Ready Capital - Q4 2025

Transcript

Operator (participant)

Greetings, and welcome to the Ready Capital Fourth Quarter 2025 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, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Andrew Ahlborn. Thank you. You may begin.

Andrew Ahlborn (CFO)

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 GAAP measure is available on our fourth quarter 2025 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, Thomas Capasse.

Thomas Capasse (CEO)

Thank you, Andrew. Good morning, everyone. Thank you for joining today's call. To begin, we have made significant progress advancing the comprehensive balance sheet repositioning strategy outlined in the third quarter. This disciplined plan remains focused on three key priorities. One, strengthening liquidity to generate free cash flow in excess of our 2026 debt maturities. Two, selling underperforming CRE assets to eliminate negative earnings drag. Three, positioning Ready Capital for sustainable future growth. The first phase of our repositioning strategy is focused on aggressive asset management, while the second will streamline the CRE origination business into a lower-cost structure with greater reliance on our external manager waterfalls, deep CRE investment capacity, and expertise. To that end, to support and lead these efforts, we have promoted Dominick Scali to Chief Credit Officer and Co-President of our CRE operating business, ReadyCap Commercial.

With over 24 years of CRE lending experience, including 10 years with Ready Capital, Dominick has significantly contributed to building our lending infrastructure. In his new role, he will oversee all aspects of our CRE strategy. Dom is joining us on today's call. Gary Taylor will transition to focus on our SBA business as President of ReadyCap Lending from his position as Chief Operating Officer. Given Gary's over 30 years of experience leading non-bank SBA lenders, this change aligns well with our increasing emphasis on capital-light business lines going forward. I also want to express my gratitude to Adam Zausmer for his decade-long contributions to Ready Capital and the instrumental roles he has played over the years. These organizational changes support the execution of our repositioning plan and seize new opportunities as we progress. Now, turning to the business update.

We are making significant progress executing our liquidity plan to both address our corporate maturities and reposition the CRE portfolio. Our plan targets generating over $850 million of free cash and reduces the legacy CRE book 60% to approximately $2 billion, thereby optimizing the balance sheet to support future earnings growth. From the start of the fourth quarter to date, we have generated approximately $380 million in free cash from two primary sources: $130 million from both portfolio sales and $250 million from portfolio runoff and other asset management resolutions. Our liquidity projections anticipate generating an additional $500 million in free cash flow by year-end from two primary sources. First, we expect to generate $250 million from the portfolio runoff, consistent with our 36% trailing tweak twelve-month repayment rate.

We expect to generate approximately $250 million in free cash from planned one and a half billion of additional loan sales, with a focus on NPL and sub-yielding assets. Loan sales are expected to be substantially complete by the end of the second quarter. Within this gross reduction of our legacy CRE book, our portfolio repositioning includes an aggressive asset management focus on the sale or resolution of approximately $1.4 billion of sub and non-performing loans and REO assets. The current quarterly negative earnings drag of this subset is approximately $0.08 per share, with cash outflows of $13 million per quarter. Continued execution of the liquidity plan may result in additional book value pressure, depending on the specific actions we take to increase cash and reduce debt.

In the fourth quarter, the company's book value declined 14% per share. The anticipated benefit is a more attractive portfolio with competitive earnings profile and a 1.0 times reduction in leverage to 2.5x, which would allow us to allocate more cash flow towards growth. Our immediate debt maturities include $67 million due in the third quarter and $450 million due in the fourth quarter. While we are discussing the refinance of a portion of these maturities into a new debt offering, we are executing a liquidity plan that ensures free cash significantly exceeding these obligations. We successfully retired our 5.75% February senior unsecured note upon maturity.

Our plan also includes a targeted 25% reduction in operating costs to align with the business' more simplified CRE investment strategy and increased capital allocation to our capital-light small business lending operations from 10% to 20%. I would also like to provide an update on two additional items. First, the Ritz property remains our largest single equity allocation, representing 16% of year-end stockholders' equity. Since assuming control of the property in August, we have made meaningful progress in our stabilization plan. First, the condominiums, which represent 40% of the total project value. With the new sales agent, Christie's, we have adopted a phased sales strategy to sell the smaller units first at lower prices and the larger units later at higher prices. This is designed to facilitate momentum and achieve a full sellout at target per square foot levels.

We successfully launched phase one in December, placing 16 units under contract, with an additional nine units executing reservation agreements and deposits, which would result in 27% sellout of the 131 total units. The average pricing of the new sales was $737 per sq ft. Second, the hotel, which represents 50% of the total project value. We have adopted a strategy led by our property manager, Lincoln, that focuses on achieving higher occupancy, given the more competitive market rates in the improving Portland area. As a result, year-over-year occupancy increased by 6.5%, ADR rose by 5% to $492, and RevPAR reached $210. Third, the combined office and retail spaces, which represent 10% of the total project value.

