Ready Capital Corporation

Greetings and welcome to the Ready Capital third quarter 2025 earnings call. At this time, all participants are in a listen-only mode. 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Alborn, Chief Financial Officer. Thank you. 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 to the most directly comparable GATT measure is available in our third 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 Zasmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer Tom Capaci.

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 via rehabilitation of the portfolio yield, growth of our small business lending operations, and management of our 2026 debt maturities. To begin, we continue to make progress in 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. 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 million. 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. 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. At quarter-end post-completion of the sales, along with normal principal paydowns of $410 million, the portfolio totaled 1,120 loans with an unpaid principal balance of $5.4 billion and 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, and some loans migrate to delinquency net of modifications. 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 were resolved via modification or liquidation. As a result, delinquencies increased to 5.9% of the total. Leverage yields in the portfolio increased 10 basis points to 11%. For core loans experiencing negative migration, 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 UPV. In the quarter, the non-core portfolio had an $8 million drag on earnings for $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. 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 four REO, totaling 54 million via foreclosure. Of note, collapsing the majority of our CRE CLOs has provided more flexible asset management, particularly quicker execution of foreclosure deed and lieu transactions to sell liquid multifamily properties. The Portland mixed-use asset represents 14% of quarter-end equity and is segmented into three components. The Ritz-branded hotel with 251 rooms, 169,000 square feet of office and retail space, and 132 Ritz residences. In the quarter, 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. After 24 months of operation, the hotel continues to near stabilization. The office and retail are currently 28% leased and hit break-even. As discussed last quarter, our new property manager, Lincoln Property, a global platform with expertise in hospitality, is executing our business plan. 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. 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. The net loss on the residences was $900,000. In total, the position is nearing break-even on operations, with a net operating loss of $1.3 million with an additional $3.7 million in interest carried. 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, despite pressure from the government shutdown, we continue to see growth opportunities. In the quarter, we originated $175 million of small business administration 7A loans, 50% below our quarterly target. 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. With that being said, the approval of our $75 million warehouse facility and two planned securitizations will open significant capacity for achieving volume growth in 2026. USDA production was $67 million in the quarter. Combined, the small business lending platform generated $11 million in net income, adding 280 basis points return on equity before realized losses to the company's total. This platform continues to be a strong counterbalance to our C or E business with nearly 400 million invested and represents significant tangible equity value. 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. 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. Third, we intend to further accelerate sales as we move out of non-performing loan and REO positions. We expect a combination of these items to de-lever the balance sheet, which may pressure book value depending on the size, timing, and pricing of such actions. And last, we've demonstrated our ability to access the capital markets, including our successful debt issuance earlier this year, and expect new 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 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 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.

Thanks, Tom. For the third quarter, we reported a gap loss from continuing operations of 13 cents per common share. Distributable earnings were a loss of 94 cents per common share and 4 cents 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. The movement was due to a $1.4 billion reduction in the CRE 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%. The interest yield in the non-core portfolio was 3.1%. Second, gain on sale income, net available cost decreased 2.6 million to 20 million. The change was the result of lower USDA and SBA 7A volume. The income was driven by the sale of $130 million of guaranteed SBA 7A loans at average premiums of 9.3% and the sale of $57 million of USDA production 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. Third, operating costs from normal operations were 52.5 million, representing an 8% improvement from the previous quarter. The change was the 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. 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. 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 provision. 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. And last, we reported a $24.5 million increase in the bargain purchase gain related to the closing of the UDF-4 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. Reoccurring 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. Operating expense improvement of $4.6 million offset the decline in revenue. Book value per share was $10.28 at quarter end, down 16 cents from June 30th. The change was primarily due to the dividend coverage shortfall partially offset by the repurchase of 2.5 million shares at an average price of $4.17, which offsets reduction in book value per share by 9 cents per share. Liquidity remained strong with unencumbered assets of 830 million, including 150 million of unrestricted cash. With that, we will open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question is from Doug Harder from UBS. Please go ahead.

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 to run the business? And so, you know, kind of in thinking about how much debt do you need to refinance versus pay down?

Yeah, Doug, right now our current gross leverage is around 3.5. I think we're looking at a turn less than that on a pro forma basis.

And then I guess how do you think about what is the target mix of secured versus unsecured? Andrew, you want to comment on the target mix? 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. With that being said, we've accessed the unsecured markets via the baby bond market over the years quite frequently. So to the extent that market's open, I think we will tap that.

