Ready Capital Corporation

Greetings and welcome to the Ready Capital Corporation second quarter 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Andrew Ahlborn, 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-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. A reconciliation of these measures to the most directly comparable gap measure is available in our second quarter 2026 earnings release and our supplemental information, which can be found in the investor section of the Ready Capital website. I will now turn it over to Chief Executive Officer Tom Capasse.

Thank you, Andrew. Good morning, everyone, and thank you for joining today's call. The second quarter of 2026 demonstrates meaningful progress in our balance sheet repositioning strategy. At this juncture, we do not anticipate further large portfolio sales as our completed sales were successful in both raising liquidity and repositioning legacy assets. We have also completed several important financings and believe that multiple initiatives are coming together to meet our corporate obligations as we build towards sustainable profitability. We've been organizing our work this year around four priorities. First, strengthening liquidity to generate free cash flow in excess of our 2026 debt maturities. Second, resolving non- and sub-performing CRE assets to eliminate earnings drag. Third, transitioning to a lower-cost business model by divesting non-core business lines and integrating our CRE lending with our external manager waterfall. And fourth, focusing on growth in our small business SBA 7A lending. On liquidity, we are nearing completion of the initiatives we started at the end of 2025. Since our first quarter earnings, we have completed the following actions. First, the sale of our $167 million construction portfolio, generating $64 million of net liquidity and removing $172 million of future funding obligations. Second, the securitization of $158 million of unguaranteed SBA 7A loans at a 92% advance priced at SOFR plus 240 basis points. The transaction generated $25 million of net liquidity and $500 million of additional funding capacity for 7A production. Third, the disposition of $445 million of CRE assets for net liquidity of $85 million. And fourth, the successful refinance of the Portland Ritz asset into a CPACE loan. These items, together with prior loan sales and portfolio runoff, have generated approximately $1.9 billion of cash has been used to pay down $1.7 billion of asset level and corporate debt. We now have achieved approximately 81% of our target liquidity objective. Three initiatives to complete the final leg of our liquidity plan are underway. Optimizing the financing of approximately $950 million of CRE loans, the sale or financing of our $118 million joint venture position, and the second half anticipated runoff of approximately $900 million of CRE loans. Additionally, we continue to evaluate the potential refinance of a portion of the October maturity, which will help to further accelerate earnings recovery as we move into 2027. On the CRE portfolio, following this quarter's actions, the legacy loan book stands at approximately $2.7 billion across 172 positions, with an additional $218 million of CMBS exposure. 37% or roughly $1 billion of the loan book comprises sub and non-performing assets, whose current status produces a greater net present value for active asset management on our balance sheet versus sales in the secondary market. We continuously monitor assets to determine the best path forward, maximizing value, which may include sales. The sub and non-performing loans have an average duration of 11 months, average mark-to-market LTVs of 82%, and are marked at 85%. The current equity held in sub and non-performing loans is $436 million. In our performing loan book, totaling $572 million in equity, leveraged yields equal 10.1%. As of quarter end, we had $588 million of REO across 24 properties. The risk property remains our largest REO asset, representing 66% of total REO and approximately 22% of quarter end stockholders' equity. We believe our stabilization strategy is working. We now have sold 50 condominiums and have three under contract, bringing the sellout to 40% of the total. Sales progress remains consistent with our phase strategy of building momentum toward a full sellout. On the hotel, we continue to realize linear improvement in operating performance. Hotel NOI was 1 million in the quarter. Trailing 12-month occupancy rose 10% to 52%. ADR decreased 4% to $468 and room rev par increased 20% to $244 compared to the same period last year. As we move forward, we will determine the optimal path forward for the property, whether that's continued stabilization or monetization. The current earnings drag across our non and sub performing in REO was 29 cents per share in the quarter. In our SBA 7A platform, capital constraints at the start of the quarter resulted in second quarter origination volume of 82 million, which is well below production capacity. We've addressed those constraints With the completion of our SBA 7A securitization in June, which we believe will provide capital for approximately $500 million of incremental go-forward volume, and we intend to accelerate our capital levels through more frequent SBA 7A ABS offerings. Since completing the securitization, we have originated $43 million of 7A loans and have a current money-up pipeline of $78 million. We expect steady growth towards our annual target of $1.5 billion originations. Turning to expenses, we are executing a targeted cost optimization program to align our cost structure with our go-forward business model. This includes targeted organizational efficiency initiatives, divestiture of non-core businesses and assets, and deeper integration of our CRE lending platform with Waterfall. We expect these initiatives will materially lower our operating expense ratio and improve operating leverage. In summary, we remain equally focused on the completion of our liquidity plan and the action items needed to return the business to profitability. But we still have steps to complete in order to meet our 2026 corporate obligations, concurrent actions to accelerate resolutions, reduce operating costs, and increase capital deployment into new investments that focus on our SBA 7A and CRE platforms, position the company for improvement as we move forward. With that said, I'll now turn it over to Andrew for a detailed review of the quarterly results.

