Q3 2025 Ready Capital Corp Earnings Call

Speaker #3: Greetings and welcome to the Ready Capital Corp Third Quarter 2025 Earnings Call . At this time , all participants are in a listen only mode .

Speaker #3: A brief question and answer session will follow the formal presentation . Should anyone require operator assistance during the conference , please press Star Zero on your telephone keypad .

Speaker #3: As a reminder , this conference is being recorded . It is now my pleasure to introduce your host , Andrew Ahlborn Chief Financial Officer .

Speaker #3: Thank you . You may begin .

Speaker #4: Thank you . Operator . And good morning to those of you on the call . Some of our comments today will be forward looking statements within the meaning of the federal securities laws .

Speaker #4: Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect . Therefore , you should exercise caution in interpreting and relying on them .

Speaker #4: We refer you to our SEC filings for more detailed discussion of the risks that could impact our future operating results and financial condition .

Speaker #4: During the call , we will discuss our non-GAAP measures , which we believe can be useful in evaluating the company's operating performance . These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP .

Speaker #4: A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2020 earnings release , and our supplemental information , which can be found in the investors section of the Ready Capital website .

Speaker #4: In addition to Tom and myself , on today's call , we are also joined by Adam Zousmer , Ready Capital Corp Chief Credit Officer .

Speaker #4: I will now turn it over to Chief Executive Officer Tom capacity .

Speaker #5: Thanks , Andrew . Good morning , everyone , and thank you for joining the call today . Our focus remains on returning the company to financial health and profitability .

Speaker #5: Via rehabilitation of the portfolio , yield growth of our small business lending operations and management of our 2026 debt maturities begin . We continue to make progress on our balance sheet repositioning via reductions in our CRE loan exposure using sales of low yielding assets in conjunction with our traditional asset management strategies .

Speaker #5: To that end , we completed two portfolio sales . The first , discussed in the second quarter call , was the sale of 21 loans with an unpaid principal balance of 665 million at a price of 78 .

Speaker #5: The transaction netted 85 million and provided incremental earnings of $0.02 per share in the quarter . With $0.05 per share expected for the pro forma full quarter .

Speaker #5: The second , the sale of 196 small balance loans with high servicing costs with an unpaid principal balance of 93 million at a price of 97 , netting 24 million .

Speaker #5: At quarter end . Post completion of the sales , along with normal principal paydowns of 410 million . The portfolio totaled 120 loans , with an unpaid principal balance of 5.4 billion .

Speaker #5: In carrying value of 5.2 billion , split 94% in the core portfolio and 6% non-core portfolio in the core portfolio . In the absence of adding new loans , we anticipate that the denominator effect will prevail as payoffs accelerate with portfolio seasoning , seasoning and some loans migrate to delinquency net of modifications .

Speaker #5: In the quarter , there were 40 billion of new core net delinquencies , 131 million of core migrated to 60 day plus , of which 91 million will resolve via modification or liquidation .

Speaker #5: As a result , delinquencies increased to 5.9% of the total leverage yields in the portfolio increased ten basis points to 11% for core loans experiencing negative migration .

Speaker #5: Our go-forward asset management strategy will favor liquidations in the non-core portfolio. We liquidated $503 million in the quarter, leaving 31 loans marked to 79% of UPB in the quarter.

Speaker #5: The non-core portfolio had an 8 million drag on earnings , or $0.05 per share . We also have 648 million of REO across 28 positions , including the Portland mixed use asset , comprising 66% of the total .

Speaker #5: The remaining REO book of 218 million comprises 27 assets , with a 3.7 million average value , creating greater liquidity on exit . In the quarter , we sold five properties valued at 50 million and added for REO , totaling 54 million via foreclosure .

Speaker #5: Of note , collapsing the majority of our series close has provided more flexible asset management , particularly quicker execution of foreclosure deed in lieu transactions to sell liquid multifamily properties .

Speaker #5: The Portland mixed use asset represents 14% of quarter end equity and is segmented into three components the rich branded hotel with 251 rooms , 169,000ft² of office and retail space , and 132 Ritz residences in the quarter .

Speaker #5: Net operating loss on the hotel was 330,000 , with occupancy of 48% , ADR $504 , and rev par of $240 , both up sequentially quarter over quarter .

Speaker #5: After 24 months of operation , the hotel continues to near stabilization . The office and retail are currently 28% leased and hit break .

Speaker #5: As discussed last quarter , our new property manager , Lincoln Property , a global platform with expertise in hospitalities executing our business plan .

