Ready Capital Corporation (RC) 2026 Q3 法說會逐字稿

Greetings, and welcome to the Ready Capital third quarter 2026 earnings Call. (Operator Instructions)

It is now my pleasure to introduce 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 more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss certain non-GAAP measures, which we believe to 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 in the most directly comparable GAAP measure is available in our third quarter 2026 earnings release and our supplemental information, which can be found in the Investors 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. In the third quarter, we substantially completed the balance sheet repositioning and liquidity plan we laid out in the fourth quarter of 2025. After the final November payment we expect to make at maturity, we will have repaid $649 million of corporate debt. Along the way, we reduced secured asset level financing by $1.7 billion and resolved through runoff or sale $2.7 billion of legacy CRE loans, predominantly from the 2021 and '22 vintages.

While the plan was achieved within the parameters we set, it came with a cost. Generating $2.3 billion of liquidity reduced book value per share year-to-date by $2.35 to $6.44 at September 30 and required us to reduce the dividend to $0.01 per share to preserve liquidity. Looking forward, our focus will shift from the liquidity plan to continued resolution of the remaining legacy CRE loan book and rebuilding earnings. Our near-term target is to bring distributable earnings and cash flow from operations closer to breakeven.

Quarter over quarter, distributable earnings, excluding realized losses, improved $0.03 per share to a loss of $0.21 per share. To close the gap, we are prioritizing four action items: first, growing revenue in our capital-light businesses led by our SBA 7(a) platform. The June securitization created funding capacity for $500 million of originations, which we believe will allow us to ramp toward our immediate annual target of $1 billion with a long-term target of $1.5 billion.

In the third quarter, originations rose 33% to $109 million, and gain on sale revenue grew 56% to $6.1 million. We expect the incremental revenue from increasing volume to our immediate target level will be approximately $8 million per quarter. Our current 7(a) pipeline is $150 million.

A natural complement to our SBA 7(a) is unsecured conventional working capital lending, smaller balance, shorter duration loans that we originate and sell on a servicing retained basis, requiring little balance sheet capital. Our fintech iBusiness has originated this product for 10 years, and there is strong demand from private credit investors.

Gain and sale income plus origination fees from this product rose 23% to $3.2 million quarter over quarter on $61 million of originations. We believe we can scale this production approximately 2x in the new year, which would add $3 million in incremental quarterly revenue. Together, we expect these businesses to be our greatest growth opportunity in 2027.

Second, improving the earnings contribution in our legacy CRE portfolio. With our 2026 repositioning plan executed, our asset management team is pivoting from selling loans at discounts to generate liquidity to stabilizing non-performing loans and REO.

In sum, our asset managers are able to employ more flexible asset management strategies to improve NOI and value at exit. As assets stabilize, they generally move from a carrying cost to a source of income or resolution which reduces the earnings drag from non-performing assets.

Third, we continued to make progress at the Ritz-Carlton Portland. Hotel NOI net of replacement reserves improved quarter over quarter to $1.6 million, driven by increased occupancy and strong high season performance. Trailing 12-month RevPAR improved 35% year over year to $271. Condominium sales were slower in the quarter with 52 units or 39% of the building sold. We have an additional two units under contract.

And fourth, divesting non-core businesses and reducing operating expenses. We expect to announce specific non-core business divestitures in succeeding quarters and with respect to operating expenses, anticipate reducing spending in non-revenue-producing businesses and rightsizing staff to match a smaller balance sheet.

We believe we can materially reduce our operating expenses without impacting operations or revenue-producing objectives. Collectively, we expect these four actions will bring distributable earnings, excluding realized losses closer to breakeven, with future earnings growth beyond these levels determined by the turnover of a legacy CRE loan portfolio, which I'll now discuss.