Thanks, Tom. Second quarter earnings and balance sheet reflect a continuation of the repositioning plan Tom described, and importantly, a deacceleration in the pressures that have weighed on our results. For the quarter, we reported a gap loss from continuing operations of 63 cents per common share, an improvement from the $1.25 that's loss in the first quarter. Distributable earnings were a loss of 47 cents per common share and a loss of 24 cents per common share excluding realized losses on asset sales compared to losses of $1.33 respectively in the prior quarters. At quarter end, book value per share was $6.83 versus $7.43 at March 31st. A decline of 8.1% which is a substantial deceleration from the 15.5% and 14.5% per share declines in the two prior quarters and reflects the wind down of the loan sale program. The change was primarily due to approximately 23 cents per share of realized losses on asset sales, approximately 12 cents per share of net loan loss provisioning and valuation allowances and the balance from the operating loss in the quarter. The net loss from normal operations was impacted by the following revenue and expense items. On the revenue side, reoccurring revenue was $15.3 million compared to $16.2 million in the prior quarter. The change was driven by a $8.7 million improvement in the net interest loss, offset by a $2 million reduction in gain-on-sale revenue, and a $7.5 million reduction in other reoccurring revenue. The improvement in the net interest loss was due to a $445 million reduction in secured borrowings and continued corporate debt pay down, more than offsetting $4.3 million in lower interest income, which settled at $77.4 million as the CRE portfolio continued to contract. We expect net interest income to continue improving as non-approval loans and REO are resolved. Asset level and corporate debt are reduced, and capital is recycled into current market yield. On the expense side, operating expenses improved to $48.7 million from $67.7 million. This was primarily due to normalization of servicing expenses to $3.4 million from $15.4 million, which previously included $6.7 million of non-recurring servicer advance reimbursements tied to the first quarter CLO collapses. Additionally, the net loss on the risk position improved 1.2 million in the quarter. Other items included in earnings improved 80.2 million quarter over quarter to a loss of 68.3 million. The improvement was primarily due to lower realized losses, which equaled 27.9 million and lower loan loss reserves and evaluation allowances, which equaled 20.1 million. Regarding liquidity and capitalization, we ended the quarter with $124.1 million of unrestricted cash. Total assets declined to $6.26 billion from $6.31 billion on March 31st. Total leverage was three times trending towards our two and a half times target, and we held $690 million of unencumbered assets at quarter end. With that, we will open the line for questions.

Thank you. If you'd 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'd 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 key. One moment please while we poll for questions. Our first question comes from the line of Crispin Love with Piper Sandler. Please proceed with your question.

Thank you. Good morning, everyone. First, on meeting the fourth quarter debt maturities, can you share just what else needs to be done to be able to do that? Is it driven by continued sales of loans? And then just how close are you to accomplishing that? And then what are you targeting for the remainder of 2026 as it relates for and CRE and ROE dispositions and runoff.

Just to contextualize that, Crispin, we embarked on a liquidity plan in the fourth quarter and then through organic liquidity, which is portfolio runoff and supplemented by loan sales, we raised almost $2 billion, which was used to pay down $1.7 billion of corporate debt and secured debt. So as of today, we're in what I characterize as the eighth inning. And the only major difference here is that we are no longer budgeting loan sales at this stage, maybe opportunistically at the loan level here and there as part of an asset management strategy. But the balance of what we're looking at is the optimization of financing on a $950 million of performing and non-performing loans and runoff on $900 and a potential sale or financing on a $118 million joint venture position. There's a few other incremental liquidity initiatives, but we're confident that those three key drivers, absentee loan sales, which are not currently budgeted, will generate liquidity in excess of the 2026 remaining maturities.

Okay, that's helpful. And then just on the Portland mixed-use property, Tom, I believe you discussed potential monetization for that property. Is that beyond the Ritz hotel and residences? And then can you discuss the process there and when you might decide if that's the right path for the property and what you need to look at to see if that's the right path?

Yeah, I'll give a high level, and I'll have Dom, our chief credit officer, comment. But as you may recall, there's three components to that mixed-use project. One is the, obviously the core is the Rich Carlton Hotel, which continues to meet its stabilization target as measured by, you know, rev par occupancy, et cetera. And, you know, one of the big decisions we made there, which has been very successful, is working with Marriott to reduce the ADR to increase occupancy. So that strategy, that is about... 50% of the value and that continues on a trajectory. The second component which is about 40% is the condos and we've embarked with Christie's on a four phase project going back to earlier late last year. We're in phase two now and we're on target in terms of both pricing and number actually ahead of schedule on number of units sold with those under contract, plus what we've sold, we're at about 40% at this stage. And finally, there's the office, which is about, I think, 26% occupied, which we're continuing to look at. We're getting some tenant traffic there, but that's only 10%. So all of that together is we have a very aggressive plan, which is on or ahead of target. And so that will lead, to answer your question, that will lead to Thank you. Once again, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Jade Romani with KBW.

