Ready Capital Corp (RC) Q3 2026 Earnings Call Transcript

At this time, all participants are in a listen-only mood. A question-and-answer session will follow the form of presentation. If anyone should require operated assistance, please press star zero on your telephone keypad. 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 certain 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 from the most directly comparable GATT 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 Capasso.

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 2022 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 break-even. Quarter-over-quarter, distributable earnings, excluding realized losses, improve $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 life businesses, led by our SBA 7A Thank you. 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-sell 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 7A pipeline is $150 million. A natural complement to our secured 7A 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's strong demand from private credit investors. Gain on 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 REDPAR 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. 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 right-sizing 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 break even, with future earnings growth beyond these levels, determined by the turnover of the 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 the 2027, generating approximately $109 million of net liquidity. This portfolio generated a half 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 comprise 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 It 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 $67 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 recovery. 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 multi-family 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 the substantial completion of our 2026 liquidity plan. And a continued deacceleration in the pressure on book value. For the quarter, we reported a gap 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 C-SOL and valuation allowances. At quarter end, book value per share was $6.44. The change was primarily due to a 17 cents per share loss on operations, a 14 cent per share loss on loan sales, and a 6 cents 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, reoccurring 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 7A. We expect net interest income to continue improving as non-accrual loans and 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. Surfacing 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 advanced 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 $68.3 million last quarter. These included $53.9 million of realized losses in 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 on June 30th. 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 three times and approaching our two-and-a-half-time target. We held $606 million of unencumbered assets at quarter-end. 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

One moment, please, while we poll for questions.

Our first question comes from the line of Jade Rahmani with KVW. Please proceed with your question.

And J.J. Lyne is now live. Yeah, right. All right.

Therefore, we'll go to the next question. Our next question comes from the line of Christopher Nolan with Lattenburg-Dowman. Please proceed with your question.

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

In, sorry, in the current quarter?

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 that REO, we wrote it down to its as-is value per. The appraisal. And so, it is no longer sitting in the allowance. It's sitting in, you know, the REO bucket and it's been written down to its assets value. And the value you've seen decreasing is primarily due to the condo sales.

Got it. And then, Tom, thanks for the comments 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%.

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

Great. And then the 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, do you want to comment on the timing?

Yeah, sure. If you look at the, you know, the earnings bridge that Tom prepared in his opening remarks, the revenue items he described account for, you know, closing the gap in, you know, current normal operations by around 50%. And so the, you know, you will see SBA 7A volume ramped. From its levels in the third quarter, you know, to our billion-dollar 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. Um, the other, um, portion of the shortfall is going to come from. Reducing the operating expenses in the company. You know, 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 right sizings occur in the fourth quarter with the full benefits of those. Rolling, you know, 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, you know, going down that path rather than sort of an immediate reduction in those operations is we believe we can recover, you know, some of the book value associated with those assets, and that recovery is in excess of what it, you know, costs us to carry So, you know, we think we'll make material progress, you know, as we go into 27 on the earnings. And then, you know, the other part of it is just the turnover of the CRE portfolio, which will track the outline we put in the supplemental information.

Great. Thank you.

Thank you. And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. Our next question comes from the line of Jade Ramani with KBW. Please proceed with your question.

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 in terms of our chief credit officer in terms of some of the specifics, but just broadly speaking, the rate increase has, you know, reduced transaction volume and probably resulted in another leg down. And multifamily prices are around 5% to 10%. But at this point, our portfolio is very – the legacy book is very concentrated. And so, Don, maybe you could just, beyond the broader market, comment on it.

Yeah, sure. Sure. Good morning. I say, listen, obviously, the transitional book and the securitized book. Given that transitional loans float over sulfur 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 sort of the takeouts.

Okay, thank you very much. And then the supplemental shows about 10 CERI NPL positions. With around $330 million in multifamily you expected foreclosed 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.

Yeah, this is Dominic again. So, as Tom mentioned in his remarks, we have a sort of long-term strategy for a bucket of assets. You know, we think, I think it's roughly 28 assets, just about a half a 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, some parts outside of Atlanta. So the strategy there is really to hold those long-term and allow the market to recover. Obviously, you know, bringing occupancy up to market occupancy and... 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, you know, detailed business plans. But I think we have, you know, $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, like, it's going to take quite a long time to get that to be 6.5.

Yeah, I think the two and a half is a function of current occupancy, right? So I think you get 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, you know, 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, you know, 14 assets or around $300 billion of CV, we can exit out of through remainder of 2026 and 2027, you know, at CV or higher. But unfortunately, just given some of the markets that the residual portfolio is in, you know, 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.

Thanks very much.

Thank you. Our next question comes from the line of Chris Muller with Citizens Capital Markets. Please proceed with your question.

Hey, guys. Thanks for taking the question this morning. Slide eight 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?

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

Yeah, well, 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 we're 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, Phoenix, what that recovery looks like over the next, you know, 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-recrual status. Can you guys just talk about how you delineate between the performing and non-performing buckets?

Andrew, you want to comment?

Yeah, so the inside of the, you know, performing bucket, there is a certain portion of that, that portfolio where it is, you know, 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, you know, current, we've taken a pretty conservative stance on You know, accruing interest into loan balances, and so that's primarily what that bucket is there.

Got it. Very helpful. Appreciate you guys taking the questions this morning.

Thank you. Our next question comes from the line of Gabe Paget with Raymond James. Please proceed with your question.

Good morning, guys, and thanks for taking the question. Tom, you've got about, in the CRE book, About $880 million, I'm 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 a – in a 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.

Well, yeah, and I – 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. You know, they have been on balance sheet for a while, and we've been able to sort of, you know, 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, you know, 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, you know, elevated rate environment. So that to me is a, you know, 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, you know, 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 to your earlier comments, Tom and Dom, Dom, I think you said you've got 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?

Yeah, it's actually 28, and, you know, we do, you know, 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, you know, with the, you know, obviously the intense, the benefit of the intense. The operations of these properties by putting in new sponsors, 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 book.

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

28 assets, around half a billion dollars of values that you guys said, just to make sure I've got that number right?

It's 28 assets in the MPL book, right around $515 million of CV. And then in addition to that, we currently have five 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, is in the SBA business, what's the optimal amount of equity, right? All else equal, right? What's the right amount of equity to have in that business over time?

Yeah, I mean, it's obviously a very high ROE in capital-like business. Yeah, that's right. 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, you know, as the kind of second leg in the 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%.

Okay. Thanks, guys.

Thank you. And we have reached the end of the question and answer session, and therefore, I'd like to turn the call back to Tom Capassi for closing remarks.

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