The CRE loan portfolio is now $1.95 billion and is segmented into three parts based on asset management strategy. First, performing loans, which comprise 98 positions with a carrying value of $1.1 billion, a weighted average LTV of 83% and a weighted average coupon of 7.9%. The levered yield of this portfolio is 11.5%. This group is 83% multifamily. Within it, we expect that 29 loans totaling $391 million will pay off at par in 2027, generating approximately $97 million of net liquidity.

Second, we expect 14 assets with a carrying value of $318 million to be resolved by the end of 2027, generating approximately $109 million of net liquidity. This portfolio generated $0.5 million of net income in the third quarter, and we believe that full reinvestment of the equity at market yield would generate improvement of $3 million in net income per quarter.

Third, non-performing loans with longer-term workouts comprised 28 assets with a carrying value of $515 million. For this population, we believe value is best maximized by stabilizing operations before exit rather than selling at today's prices.

The current quarterly earnings drag associated with this portfolio is $1.7 million. The portfolio is 93% multifamily and has an average carrying value of $18.4 million.

In addition to the non-performing loans identified for long-term hold, there are five REO assets totaling approximately $57 million in carrying value, which we believe will also benefit from a longer-term hold strategy, allowing sufficient time to stabilize operations and for market --

While we undertook asset sales early in the credit cycle, which reduced the relative size of the non-performing loan book and have active management plans in place for all 28 remaining non-performing assets, the recent increase in the 10-year Treasury has created another leg down in multifamily transaction volume and prices, potentially extending realizations.

Additionally, we believe that continued focus on increasing liquidity and reducing leverage remains paramount under current market conditions. This framework makes the path forward measurable. The performing book supports current income. The resolution segment drives near-term liquidity and earnings recovery, and the workout segment is where patient asset management can recover value over time.

With that, I'll turn it over to Andrew for a detailed review of the quarterly results.

Thanks, Tom. Third quarter results reflect a substantial completion of our 2026 liquidity plan and a continued deacceleration in the pressure on book value. For the quarter, we reported a GAAP loss from continuing operations of $0.40 per common share, an improvement from the $0.63 loss in the second quarter. Distributable earnings were a loss of $0.53 per common share and a loss of $0.21 per common share, excluding realized losses, compared to losses of $0.47 and $0.24, respectively, in the prior quarter.

The higher distributable loss reflects $53.9 million of realized losses primarily from resolving assets that were already in part reserved. Those resolutions released $33.1 million of combined CECL and valuation allowances. At quarter end, book value per share was $6.44 versus $6.83 at June 30.

The quarter-over-quarter percentage decline in book value is a substantial reduction from the declines in the two previous quarters. The change was primarily due to a $0.17 per share loss on operations, a $0.14 per share loss on loan sales, and a $0.06 per share decline due to additional reserves. The $26.9 million net loss from normal operations before tax, which can be found on slide 14 in the earnings deck, improved 33% quarter over quarter.

On the revenue side, recurring revenue was $20.7 million compared to $15.3 million in the prior quarter. Net interest income improved $6.4 million to $3.4 million. Interest income rose $6.4 million to $83.8 million, driven by improved collections on non-performing loans while interest expense was broadly flat at $80.4 million.

Gain on sale revenue was $11.2 million, of which $6.1 million came from SBA 7(a). We expect net interest income to continue improving as non-accrual loans in REO are resolved, corporate debt is reduced, and capital is recycled into SBA and current yield CRE.

On the expense side, operating expenses were $47.6 million compared to $55.5 million in the prior quarter. Compensation and benefits declined $1.1 million to $21.8 million. Servicing expense was $7.6 million compared to $3.4 million in Q2 due to increased costs on SBA loan deferments and a quarter-over-quarter reduction in protective advance recoveries. Fixed operating costs improved to $10.3 million.

On the Portland asset, the net loss, inclusive of financing costs, improved to $4.2 million as NOI from hotel operations turned positive and the carry-on condos was reduced due to continued sales. Other items included in earnings totaled a loss of $35.4 million compared to a loss of $58.3 million last quarter. These included $53.9 million of realized losses and charge-offs, net of tax, $23 million of reserve recoveries, and approximately $4.5 million of additional non-cash tax and one-time expenses.