Speaker #5: We have had six prospective office tenants tour the space and taking the keys and expect to make significant progress in lease up over the next few quarters .

Speaker #5: Lastly, we have sold a total of 11 Ritz residences. We've engaged a top global firm in luxury condo sales and are launching a revised pricing strategy to improve future sales velocity.

Speaker #5: The net loss on the residences was 90 $900,000 in total . The position is nearing break even on operations . The net operating loss of 1.3 million , with an additional 3.7 million in interest , carry as previously stated , we will look to exit the position on the heels of ongoing stabilization , lease up and sales in our small business lending operations .

Speaker #5: Despite pressure from the government shutdown , we continue to see growth opportunities in the quarter . We originated 175 million of small business Administration , 70 loans , 50% below our quarterly target .

Speaker #5: As discussed on prior calls , the primary hurdle to reaching target volumes has been access to the capital markets , which has been slow given SBA turnover , staff turnover earlier in the year .

Speaker #5: With that being said , the approval of our 75 million warehouse facility in two planned securitizations will open significant capacity for achieving volume growth in 2026 .

Speaker #5: USDA production was 67 million in the quarter . Combined , the small business lending platform generated 11 million in net income , adding 280 basis points .

Speaker #5: Return on equity before realized losses to the company's total . This platform continues to be a strong counterbalance to our CRE business , with nearly 400 million invested and represents significant , tangible equity value .

Speaker #5: Turning to our balance sheet in 2026 , we have 650 million of debt maturing , which is our top priority . We have multiple pathways to address these obligations .

Speaker #5: First , we have 830 million of unencumbered assets , including 150 million of unrestricted cash . Second , we expect 425 million in net liquidity from portfolio maturities and pending asset resolutions over the next 12 months .

Speaker #5: Third , we intend to further accelerate sales as we move out of non-performing loan in REO positions . We expect a combination of these items to deliver the balance sheet , which may pressure book value depending on the size , timing and pricing of such actions .

Speaker #5: And last , we we've demonstrated our ability to access the capital markets , including our successful debt issuance earlier this year , and expect new debt .

Speaker #5: Debt issuance to replace a part of the maturing debt . We expect a more conservative posturing of the company regarding new investments and dividend policy .

Speaker #5: As we work through our maturities . Regarding the dividend , we will evaluate the current level in December and determine at that time the most appropriate level in the context of progress in the business plan , liquidity .

Speaker #5: Liquidity levels for managing the 2026 maturities and competing sources of liquidity . With that , I'll turn it over to Andrew to go through the quarterly results .

Speaker #4: Thanks , Tom . For the third quarter , we reported a gap loss from continuing operations of $0.13 per common share . Distributable earnings were a loss of $0.94 per common share .

Speaker #4: And $0.04 per common share , excluding realized losses on asset sales , several key factors impacted our quarterly results . First , net interest income declined to 10.5 million in the quarter .

Speaker #4: The movement was due to a $1.4 billion reduction in the portfolio and 40 million of negative credit migration in the core portfolio . The interest yield was 8.1% and the cash yield was 5.8% .

Speaker #4: The interest yield in the non-core portfolio was 3.1% . Second gain on sale income , net of variable costs , decreased 2.6 million to 20 million .

Speaker #4: The change was the result of lower USDA and SBA seven volume . The income was driven by the sale of $130 million of guaranteed SBA , seven loans and average premiums of 9.3% , and the sale of 57 million of USDA production .

Speaker #4: At premiums averaging 10.6% . Realized gains from normal operations were offset by 189 million of realized losses from the sale of assets . These losses were offset by the release of 178 million of valuation allowances .

Speaker #4: Third , operating costs from normal operations were 52.5 million , representing an 8% improvement from the previous quarter . The change result of a 4.1 million reduction in compensation expense , servicing expense and other fixed operating costs , along with an increased tax benefit of 5.6 million .

Speaker #4: These positive movements were partially offset by the inclusion of the Portland mixed use assets . Net operating loss and carry costs , which totaled 5 million .

Speaker #4: Further , the combined provision for loan loss and valuation allowance decreased 140.2 million . The net increase in provision for loan losses of 38 million was due to a net increase of 43.2 million of specific reserves , offset by a slight decline in the general was the provision .

Speaker #4: The decrease in the valuation allowance of 178 million relates to the reversal of previous marks taken on the $665 million loan sale upon settlement .