We continue to maintain 28% occupancy, prospective tenant tours have substantially increased since our relaunch. Separately, the impact of last year's government shutdown was estimated to have curtailed $5.3 billion of industry-wide SBA 7(a) originations, resulting in a 50% decline in our originations in the quarter to $84 million, a level significantly below 2026 volume targets. Importantly, we remain a top five lender in the SBA market. We anticipate coming to market with our fourth SBA securitization during the second quarter, highlighting the growth of this key segment in 2026. In terms of our repositioning plan, greater capital allocation to this high ROE segment provides another foundation for future earnings growth. We continue to take deliberate steps to enhance liquidity and strengthen the platform.

As of today, we generated approximately 35% of our target liquidity objective and continue to make steady progress. At the same time, we are redefining or re-refining our CRE business and increasing our reliance on Waterfall to expand investment capacity and reducing related operating costs. There is more work ahead, but we are encouraged by the progress made to date and remain focused on disciplined execution. With that said, I'll now turn it over to Andrew for a detailed review of the quarterly results.

Andrew Ahlborn (CFO)

Thanks, Tom. The fourth quarter earnings and balance sheet are reflective of the repositioning strategy outlined by Tom. For the fourth quarter, we reported a GAAP loss from continuing operations of $1.46 per common share. Distributable earnings were a loss of $0.43 per common share and $0.09 per common share, excluding realized losses on asset sales. As Tom just discussed, book value ended the year at $8.79 per share versus $10.28 per share in the prior quarter. This change was primarily due to an increase in the combined valuation allowance and CECL reserves of $173 million. The $23 million of valuation allowances relates to $600 million of loans that were transferred to held-for-sale in the fourth quarter and subsequently sold in the first quarter of 2026.

The $150 million increase in CECL reserves relates to more aggressive reserves on non-performing loans, given the shortened resolution timelines. We also anticipate incurring increased valuation allowances as additional loans are identified for sale. In the net loss from normal operations, the following items were impactful. First, recurring revenue was $41.5 million, compared to $47.3 million in the prior quarter. The change was primarily due to a $7.7 million reduction in gain on sale revenue from lower SBA 7(a) and USDA loan sales due to the government shutdown. This reduction was partially offset by a two and a half million dollar increase in net interest income as we reduced the negative carry on non-performing loans. Second, operating expenses increased $7.4 million quarter-over-quarter to $59.9 million.

This change was primarily due to increased compensation expense, higher legal fees, and a reduction in the tax benefit. Other items of significance included realized losses of $29 million on asset sales, $15 million of REO charge-offs, and $9.1 million of unrealized losses. Regarding the portfolio, we significantly increased the population of loans placed on nonaccrual, which totaled 27% at year-end. Given portfolio repositioning efforts, we have limited interest accruals to both loans we anticipate holding through maturity and to the cash yield on non-performing or loans that are potentially sale candidates. We currently have a little under $200 million of free cash, which positions us well to address our near-term obligations, along with the items previously discussed by Tom. We will open the line for questions.

Thomas Capasse (CEO)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue.

Operator (participant)

For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please, while we pull for questions. Our first question comes from the line of Douglas Harter with UBS. Please proceed with your question.

Douglas Harter (Equity Research Analyst)

Thanks. In light of your comments around looking to kind of reposition the portfolio, accelerate dispositions, can you talk about, you know, the thoughts around keeping the Portland asset or whether that makes sense to kind of accelerate the time frame on that?

Thomas Capasse (CEO)

The good question, Harter. You know, as you can see in the quarter with there's been a very dramatic change in the trajectories on both the RevPAR, kind of, given the change in the occupancy strategy by lowering the ADR. Secondly, the condominiums by putting two professional managers with specialization in both. We're ahead of schedule right now in terms of our stabilization plan. The short answer is we're making very strong progress. You know, would we hold to the last mile if that stabilization plan versus accelerating it, accelerated sale? The answer is yes. We probably would, you know, lean in that direction.

However, we're very confident of our ability to meet the stabilization plan on the two primary components, which are 90% of the value, the condos and the hotel. We also note an overall improvement in the kind of a Phoenix factor in the Portland market more broadly. Yeah, that being said, we would if post, you know, stabilization with the appropriate, you know, pricing in relation to that, we would look for an early disposition.

Douglas Harter (Equity Research Analyst)

Great. Appreciate that. Just on the increase on the nonaccruals, just to flush that out, was there a change in the underlying performance or just a change in the strategy of how long you expect to hold those assets?