Regarding liquidity and capitalization, we ended the quarter with $157.1 million of unrestricted cash, up from $124.1 million at June 30. Total assets were $5.78 billion compared to $6.26 billion in June. Secured borrowings improved $185 million to $1.69 billion, and during the quarter, we renewed our largest CRE and SBA warehouse facilities.

We also moved $161 million of loans from held for sale back to held for investment, consistent with our shift away from portfolio sales. Total leverage was 2.8 times, an improvement from 3 times and approaching our 2.5 times target. We held $606 million of unencumbered assets at quarter end.

With that, we will open the line for questions.

(Operator Instructions) Christopher Nolan, Ladenburg Thalmann.

Andrew, assuming the Portland property is held at cost, how much of the loan loss allowance accounted for that particular asset?

Sorry, in the current quarter?

Just what's the balance sheet loan loss reserve for that? How much does Portland account for the loan loss reserve?

Yeah, well, remember, when we took it REO, we wrote it down to it as is value per the appraisal. And so, it is no longer sitting in the allowance. It's sitting in the REO bucket, and it's been written down to its value. And the value you've seen decreasing is primarily due to the condo sales.

Got it. And then, Tom, thanks for the comments on the going forward. For the SBA business, how much are you going to look to increase your equity allocation to that business? I think right now it's roughly 13%.

Platform, broadly speaking, but ideally, we get it to around 25% to 30% over a 12 to 24-month period.

And then final question is, when are you hoping to get to your goal of breakeven distributable? I think I heard year-end '27, but is that correct?

Yeah. Andrew, you want to come in on the timing?

Yeah, sure. If you look at the earnings bridge that Tom prepared in his opening remarks, the revenue items he described account for closing the gap and current normal operations by around 50%. And you will see SBA 7(a) volume ramp from its levels in the third quarter to our $1 billion run rate sometime in early '27. We believe the working capital or loans that Tom also described is an early '27 event. So I think you will start to see the revenue items increase in the early parts of '27.

The other portion of the shortfall is going to come from reducing the operating expenses in the company. In Tom's remarks, he sort of described two different components of that reduction. The first are just right-sizing the company to a balance sheet that is smaller today. You will see those rightsizings occur in the fourth quarter with the full benefits of those hitting earnings in full in the beginning parts of '27.

The other component of it is divesting of sort of non-core operations that have weighed on earnings over the last couple of quarters. Those transactions take a little bit of time. We think a portion of those should get completed in 2026 and some of them in '27. The reason for going down that path rather than sort of an immediate reduction in those operations is we believe we can recover some of the book value associated with those assets and not recoveries in excess of what it cost us to carry them.

So we think we'll make material progress as we go into '27 on the earnings. And then the other part of it is just the turnover of the CRE portfolio, which will track the outline we put in the supplemental information.

Jade Rahmani, KBW.

Thank you very much. I was wondering if you could give your thoughts on the recent spike in interest rates and if it pressures credit incrementally.

Yeah, I mean, I'll defer to Dom Scali, our Chief Credit Officer, in terms of some of the specifics. But just broadly speaking, the rate increase has reduced transaction volume and probably resulted in another leg down in multifamily prices of around 5% to 10%. But at this point, our portfolio is very -- the legacy book is very concentrated, and so, Dom, maybe you could just be -- on the broader market Yeah, just comment on it.

Yeah. Yeah, sure. Good morning. I think, listen, obviously, the transitional book and the securitized book. Given that transitional loans flowed over SOFR and the securitized book is match-funded, we're more insulated there.

I think the real issue is sort of on exits, right, with 10-year at 5% earlier in the year. It does put stress on refis. And what typically happens is on resolutions where borrowers are looking for refinance proceeds or potentially selling assets, that could delay resolutions. But we are encouraged to see that sort of it's sort of on the way down. I think it was at 4.9% as of yesterday, but obviously, the elevated rate environment may cause some delays on some of the takeouts.