But I expect more secured issuance at least at this point. Great. Thank you. Thanks, Jack.

The next question is from Jade Romani from KPW. Please go ahead.

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, and the slide deck shows 1.2 as the current ratio.

Good morning, Jade. How are you? So the unencumbered assets, we are well covered within that 1.2 range, so the covenant is well in excess of that. The covenant, is the covenant minimum 1.2?

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 a 1.1. So we're well covered.

Oh, okay. So there's no requirement to be at 1.25?

No, it's just the 350 at 1.1.

Oh, 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. 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 dividend and to also buy back stock. Can you please explain the rationale and what the plan is going forward?

Yeah, so, Jade, 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. You know, we currently have $150 million of cash, $150 million of warehouse lines, and organic projected maturities of about $425, $450 million. We're going to supplement that with, you know, we have $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 appropriate policy in that context. But the rank order of liquidity will be to, A, reduce leverage, B, exit low-yielding assets and regenerating the resulting liquidity with a prioritization on the debt, and then subsequently the potential for asset repurchases and then reinvestment of ultimate free cash flow into new loans to rehabilitate the net interest margin.

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. 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 seems quite long given current profitability and allocation of G&A 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? Thank you for taking the questions.

Hey, Jade. We certainly reevaluate the deferred tax asset on an ongoing basis, including at the year-end audit. What I would say is our expectation is that profitability in those businesses grow as origination volume grows to our target levels. And then the second thing I would add is you know, to the extent we monetize those businesses at some point inside the TRS, you know, that tax benefit can be used in that way as well. So there's no limitations on the time period in which they can be used. And we think that, you know, the pro forma profitability of those businesses, as well as the fair value of those businesses in excess of their current book value, you know, provides a window to utilize those over time.

As a reminder, to ask a question, please press star 1. The next question is from Christopher Nolan from Leidenberg Thalmann. Please go ahead.

Hey, guys. On the Portland property, is that being carried at fair value or at cost?

Fair value, the current value of 425.

Okay.

And then... Yeah, please go ahead.

Just one thing. The property is actually broken out into two components. So the condos are being held for sale, and they're at fair value. And then the other two components are held for use, so they're being carried at cost. But both were put on the balance sheet at the time of taking the property area at fair value.

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

No, there's currently leverage on that asset.

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. Bancorp headquarters. And it recently sold for $45 million. It was originally, prior value was $373 million, like five or ten years ago. And, you know, given that, and apparently it's a marquee property in Portland, and I mean, doesn't that, 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.

Yeah, no, I appreciate it, Chris. It really is apples and oranges comparison. And as you're probably well aware, the office sector, especially for, I think the Big Pink was an 80s-ish property, maybe a B, B-minus, and it had very large tenant concentrations and there was an outflow from the poor quality, the BC space into newer space. Actually, we're benefiting from that with the small amount of office we have in the Ritz. But the Ritz is really a hospitality asset, right? A luxury hospitality asset. It's the only, in the Portland market, it's the only luxury branded hotel And most of what you have in Portland is on the luxury end, is more on the boutique side. So this is a one-of-a-kind property. So I think the economic forces that are driving the loss of tenancy in the Big Pink are actually benefiting a brand-new Class A office like the small amount we have. And then the hospitality is completely different. It's really not affected by the office trend. And, you know, as we noted, REVPAR has been increased sequentially in Um, and, um, you know, with, with the new, uh, uh, Lincoln property is their best in class and have had a lot of experience, not only just in the Portland market, but globally in, in these, in these, uh, uh, hospitality properties. And so, you know, we're two years into the stabilization and we continue to see positive trends in the hospitality, uh, in, in the, uh, the rev par at the hotel, which ultimately will drive condo sales where we're, we've hired a, uh, national firm 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. So anyways, duly noted on the big pink, but it is really an apples and oranges comparison.

Okay. Thank you for the clarification, Tom.

No problem, Chris.

There are no further questions at this time. I would like to turn the floor back over to Mr. Capese for questions. closing comments.

We appreciate everybody's time today and again wanted to underscore the commitment of the management team to continue to drive the repositioning of the company and we're very confident of our ability to refinance our pending debt maturities and we look to the fourth quarter call pending. Thanks for your time.

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