Thomas Capasse (CEO)

Yeah, no, it's actually 100% the latter. On that point, it's a good question. You know, just to be very clear, what we are undertaking is a focus on short-term resolutions, which will through both asset sales and what we call strategic asset management. You know, that will reduce the portfolio by 60% to $2 billion. That actually renders the our previous characterization of core non-core as less relevant, as well as the typical 60-day metrics.

A good example of that is in the strategic asset management is, you know, we have, for example, a large loan with a sponsor who we might have otherwise extended, and we decide not to extend, and that work with the sponsor to execute a sale of all or a portion of the portfolio. Actually, that's very critical to understand. It's not necessarily negative credit migration. It's really related to the asset sale, that asset management strategy itself.

Douglas Harter (Equity Research Analyst)

I appreciate the clarification. Thank you.

Operator (participant)

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

Jade Rahmani (Managing Director)

Thank you very much. On the core CRE and non-core CRE loan portfolios, the percentage of nonaccruals, as you just said, increased sharply. Do you anticipate needing to reverse previously accrued interest on these loans as a result? If not, why not? Can you just comment on the underlying credit trends in both portfolios?

Thomas Capasse (CEO)

Yeah, again, I'll. Andrew, you could touch on the accrual question, but Jade, to be very clear, we're making strategic asset management decisions to not extend where, we believe they, we're putting the borrower in a good place to be able to execute an alternative strategy, which is usually a portfolio sale. To put more granularity on, therefore it's not negative credit migration. It's a conscious decision by us as the lender to not execute modification and extension strategies.

Maybe what we could do is, Andrew, if you could, answer the question regarding the accrual, and then, Dom, maybe just give Jade a, an example or two in terms of what we're looking at with respect to the, what we're deeming our strategic AM strategies.

Dominick Scali (Chief Credit Officer and Co-President)

Yeah. Good morning, Jade. For loans that were identified for sale in the fourth quarter and settled in the first quarter, or loans that we anticipate selling, we have taken the reversals of the accrued interest in the fourth quarter numbers. You saw roughly a $53 million reduction in accrued interest. The accrued interest that's sitting on the balance sheet as of year-end is roughly $42 million.

... and really just related to loans we anticipate, holding, through maturity with, you know, full collectibility on that interest.

Thomas Capasse (CEO)

Dom, maybe.

Jade Rahmani (Managing Director)

Andrew, it does sound like you're stepping up the pace of loan resolutions, and you did say that you expect to increase valuation allowances on loan sales in the future. Would that not entail writing down that accrued interest balance as well?

Andrew Ahlborn (CFO)

Yeah. The accrued interest associated with, loans that, you know, may be subject to a market discount if we move them to sale. The accrued interest attached to any of those loans was written down in the fourth quarter.

Jade Rahmani (Managing Director)

Okay.

Thomas Capasse (CEO)

Hopefully, Jade, that was helpful in terms of the accrual question. Dom, maybe just give an example of a more granular example of what our asset management strategy is with respect to some of these larger loans.

Dominick Scali (Chief Credit Officer and Co-President)

Yeah, sure. Hey, good morning, Jade. As Tom mentioned, and consistent with our AM strategy and liquidity strategy, we're purposely, you know, not entertaining, you know, longer-term modifications with some of our assets. You know, a concentration in sort of the increase in non-accrual is in four or five larger loan exposures, where, you know, good sponsors, good quality asset, good performance, but unwilling to provide additional time. What sponsors have pivoted to do is seek alternative financing or potentially sell assets. A good example of that, we have a five-property portfolio in the Sunbelt region with an institutional sponsor. You know, obviously, they would have preferred to have additional time and maybe some spread forbearance to get to the next 12 to 18 months.

In lieu of that, they've sort of started marketing that portfolio with a national brokerage firm, and, you know, we're confident that we should be able to get repaid in the next quarter or so, at or close to par. Just putting some pressure on borrowers on some of these assets, where they will pivot ultimately to either seeking alternative financing or potentially selling the underlying assets.

Jade Rahmani (Managing Director)

Okay, thank you. Just on the Portland asset, the 25 reservation agreements, what % will convert to contracts, and what's the average price?

Thomas Capasse (CEO)

Dom, you want to comment on that?

Dominick Scali (Chief Credit Officer and Co-President)

Of the 25, 16 are in contract with hard deposits. The remaining nine should be converted to contracts with hard deposits within the next few weeks. We have actually closings in process this week and next. Those units sold for an average price of $737. As Tom alluded to earlier in the call, you know, the lower per square foot is expected, just given these are sort of the smaller units on the lower floors.

