency multi-family loan products.
In 2015, Ready Capital entered the small business lending space, acquiring a license as one of only 20 non-bank Small Business Lending Companies. This allowed the company to acquire, originate and service owner-occupied loans guaranteed by the SBA under the SBA Section 7(a) Program. The small business lending operations became an increasingly important part of RCC's business, contributing earnings and diversifying the company's revenue streams.
Over the years, Ready Capital has expanded its reach through a series of strategic acquisitions, including the purchase of Broadmark Realty Capital in 2023 and the recent merger with United Development Funding IV (UDF IV) in 2025. These transactions have strengthened the company's footprint in the residential and commercial construction lending markets, diversifying its portfolio and enhancing its capabilities. Earlier in 2024, RCC acquired Funding Circle, an online lending platform that originates and services small business loans, as well as Madison One, a leading originator and servicer of USDA and SBA guaranteed loan products. These acquisitions further diversified RCC's business and lending platform.
Despite these growth initiatives, Ready Capital has faced some challenges in recent years. The company had to navigate the COVID-19 pandemic, which impacted its commercial real estate loan portfolio. RCC also encountered issues with certain non-performing loans acquired through mergers and acquisitions, requiring it to take significant reserves and writedowns. However, the company has worked to proactively address these credit challenges and reposition its portfolio for future growth.
Financial Performance and Liquidity In terms of financial performance, Ready Capital has faced some challenges in recent years, particularly in its lower-middle-market (LMM) commercial real estate lending segment. For the most recent quarter, the company reported revenue of $27 million and a net loss of $316.1 million. The company's liquidity position remains strong, with $143.8 million in cash as of the end of the most recent quarter.
Ready Capital has faced increased pressure on its net interest margin (NIM) due to the impact of rising interest rates and the static structure of its collateralized loan obligations (CLOs). To address these challenges, Ready Capital has undertaken several strategic initiatives, including the reduction of its dividend to $0.125 per share and the implementation of a $150 million share repurchase program.
In 2024, RCC's core CRE loan portfolio contracted by $1.3 billion, as loans matured and new production was limited to $485 million. This resulted in an 840 basis point contribution to distributable ROE before realized losses, compared to their long-term target of 11-13%.
Segmental Performance and Outlook Ready Capital's business is divided into two main segments: LMM Commercial Real Estate and Small Business Lending.
The LMM Commercial Real Estate segment, which accounted for 84.7% of the company's loan portfolio and 88.9% of its equity allocation as of the end of 2024, has been the primary driver of challenges. This segment focuses on originating and acquiring LMM commercial real estate loans through its subsidiary ReadyCap Commercial. The company originates loans across the full life-cycle of a property, including construction, bridge, stabilized, and agency loan origination channels. As of December 31, 2024, this segment had $8.06 billion in assets.
For the year ended December 31, 2024, the LMM Commercial Real Estate segment generated $766.35 million in interest income and had a net interest income before provision for loan losses of $167.51 million. However, the segment recorded a provision for loan losses of $283.8 million and had a net loss before unallocated expenses and provision for income taxes of $503.49 million.
The company has bifurcated this segment into "core" and "non-core" assets, with a focus on aggressively liquidating the non-core portfolio to reinvest proceeds into higher-yielding core loans. For 2025, RCC expects to originate $1 billion to $1.5 billion of new lower middle market CRE loans, with increased pace as the year progresses.
In contrast, the Small Business Lending segment has been a bright spot, contributing $0.08 per share or 290 basis points of return on equity (ROE) in 2024. This segment focuses on 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 USDA loans, through the company's subsidiaries ReadyCap Lending, Madison One, and iBusiness Funding LLC.
As of December 31, 2024, the Small Business Lending segment had $1.43 billion in assets, representing 15.3% of the company's total loan portfolio and 9.7% of its equity allocation. For the year ended December 31, 2024, the segment generated $130.62 million in interest income and had a net interest income before provision for loan losses of $33.01 million. The segment recorded a provision for loan losses of $8.96 million and had a net income before unallocated expenses and provision for income taxes of $45.74 million.
The company's leadership expects this segment to continue its strong performance, with anticipated originations of $1.5 billion in SBA 7(a) loans and $300 million in USDA loans during 2025. These originations are expected to contribute $0.05 per share each in incremental earnings.
The company's outlook for 2025 is cautiously optimistic, with several key initiatives expected to drive a recovery in net interest margin and ROE. These include:
1. The liquidation of the $1.2 billion non-core portfolio, which is expected to result in an annual benefit of $0.18 per share or 165 basis points on ROE, to be fully realized in 2026. 2. Liability management through the sequential collapse and reissuance of non-core CRE CLOs, expected to provide $0.05 per share or 45 basis points in ROE. 3. Growth in the Small Business Lending segment, as mentioned above. 4. The accretive impact of the UDF IV merger, expected to close in March, which is estimated to provide annual incremental earnings of 17% per share or 150 basis points on ROE.
Ready Capital expects the cumulative effects of these actions to allow them to recover to a 10% stabilized core return through 2025.
Risks and Challenges While Ready Capital has demonstrated resilience, the company faces several risks and challenges that investors should consider. The ongoing challenges in the LMM commercial real estate market, including potential credit deterioration and the impact of rising interest rates, pose a significant risk. Additionally, the company's reliance on securitization and other forms of leverage exposes it to fluctuations in the capital markets.
The company has also faced scrutiny from short-sellers, with a recent report alleging issues related to its accounting practices and loan underwriting. While Ready Capital has refuted these claims, the lingering overhang of such reports can create uncertainty and volatility for investors.
Conclusion Ready Capital's journey over the past few years has been marked by both challenges and opportunities. The company's diversification efforts, including the expansion into the residential and commercial construction lending markets, have strengthened its position, but the cyclical nature of the real estate finance industry continues to test its resilience.
As the company navigates the current market environment, its focus on liquidity management, portfolio optimization, and targeted growth initiatives in the Small Business Lending segment offer a path to recovery. The company's strategic plan, including the liquidation of non-core assets, liability management, and the recent UDF IV merger, provides a roadmap for improved performance in the coming years.
Investors will be closely watching Ready Capital's execution of its strategic plan and its ability to capitalize on emerging opportunities in the evolving real estate finance landscape. The company's diverse real estate finance platform, with a focus on LMM commercial real estate loans and government-guaranteed small business loans, positions it to adapt to market conditions and deploy capital in asset classes and segments with the most attractive risk-adjusted returns.