Please proceed with your question.

Thank you very much. Can you say more about the $118 million joint venture investment? What is that exactly?

Yeah, Jay, that was historically, ReadyCap had purchased equity interests, CRE equity, from the external manager who had a strategy around accessing those investments at a very cheap levels in the context of the fair value options on CMVS deals. So that was in turn converted into a fund was raised around that strategy and ReadyCap converted its interest in those CRE equity investments into an investment in the fund. So it's essentially an LP interest in a waterfall managed CRE fund, which is currently unencumbered.

Okay, but I assume that the underlying investments have leveraged on them, or do they not?

Yes, they're just traditional CRE equity investments. There's about 30 line items in the portfolio.

So this can be leveraged, this investment?

Yes, it's a straight-up LP interest in a fund that's in its harvest period, so it's very short duration. And so there's, as you probably know, there's a whole growth area in the banking industry and non-banks with these fund finance, fund financing on LP interest as well as a secondary market for sale. So that's what we've been evaluating in the context of this being a good asset that's unlevered.

And the $2.7 billion CRE loan book, how much leverage both Secured and Unsecured is currently on that portfolio.

Andrew, you want to comment?

Yeah, so on the asset level side, to the extent not securitized, you know, average advance rates through there are in the low 60s. So the majority of that book is levered with the exception of the unencumbered, portfolio, which, you know, on the loan side is roughly 300 or so million. And then on the securitized side, it's really, given all the CLOs have been collapsed, it's really limited to our, you know, our legacy fixed rate product, as well as, you know, some of the small balance commercial loans we bought, you know, at the start of the company. So typically the, you know, the warehouse leverage advance rates are in the low 60s.

But in aggregate, that doesn't include the corporate leverage. So the 60s advance rate goes up, including the corporate leverage. So what's the total leverage that you would associate with the $2.7 billion portfolio?

Yeah, so the corporate leverage on the secured side, the majority of that secured debt is sort of equity pledges of entities throughout the structure. and the majority or a good portion of that equity is in DRE assets. That's really how it's done. It's not a direct pledge of that DRE collateral.

So, I mean, just from my vantage point as an outsider looking at this, it seems challenging to raise and many more. So, I'm surprised to hear that the Loan Asset Sale Program has been, that you're not going to be doing that. I would have thought you'd continue to do that as the way to make sure you meet these maturities.

Jay, I think, and I totally understand the comment, What we constantly evaluate is the discount for sale in the secondary market versus on-balance sheet strategies. And we're talking about a smaller number of line items now. The billion dollar non-performing portfolio, for example, is down to 44 assets. So it's very finite. And so we have very strong, away from loan sales, we have very strong financing counterparties. There's a lot of and many more. pay off the debt with a comfortable margin.

Okay. And so post all of this, do you think the company can get back to profitability based on its existing capital base, whatever that will look like after all of these remaining actions are effectuated?

Yes. And it's a very... straightforward answer. As you know, in one shade of gray or another, many in the sector are undertaking this exercise. But with respect to Ready, the first is the recycling of the legacy book, which is $2.7 billion, and we've changed the characterization of the portfolio, performing, non-performing, to enable analysts and investors to track the success there. but I do point out that the duration of that book is the billion dollars of non-performing is only 11 months. So it's a very quick runoff and 44 assets. The other component of the legacy book obviously is the 24 REO units of which the Ritz is the largest and those have very defined relatively short duration runoff too. Big part, but the first leg of the stool on the reboot of the earnings is the runoff of the legacy book, which we're highly confident that it is, you know, it's a short duration and will be realized. And we're also looking at joint ventures and other ideas, you know, quasi-securitizations to accelerate that effort. The second thing is obviously the reboot, the Now that we've fixed the liquidity and warehouse line structure in our SBA business, that is obviously highly profitable, and that will be the ramp in originations there, will be the second leg of the stool. And finally, OpEx. We expect through three approaches. One is just a natural reduction in staffing and vendors associated with the portfolio runoff. to the second thing being divestiture of ancillary businesses, all of which are in flight. And the third is integration with the external managers, CRE lending businesses to source investments. Those three things will result in a targeted 25 to 35% reduction in OpEx. So those are the three legs to the stool, the runoff of the legacy book, focus on the and doubling down on the SBA business and the OpEx right sizing in that context. which will enable us to return to profitability.

Okay, thank you for taking the questions.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Capasse for any final comments.

We appreciate everybody's time today and look forward to next quarter in terms of final updates on our repositioning plan. Thank you, everybody. Have a good day.

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