Okay, thank you very much. And then the supplemental shows about 10 theory NPL positions with around $330 million in multifamily you expect to foreclose on. So I was wondering if you could give any color as to what the current debt yield is on in-place NOI and how much capital you think would be required to stabilize these assets.

Dom, you want to comment on that?

Yeah, sure. This is Dominick again. So as Tom mentioned in his remarks, we have a sort of long-term strategy for a bucket of assets. We think, I think it's roughly 28 assets. Just about $0.5 billion in CV. That portfolio is probably 70% occupied. I'd say debt yield is probably 2.5%.

I think the strategy there is given that most of it, over 70%, is located in markets that are currently sort of bottoming out, for example, Phoenix, Dallas, and some parts outside of Atlanta. So the strategy there is really to hold those long-term and allow the market to recover.

Obviously, bringing occupancy up to market occupancy and taking a look at sort of the expense side of the equation, we hope to increase NOI over time, and obviously, that comes at a cost. I think we have penciled now around $15 million or so for that portfolio of assets. But obviously, we're going through each asset at the moment developing detailed business plans, but I think we have $15 million plus or minus pegged for that portfolio.

So, sorry, what percentage of the portfolio do you think is sort of just waiting for the market to recover? And what percent of this foreclosure portfolio is things that you can immediately do to bolster? Because it seems to me that 2.5% in place NOI and waiting for the market to recover, it's going to take quite a long time to get that to be 6%, 6.5%.

Yeah, look, I think the 2.5% is a function of current occupancy, right? So I think you get an immediate pickup by getting into the assets, putting in management that has experience in those markets, turning over the rent roll and getting that occupancy up to market occupancy, so there's a pickup there. And then obviously, on the expense side, ensuring that you're grieving taxes, revisiting insurance, which are the two largest line items for expenses and sort of monitoring the expense side.

I think in the supplemental, and Andrew, feel free to jump in, I think we have about 42 assets listed as non-performing. As Tom mentioned in his earlier remarks, we feel that 14 assets or around $300 million of CV, we can exit out of through remainder of 2026 and 2027 at CV or higher.

But unfortunately, just given some of the markets that the residual portfolio is in, those will take longer for recovery. But we do think, listen, there's a pickup on occupancy. There's an NOI optimization play. And we feel, over the long-term, 12 to 24 months, we'll see some pickup in the market as well.

Chris Muller, Citizens Capital Markets.

Slide 8 in the deck is very helpful, but a lot of those resolution timelines fall well into 2029. And I hear you guys on the longer hold period kind of shift in strategy there. But I guess what things either within your control or outside your control could help accelerate those resolution timelines?

Dom, you want to count this maybe at a more granular level?

Yeah. I think we've been conservative with some of the timelines just given some of the markets, right? Do I see a situation where some of the markets improve at an expedited rate and were able to exit sooner than 2029? Yeah, I think that's definitely an option.

I think, for us, it's really optimizing NOI to reduce drag, and obviously, we'll continue to test these assets throughout the whole period to the extent we can hit on some of them and exit at CV or higher. Obviously we'll do that, right. But I think for us, the immediate focus is really increasing NOI and optimizing that NOI and reducing drag on that portfolio.

And then depending on how some of these assets, for example, San Antonio, Dallas, and Phoenix, what that recovery looks like over the next year or two will dictate sort of how we exit and sort of the ultimate timeline.

Got it. That's helpful. And then it looks like 14% of the performing loan bucket is on non-accrual status. Can you guys just talk about how you delineate between the performing and non-performing buckets?

Andrew, you want to comment?