Speaker #4: And lastly , we reported a $24.5 million increase in the bargain purchase gain related to the closing of the UDF merger , the increased bargain purchase gain was the result of additional future cash flows expected to be received on the portfolio , which required an increase to the day one valuation loss from normal operations , net of tax , which can be found on page 11 of the Financial Supplement , improved quarter over quarter to a $5.2 million loss .

Speaker #4: Recurring revenue declined 2.6 million due to lower net interest income and lower gain on sale revenue , offset by increased earnings from our JV investments .

Speaker #4: Operating expense improvement of 4.6 million offset the decline in revenue book value per share was $10.28 at quarter end , down $0.16 from June 30th .

Speaker #4: The change was primarily due to the dividend covered shortfall , partially offset by the repurchase of 2.5 million shares at an average price of $4.17 , which offset the reduction in book value per share by $0.09 per share .

Speaker #4: Liquidity remains strong , with unencumbered assets of 830 million , including $150 million of unrestricted cash . With that , we will open the line for questions .

Speaker #3: Thank you . We will now be conducting a question and answer session . If you would like to ask a question , please press star one on your telephone keypad .

Speaker #3: A confirmation tone will indicate your line is in the question queue . You may press star two . If you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys , one moment please , while we pull for questions .

Speaker #3: The first question is from Doug Harter from UBS. Please go ahead.

Speaker #6: Thanks. You talked about, you know, having a more conservative posture for the company going forward. Can you talk about where you think the right level of leverage is to run the business?

Speaker #6: And so kind of thinking about how much debt do you need to refinance versus , hey , down .

Speaker #5: Yeah . Hey , Doug . Right . Right now our current gross leverage is around three and a half . I think we're looking at a turn less than that on a pro forma basis .

Speaker #6: And then I guess, how do you think about what is the target mix of secured versus unsecured?

Speaker #5: Andrew , you want to comment on the the target mix ?

Speaker #4: Yeah . You know , I expect at least on the corporate side , the the majority of our debt to be secured , at least for the immediate future .

Speaker #4: With that being said , we've asked access the unsecured markets via the baby bond market over the years quite frequently . So to the extent that markets open , I think we will tap that .

Speaker #4: But I expect a more secured issuance , at least at this point .

Speaker #6: Great . Thank you .

Speaker #7: Thanks , Doug .

Speaker #3: The next question is from Jade Rahmani from KBW. Please go ahead.

Speaker #8: Thank you very much . Can you tell me what the current covenant is on the unencumbered asset ratio ? I'm not sure if it's 1.25 or 1.2 .

Speaker #8: And the slide deck shows 1.2 as the current ratio .

Speaker #4: Morten . Jade , how are you ? So the the unencumbered asset test , we are well covered within that one two range .

Speaker #4: So the covenant is is well in excess of that .

Speaker #8: The covenant is the covenant minimum 1.2 .

Speaker #4: No , no 1.2 is our current coverage of that . The only debt we have that has that ratio is 350 million . And that's at A11 .

Speaker #4: So we're well covered .

Speaker #8: Oh, okay. So there's no requirement to be at 1.25.

Speaker #4: No it's just the 350 at 110 .

Speaker #8: Okay . The comment about the restoration of financial health is well taken . The dividend cost , as you know , around I think 80 million a year seems unjustifiable to continue paying it .

Speaker #8: And also spending money to buy back stock in the face of these corporate maturities and the company's plans to reduce leverage. So it just doesn't seem justifiable to continue to pay dividends and to also buy back stock.

Speaker #8: Can you please explain the rationale and what the plan is going forward ?

Speaker #7: Yeah . So , Jade , the the company is adopting a very aggressive approach to repositioning the balance sheet . And in the context of your question , we think about it in terms of the rank order of liquidity .

Speaker #7: You know , we currently have 150 million of cash , hundred and 50 million of warehouse lines and organic projected maturities of about 400 and 425 to 450 million .

Speaker #7: We're going to supplement that with 800 million of unencumbered assets that will be supplemented by additional senior and unsecured issuance , as well as asset sales to plug the gap in that context , we're going to evaluate , obviously , the dividend in December to determine the the appropriate policy in that in that context .

Speaker #7: But the the rank order of liquidity will be to a reduce leverage . B exit low , low yielding assets and and and regenerating the resulting liquidity with a prioritization on the debt .

Speaker #7: And then subsequently the potential for asset repurchases . And then in reinvestment of ultimate free cash flow into new loans to rehabilitate the net interest margin .

Speaker #8: Okay . Thank you very much . Just one more , which would be on the other assets category , which continues to increase to now 5.7% of assets and 25% of equity .