Jade Rahmani (Managing Director)

Okay.

Thomas Capasse (CEO)

Jade. Just put some more color on it. This is part of a strategy we're working on with Christie's, our broker, and they have, you know, experience globally with these rich residences and other luxury hotel concepts, where the lower units sell at lower prices early on, and then the higher floor or higher units sell at the higher prices later in the process. We've bifurcated the 132 units, of which were sold out now, and I'm 27% into, you know, these four phases, and we're highly confident of our ability to achieve on an average price per square, per square foot basis, the numbers in our projection plans.

Jade Rahmani (Managing Director)

Okay. That's good to hear. On the $855 million of loans sold in February, what's the sales price relative to par and relative to carrying value?

Thomas Capasse (CEO)

Yeah, Andrew, do you want to comment on that?

Andrew Ahlborn (CFO)

Yeah. They sold in the high nineties, Jade. Carrying and UPB were right on top of each other. The pricing is the same there.

Jade Rahmani (Managing Director)

Thanks very much.

Operator (participant)

Thank you. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

Christopher Nolan (SVP)

Tom, in your comments, you indicated that, through repositioning the portfolio and dispositions, the leverage ratios are going to go down. How much was that again, please?

Thomas Capasse (CEO)

By 1 turn to 2.5. The, you know, the pro forma RC 2.0, if you will, is gonna involve significantly less leverage with, you know, multi-sector approach, with a significant percentage of investment capacity being brought to bear by the external manager, Waterfall, which is a, you know, is a large private funds investor in commercial real estate, debt, and equity.

Christopher Nolan (SVP)

For the debt maturities that you guys coming up in the second half of the year, is the plan to retire that debt with just, you know, portfolio realizations and so forth?

Thomas Capasse (CEO)

Yeah, I'll let Andrew comment on that. As we said before, the broader liquidity plan is to, you know, it's in excess of $800 million, which is a multiple-- significant multiple of the total maturities. We're 35% into that plan and are going to raise another $500 million, half through asset sales and half through runoff, which we've been running at a 36% repayment rate. These asset management strategy that Dom just talked about will enable us to outperform there. We've completed two of the four asset sales with the other two by the end of the second quarter. Given that plan, Andrew, what is your, yeah, what is the timing on the debt maturities?

Andrew Ahlborn (CFO)

I would say, certainly, to the extent we can get execution levels that are accretive to the business from both an earnings perspective and a cash flow perspective, you know, we would like to refi portions of the 26 maturities. With that being said, as Tom, you know, highlighted, the liquidity plan currently underway certainly provides a substantial cushion to take out all of the three remaining maturities with cash, if needed. I think you will see us sort of sequentially take out these bonds in the upcoming weeks and months, given the current liquidity position.

Thomas Capasse (CEO)

Okay, thank you.

Operator (participant)

Thank you. Our final question comes from the line of Chris Muller with Citizens JMP Securities. Please proceed with your question.

Chris Muller (Director Equity Research)

Hey, guys. Thanks for taking the question. I guess as you guys are focused on liquidity here, are there other monetization strategies that you guys would consider, like selling or spinning off a business line? It also looks like there's a couple GSE licenses up for sale right now, so maybe not the best time to be a seller there, but are there other avenues of raising some capital that you guys are looking at?

Thomas Capasse (CEO)

Yeah, there are. That's a good question, Chris, and appreciate you taking the time. Yeah, there's a number of, what we'll call non-core assets that are not in this liquidity plan that we're entertaining potential dispositions. You know, I think one, obviously, one area, you're right, we do have opcos in the form of TRS, taxable REIT subsidiaries, that are, you know, would could be sold. However, I'll just underscore that our commitment to the SBA business, which is a high ROE business and low capital allocation, we are strongly committed to that.

However, there are other non-core assets that we are undertaking reviews for sale that could materially provide an additional buffer to the portfolio sales. But, you know, as far as the SBA, we're really committed to that and but are looking at other smaller non-core assets for additional sale.

Chris Muller (Director Equity Research)

Got it. That's very helpful. Thanks for taking the question.

Thomas Capasse (CEO)

No problem.

Operator (participant)

Thank you. We have reached the end of the question and answer session, and therefore, I would like to turn the call back over to CEO Thomas Capasse for closing remarks.

Thomas Capasse (CEO)

Yeah. Again, we appreciate everybody's time, and, you know, Ready Capital and our team remain highly confident of our ability to execute this liquidity plan, you know, and emerge in the latter half of this year in a position to, you know, improve the fundamental earnings capacity of the business, and we look forward to future calls.

Operator (participant)

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