Ready Capital Corp Q2 FY2024 earnings call

• Credit metrics improvement: All credit metrics across the originated CRE loan book improved QoQ. Office underperforms core multifamily, but active asset management strategies were employed.
• Asset management: Modified 25 loans totaling $801 million in the originated CRE bridge portfolio, with 82% completed in Q2. Focused on selling underperforming assets, transferring $720 million of loans into held for sale.
• Origination and portfolio repositioning: CR loan business origination totaled $256 million, and the M&A portfolio is being repositioned. Small business lending saw growth through acquisitions and organic efforts.
• Earnings drivers: Revenue from net interest income, servicing income, and gain on sale increased. However, net increase in provision for loan loss and valuation allowance impacted earnings, along with REO activity.

The originated CRE loan book of $7.9 billion saw improved credit metrics. 60-day-plus billing paces improved to 5.2% (270 basis points QoQ), risk score 4 and 5 rated loans improved to 5% (460 basis points QoQ improvement), and non-accrual loans declined to 4.6% (120 basis points QoQ). Origination activity in the CR loan business totaled $256 million in the quarter, with 61% in transitional and 39% Freddie Mac (Freddie Mac uptick to $122 million in July). The small business lending segment saw SBA 7(a) loan origination exceed target, growing 80% YOY to $217 million, on pace for a $1 billion run rate. Acquisitions included Madison One (a large national USDA lender) with forward 12-month originations expected at $300 million, and Funding Circle US platform to boost 7(a) small loan production.

Management expects earnings accretion from loan sales, with closed loans expected to generate incremental annual earnings of $0.24 per share. Anticipates returning to a 10% annual return target through initiatives like reallocating low-yield assets, adding accretive leverage, exiting residential mortgage banking, and growing the small business lending platform. The small business lending segment is expected to exceed the $1 billion target and achieve number three USA market share.

Risk of negative migration in the existing multifamily book, especially in markets with peak deliveries. Execution risk in achieving a 10%-plus return, including potential credit issues and market uncertainties. Limited M&A opportunities in the SBA channel due to few non-bank licenses.

Q: Can you give more detail on loan sales in the quarter? How did it compare to initial expectations?

A: Adam Zausmer said they got 15 individual buyers for loan pools, mainly regional investors and local groups. Andrew Ahlborn noted year-to-date EPS impact from loan sales was $0.70 net of tax, with quarter impact $0.26. Remaining loans have certain characteristics and are marked down.

Q: What is the biggest risk in executing the earnings ramp strategy?

A: Tom Capasse said the biggest risk is negative migration in the existing multifamily book, especially in markets with peak deliveries. Adam Zausmer added they focus on lower middle market multifamily with limited exposure to rent regulation.

Q: Any update on CLO servicing?

A: Adam Zausmer said collaboration with third-party special servicer improved, with quicker resolution of relief requests and additional mods in process.

Q: Thoughts on Funding Circle and its strategic implications?

A: Tom Capasse said Funding Circle has a complementary platform for loan origination, can cross-sell borrowers, reduce OpEx, and has potential for bolt-on products like unsecured loans and equipment leasing