Ready Capital (RC) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Quarterly GAAP earnings per common share were a loss of $0.21, while distributable earnings per common share were$ 0.07 [16] - Distributable earnings less realized losses on asset sales were $0.19 per common share, equating to a 5.8% return on average stockholders' equity [16] - Revenue from net interest income, servicing income, and gain on sale increased by$ 6.2 million or 9% quarter-over-quarter to $73.7 million [16] - The levered yield in the portfolio increased to 16.3% due to the liquidation of$ 140.1 million of under-yielding assets and a higher percentage of accrual loans [16] - Book value per share decreased by 3.5% to $12.97 per share, primarily due to mark-to-market or realized losses on loans and REO liquidation [20] Business Line Data and Key Metrics - Origination activity in the CRE loan business totaled$ 256 million in the quarter, with 61% in transitional loans and 39% in Freddie Mac loans [7] - The small business lending segment saw SBA 7(a) loan originations grow 80% year-over-year to $217 million, putting the company on pace to achieve a$ 1 billion target run rate by the fourth quarter [9] - The M&A portfolio totaled $1.1 billion across 81 assets as of June 30, with 60-day plus delinquencies improving by 910 basis points to 15% [8] Market Data and Key Metrics - Office loans constituted only 4% of the portfolio but represented 16% of delinquencies, with 60-day plus delinquencies at 26% compared to multifamily at 6% [5] - The company's portfolio was 82% concentrated in mid-market multifamily, driven by nationwide affordability gaps and rental demand [9] - The company's office exposure net of specific reserves was reduced to 4% of loan exposure, with plans to reduce it further to 3% by year-end [8] Company Strategy and Industry Competition - The company is focusing on active asset management, reallocation of low-yield assets, adding accretive leverage, exiting residential mortgage banking, and growing the small business lending platform [4] - The company closed two strategic acquisitions in the quarter to support origination growth in the small business lending segment through expanded product offerings and increased market share [10][11] - The company aims to achieve a$ 1 billion target run rate in SBA 7(a) loans by the fourth quarter and eventually reach a 1.5 to 2 billion run rate in the next 12-24 months [34] Management Commentary on Operating Environment and Future Outlook - The company believes that multifamily credit fundamentals are bottoming, with green shoots in the form of rate declines and improving transaction volumes [14] - The company expects to achieve a 10% annual return target through strategic initiatives, including portfolio cleanup, reinvestment, and organic growth [14][29] - The company anticipates that the full financial effects of its initiatives will be felt by 2025, with some benefits expected in the remainder of 2024 [30] Other Important Information - The company repurchased 2.3 million shares at an average price of $8.61 during the quarter [20] - The company has$ 226 million of unrestricted cash and an additional $40 million in committed but undrawn borrowings [20] Q&A Session Summary Question: Details on loan sales in the quarter - The company sold approximately$ 450 million of loans, with $20 million in realized losses. The sales involved 15 individual buyers, mainly regional investors and local groups [21][23] - The remaining$ 130 million in loans to be sold are mostly 60-plus days delinquent, with office loans marked down to 25% and multifamily loans marked down slightly higher [25] Question: Core earnings trajectory and 10% ROE target - The company provided a bridge to dividend coverage, focusing on portfolio cleanup, reinvestment, and organic growth. The full financial effects are expected to be felt by 2025 [27][29][30] Question: Appetite for further SBA originator roll-ups - M&A opportunities in the SBA channel are limited due to the small number of non-bank licenses. Growth will primarily come from acquiring specialist origination teams [32][33] Question: Long-term growth in SBA lending - The company aims to grow its SBA 7(a) loan run rate to 1.5-2 billion in the next 12-24 months, driven by leadership in the small loan component and fintech growth [34][35] Question: Risks to earnings ramp and credit migration - The primary risk is negative credit migration in the multifamily book, though the company believes the worst is behind them [39][40][42] Question: Buybacks and capital allocation - The company has $42 million left in its share repurchase program and will consider buybacks depending on stock price and other capital needs [45] Question: Earnings excluding tax gains and delinquency rates - Tax activity in the quarter was related to loan sale losses, and the company expects to cover the$ 0.30 EBITDA by 2025 [49][50] - Delinquency rates declined primarily due to modifications and natural credit improvement, with minimal impact from loan sales [52] Question: Valuation allowance and rent regulation exposure - The majority of the CECL reduction was related to loans transferred to held for sale, and the company does not expect a drastic reduction in CECL reserves [56][57] - The company has minimal exposure to rent regulation, with less than 1% of the portfolio affected [58][59] Question: Strategic implications of Funding Circle acquisition - Funding Circle's platform complements the company's existing technology, with opportunities for cross-selling, cost reduction, and bolt-on products [60][61][62]