Yeah, so inside of the performing bucket, there is a certain portion of that portfolio where it is contractually current, meaning it could be a construction loan that's contractually current, but where we are not accruing non-cash paying interest. So although it is contractually current, we have taken a pretty conservative stance on accruing interest into loan balances. And so that's primarily what that bucket is there.

Gabe Poggi, Raymond James.

Tom, you've got about, in this CRE book. $880 million, rounding up a bit, of performing loans across 2020, 2021, 2022 vintage, primarily multifamily, right? How should we think about that in the current rate environment? What percentage of that are you guys now going back and looking at and saying that could drop to non-performing? How do we think about the performance of the performing book is what I'm trying to ask.

Yeah, a lot of them are legacy small balance, which have been very seasoned. So maybe, Dom, you could just discuss some of the credit characteristics and our expectations in terms of the near-term performance of the portfolio.

Yeah, good morning, by the way. So I think Tom touched on it a little bit there. I think the seasoning is important here. I think, listen, given the vintage of some of these assets, they have been on balance sheet for a while, and we've been able to sort of monitor these assets and sort of the stabilization and operations, right? So I think many of the performing loans are seasoned, and we feel comfortable given the current operational side of the asset, right?

I think you bring up a good point. Obviously, we can't control and we touched on this earlier on the call in terms of sort of exits just given elevated rate environment. So that, to me, is a potential. Risk that we're going to have to deal with in sort of the current rate environment in terms of exits. But just given the seasonality of these assets and the current occupancy and cash flow, to the extent that we need to provide some additional time vis-a-vis an extension, I think they're more than capable of supporting that.

Got it. A follow-up to that is and into your earlier comments, Tom and Dom, I think you said you have about 20 assets that RC is looking to kind of own multifamily, own for the longer term. I think about that as kind of like an opportunistic REIT inside the REIT. Are there more assets, more than 20, if you had the capital that you would look to own longer-term from a multifamily perspective?

Yes, it's actually 28. And we do -- with the improved flexibility we have from the execution of our liquidity plan, we've now pivoted to value creation via active ownership and property management. We're also considering joint ventures on a global and local basis with opportunistic operators that would actually put capital on these properties.

But I think, and Dom, you can comment on this, as we screen, as we scrub the portfolio with obviously the benefit of the intense operations of these properties by putting in new sponsors by putting in the $15 million of CapEx and the 28 assets Dom commented is book value preservation over the next 24 months.

But to answer your question, Dom, I don't think we have much in the way of additional assets that we -- maybe a handful, maybe that we've thought about adding to that?

I would say, as you mentioned in your remarks, Tom, it's just an additional five or so REO assets that we currently have. So that's a 28 referenced in the NPL book and an additional five or so in the REO book.

28 assets, around a $0.5 billion of values that you guys said, just to make sure I've got that number right.

It's 28 assets in the NPL book, right around $515 million of CV. And then in addition to that, we currently have 5 REO assets at around 67 CV that would also benefit from a longer-term hold strategy.

Got it. So rounding up $600 million of hold it, work it, multifamily assets. Okay, that's helpful. And one more, Tom, if I can, because I missed what you just said earlier. In the SBA business, what's the optimal amount of equity, right, all else equal, right? How much -- what's the right amount of equity to have in that business over time?

Yeah. I mean, it's obviously a very high ROE and capital-light business. However, there's a denominator effect in terms of the current equity position of the company, which will actually turbocharge, if you will, that amplify that benefit over as the kind of second leg in the rebooting of or rebuilding of distributable earnings. But right now, we're at 13%. And to answer your question, I think the longer-term target over 24 months would be 25% to 33%.

We have reached the end of the question-and-answer session, and therefore, I'd like to turn the call back to Tom Capasse for closing remarks.

Yeah. We appreciate everybody's time today and are pleased with the execution of the liquidity plan within the parameters that would be set forth a year ago. And now we look forward to recycling our legacy book, building our SBA business, rebuilding earnings, and managing liquidity.

So I appreciate everybody's time on the call and look forward to the next quarter's call.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.