Speaker #8: I guess that I assume will be evaluated at year-end as part of the audit. It includes significant deferred tax assets and the duration of being able to absorb such assets.

Speaker #8: Seems quite long given current profitability and allocation of gas to the SBA business . So do you think that that category of assets will be evaluated at year end as part of the audit process ?

Speaker #8: Thank you for taking the questions .

Speaker #4: We we certainly re-evaluate the deferred tax asset on an ongoing basis , including at the year end asset urine audit . You know what I would say is our expectation is that profitability in those businesses grow as you know , origination volume grows to , you know , our target levels .

Speaker #4: And then the second thing I would add is , you know , to the extent we monetize those businesses at some point inside the Tres , you know , that tax benefit can can be used in that way as well .

Speaker #4: So there's no limitations on the time period in which they can be used . And we think the , you know , the pro forma profitability of those businesses as well as the the fair value of those businesses in excess of their current book value , you know , provides a window to utilize those over time .

Speaker #3: As a reminder to ask a question , please press star one . The next question is from Christopher Nolan from Ladenburg Thalmann . Please go ahead .

Speaker #9: Hey guys, on the Portland property, is that being carried at fair value or at cost?

Speaker #7: A fair value of the current appraised value of 4.25 ?

Speaker #9: Okay . And then yeah , please go ahead .

Speaker #4: Just just just one thing . The property is actually broken out into two components . So the condos are being held for sale .

Speaker #4: And they're at fair value . And then the other two components are held for for use . So they're being carried at cost .

Speaker #4: But both were put on the balance sheet at the time of taking the property at fair value .

Speaker #9: Okay . And would the Portland property be categorized as one of the unencumbered assets that Tom alluded to earlier ?

Speaker #4: No, there's currently leverage on that aspect.

Speaker #9: Okay . And I guess the final question is I saw somewhere where there's a large office building in Portland , the Big Pink , I think it's called I think it was the U.S.

Speaker #9: Bancorp headquarters , and it recently sold for 45 mil . It was originally prior value was 373 million , like 5 or 10 years ago .

Speaker #9: And you know , given that and apparently it's a marquee property in Portland , I mean , doesn't that for some for as nice as this property seems , doesn't it seem like , you know , the valuations on these things is really going to take a dive just like your comments .

Speaker #7: Yeah . No , I appreciate it Chris . It really is a apples and oranges comparison . And as you're probably well aware , the office sector , especially for I think I think the Big Pink was a 80s ish property , maybe a be B minus .

Speaker #7: And it had very large tenant concentrations and there was a outflow from the the poor quality . Yeah . The BC space into newer space actually we're benefiting from that with the small amount of office we have in the , in the Ritz .

Speaker #7: But the Ritz is really a hospitality asset , right ? A luxury hospitality asset . And it's the only in the Portland market .

Speaker #7: It's the only , you know , luxury branded hotel . And most of what you have in Portland is , is on the , on the luxury end is , is more on the boutique side .

Speaker #7: So this is a one of a kind property . So I think the , the economic forces that are driving the loss of tenancy in the big Pink are actually benefiting brand new class A office like the small amount we have .

Speaker #7: And then the hospitality is a completely different . It's really not affected by the office trend . And you know , as we noted , RevPAR has been increased sequentially .

Speaker #7: And , you know , with with the new Lincoln property is their best in class and have had a lot of experience , not only just in the Portland market , but globally in these in these hospitality properties .

Speaker #7: And so , you know , we're two years into the stabilization and we continue to see positive trends in the hospitality in the the repar at the hotel , which ultimately will drive condo sales , where we're we've hired a national firm to that has experience with Ritz Residences to drive a different pricing policy there to get some momentum on the heels of the stabilization of the hotel .

Speaker #7: So anyways , duly noted . On the on the Big Pink . But it is a really an apples and oranges comparison .

Speaker #9: Okay , thank you for the clarification , Tom .

Speaker #7: No no problem Chris .

Speaker #3: There are no further questions at this time . I would like to turn the floor back over to Mr. Capeci for closing comments .

Speaker #7: Yeah , we appreciate everybody's time today . And again , wanted to underscore the the commitment of the management team to continue to drive the repositioning of the company .

Speaker #7: And we're very confident of our ability to refinance our our pending debt maturities . And we look to the fourth quarter call pending .

Speaker #7: Thank you for your time .

Speaker #3: This concludes today's teleconference . You may disconnect your lines at this time . Thank you for your participation .