Ready Capital Corporation

Greetings. Welcome to Ready Capital's second quarter 2025 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow today's formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, today's conference is being recorded. At this time, I'll now turn the conference over to Andrew Althorne, Chief Financial Officer. Andrew, you may begin.

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. 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. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GATT 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 GATT. A reconciliation of these measures for the most directly comparable GATT measure is available in our second quarter 2025 earnings release and our supplemental information which can be found in the Investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Zauser, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer Tom Capaci.

Tom Capaci Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. In the second quarter, we completed three initiatives to continue the repositioning of the company's balance sheet coming out of this CRE cycle. the financial benefit of which will be visible in the second half of the year and beyond. First, as part of the broader strategy, each loan in both the core and non-core portfolios is evaluated to determine whether the NPV of asset sale is more accretive to improving net interest margin by disposing of low-yield assets and reinvesting in new originations versus traditional on-balance sheet asset management strategies such as loan modification. In this regard, We completed our first bulk sale earlier this week, selling $494 million of legacy multifamily bridge assets, generating net proceeds of $85 million. While the transaction settled in the third quarter, it reflects a sale process initiated in the second. The pool included 73% non-core, 27% core, 40% were delinquent, 33% risk-rated 4 or 5, and 92% non-accrual. An additional $26 million of REO included in this trade is expected to settle by mid-August. This transaction is strategically significant, eliminating 100% of the 2021 vintage syndicated loans while allowing potential upside through retention of a preferred return if certain performance targets are met by the buyer. The pro forma financial benefit is twofold. An immediate increase of $0.05 per share per quarter representing the removal of of the negative carry associated with these assets, and longer term, an additional two cents per share per quarter from the reinvestment of the equity into market yielding loans. In the third quarter, the cumulative loss from the transaction will flow through distributable earnings with no material expected impact on book value per share as the transaction was reserved in the second quarter. Second, we took ownership of the Portland, Oregon mixed use asset, which includes a Rich Carlton Hotel and branded residences along with Class A office and retail space through a consensual transaction that closed on July 21st. We avoided a lengthy and costly foreclosure process with a net cash outlay in the third quarter of $10 million. Since taking title and assuming operating control, we're moving quickly to stabilize the asset. We partnered with institutional property manager Lincoln Property Company and are evaluating residential brokers and RIT's resident sales strategies. From a performance standpoint, in the second quarter, rev par at the hotel was $192. The retail component is 100% occupied. The office is 23% leased. And to date, 11 of the 132 residences were sold at an average price of $1,123 per square foot. The negative carry from the asset was $5.3 million, or $0.03 per share, for the quarter. ReadyCap fully intends to provide financial and operational support to maximize the value of this premier hospitality asset in the Portland market. Third, we took steps in the capital markets to enhance liquidity and increase warehouse capacity to support loan origination. In our CRE business, we collapsed two of the five outstanding CRE CLOs, improving advance rate 7%, generating $71 million in proceeds with nearly 100 basis point improvement in financing costs. In our SBA business, two of the three warehouse lines pending approval with the SBA were approved, adding $75 million of additional warehouse capacity that is expected to fund over $400 million of 7A production. Additionally, we closed a $100 million USDA warehouse facility for the second $100 million facility anticipated to close in the third quarter. These two facilities will facilitate the ramp in USDA volume to our $300 million annual target. Collectively, these three actions, sale of underperforming loans, taking ownership of the Portland asset to accelerate its stabilization, and expanding our funding capacity, generated $221 million of liquidity, providing capital for new loan originations to rebuild our NIM. As of the quarter end, the CRA loan portfolio totaled $6.1 billion, now clearly segmented into two parts, a $5.4 billion core portfolio consisting of legacy loans, favoring on-balance sheet hold to maturity asset management strategies, and a $695 million non-core portfolio consisting of lower yielding assets where asset management strategies favor accelerated liquidation. In the core portfolio, 527 million of payoffs and liquidations reduced the portfolio 8% in the quarter. As expected, negative credit migration in the portfolio was muted, with only 17 loans totaling $71 million transitioning to 60-day plus delinquency, 60% of this 50 basis point increase in the 60-day delinquency number was due to quarterly decline in the portfolio balance. Additionally, we modified 14 loans totaling $250 million with a 14 basis point decline in expected yield on those assets. Regarding the earnings impact of the core portfolio, the leverage yield decreased 20 basis points quarter over quarter to 10.9%. producing $43 million of net interest income, or $0.26 per share. Several quarters of reduced originations and loan payouts have reduced our CRE portfolio over 30% from its $10.5 billion peak in the second quarter of 2023. As discussed previously, our bridge portfolio is primarily financed via the issuance of static CRE CLOs with industry-tight CLO triggers where weakening collateral performance resulted in loan payoffs reducing senior bonds rather than providing capital for reinvestment. In turn, relative to the peer group, ReadyCap experienced more rapidly leveraging with less free cash flow to make loans. After a prolonged focus on stabilizing the portfolio, liquidating underperforming assets, and collapsing five of our eight CLOs, we anticipate reentering the origination market in the third quarter. Originations will focus on high-quality multifamily bridge loans underwritten at a lower LTV and healthy in-place debt yield designed to rebuild the core portfolio and facilitate our return to the CLL market in early 2026. Current lending margins of SOFR plus 275 to 300 and a CLL AAA market spread under 150 basis points support projected retained yields of 13 to 15%. Additionally, we continue to leverage our external manager Waterfalls infrastructure to also allocate capital to more liquid CRE debt securities. In our non-core portfolio, we have met 78% of our second quarter disposition targets, of which 3% settled in the quarter, with the remaining 97% closing post-quarter end. In the second quarter, 9.6 million of loans were liquidated at 105% premium to our mark, generating 3.8 million of liquidity. Post-settlement of the bulk sale, the non-core portfolio was reduced by an additional 52% to 333 million of carrying value consisting of 39 loans with an average price of 79. The quarterly yield on the non-core portfolio was negative 10.7% resulting in a cost of 5.3 million or negative 3 cents per share However, the continued liquidation of the non-core portfolio will minimize its financial drag. As of today, the combined non-core and REO portfolios totals 12% of the company's investments down approximately 25% from the beginning of the year. In our SBA business, as anticipated from the prior quarter's earnings call, quarterly origination volume decreased to $216 million due solely to capitalist constraints as we awaited on approval of increased warehouse capacity from the SBA. In addition to the approvals received to date, we anticipate an additional $100 million in warehouse capacity currently pending SBA approval. A planned future securitization of retained 7a unguaranteed interest would provide additional liquidity to fully fund the business. In 2024, we originated $1.1 billion of SBA 7a loans, and the platform has continued to carry the infrastructure and cost to originate more. Our current SBA pipeline, in closing, totals $173 million. Now, in terms of the outlook, there are three primary items that we expect to contribute to earnings improvement. First, the increase in new originations with capital generated from the continued liquidation of the non-core portfolio and other lower-yielding assets to further growth in net interest margin. Second, stabilization of the Portland mixed-use asset, important for both reducing the current negative financial drag and to facilitate liquidation of the hospitality, office, and residential components. And third, a return of SBA 7-day lending volumes to over $325 million per quarter and the long-awaited entry of ready capital to the USDA market at scale. We expect modest earnings growth in the back half of 2025 from these initiatives relative to the first and second quarter results. Assuming no significant deterioration in the macro environment, We expect to maintain our current dividend level until our earnings profile warrants an increase. With that, I'll turn it over to Andrew to go through quarterly results.