Ready Capital Corporation (RC) Q2 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to the Ready Capital Corporation Second Quarter 2026 Earnings Call. [Operator Instructions] 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 GAAP measure is available in our second 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. 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 have been organizing our work this year around 4 priorities: first, strengthening liquidity to generate free cash flow in excess of our 2026 debt maturities; second, resolving non and subperforming CRE assets to eliminate earnings drag; third, transitioning to a lower-cost business model by divesting noncore business lines and integrating our CRE lending with our external manager Waterfall; and fourth, focusing on growth in our small business SBA 7(a) 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 7(a) 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 7(a) 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 that 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 nonperforming 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 nonperforming 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 nonperforming loans is $436 million. In our performing loan book, totaling $572 million in equity, levered yields equaled 10.1%. As of quarter end, we had $588 million of REO across 24 properties. The Ritz 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 condominium units and have 3 under contract, bringing the sellout to 40% of the total. Sales progress remains consistent with our phased 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 RevPAR 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 subperforming and REO was $0.29 per share in the quarter. In our SBA 7(a) 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 7(a) 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 7(a) ABS offerings. Since completing the securitization, we have originated $43 million of 7(a) loans and have a current money-up (sic) [ money-out ] pipeline of $78 million. We expect steady growth towards our annual target of $1.5 billion of 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 noncore 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. While 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 7(a) 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 the continuation of the repositioning plan Tom described and importantly, a deceleration in the pressures that have weighed on our results. For the quarter, we reported a GAAP loss from continuing operations of $0.63 per common share, an improvement from the $1.25 loss in the first quarter. Distributable earnings were a loss of $0.47 per common share and a loss of $0.24 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 31, a decline of 8.1%, which is a substantial deceleration from the 15.5% and 14.5% per share declines in the 2 prior quarters and reflects the wind down of the loan sale program. The change was primarily due to approximately $0.23 per share of realized losses on asset sales, approximately $0.12 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 an $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 paydown, 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 nonaccrual loans and REO are resolved, asset level and corporate debt are reduced and capital is recycled into current market yields. 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 nonrecurring servicer advance reimbursements tied to the first quarter CLO collapses. Additionally, the net loss on the Ritz 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 valuation 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 31. Total leverage was 3x, trending towards our 2.5x target, and we held $690 million of unencumbered assets at quarter end. With that, we will open the line for questions.

[Operator Instructions] Our first question comes from the line of Crispin Love with Piper Sandler.

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 CRE and ROE (sic) [ REO ] dispositions and runoff?

Yes. 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 unsecured and -- corporate debt and secured debt. So as of today, we're in the -- what I'd characterize it as the eighth inning. And the only major difference here is that we're -- 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 $950 million of performing and nonperforming loans and runoff on $900 million, 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 3 key drivers, absent any 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 kind of hotel and residences? And then can you just discuss the process there and when you might decide if that's the right path for the property? And what are the kind of -- what you need to look at to see if that's the right path?

Yes, I'll give a high level, and I'll have Dom, our Chief Credit Officer, comment. But as you may recall, the -- there's 3 components to that mixed-use project. One is the -- obviously, the core is the Ritz-Carlton Hotel, which continues to meet its stabilization target as measured by RevPAR, occupancy, et cetera. And 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 to -- continues on a trajectory. The second component, which is about 40% is the condos and we've embarked with Christie's on a 4-phase project going back to earlier -- late last year. We're in Phase 2 now, and we've -- we're on target in terms of both pricing and number -- actually ahead of schedule on a number of units sold. With those under contract plus what we've sold, we're at about 40% at this stage. And then 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 for -- which is on or ahead of target. And so that will lead -- to answer your question, that will lead to a decision to monetize it at some point in the next -- in the coming quarters.

[Operator Instructions] our next question comes from the line of Jade Rahmani with KBW.

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

Yes. Jade, that was historically, Ready Cap had purchased equity interests in 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 CMBS deals. So that was, in turn, converted into a -- fund was raised around that strategy and Ready Cap 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 leverage 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 levered, 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 nonbanks 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, do you want to comment?

Yes. So on the asset-level side, to the extent not securitized, average advance rates there are in the low 60s. So the majority of that book is levered with the exception of the unencumbered portfolio, which 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 legacy fixed-rate product as well as some of the small-balance commercial loans we bought at the start of the company. So typically, 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 that $2.7 billion portfolio?

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

So I mean, just from my vantage point as an outsider looking at this, it seems challenging to raise $450 million of equity capital in order to pay off the upcoming maturities. 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 a way to make sure you meet these maturities.

Jade, I think the -- I totally understand the comment, but what we constantly evaluate is the discount for sale in the secondary market versus on-balance sheet strategies. And we're talking about, obviously, a smaller number of line items now. The $1 billion nonperforming 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 liquidity available for these assets. So what we've done is we've focused on optimization of the existing remaining legacy book as an alternative to loan sales, and that is generating that plus cash on hand and the other liquidity initiatives that we've talked about or the runoff on the portfolio. Those 3 items will have enough cash to 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, the -- in one shade of gray or another, many in the sector are undertaking this exercise. But with respect to Ready, it's the -- the first is the recycling of the legacy book, which is $2.7 billion, and we've changed the characterization of the portfolio, performing, nonperforming to enable analysts and investors to track the success there. But I do point out that the duration of that book is -- the $1 billion of nonperforming 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. So the 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 short duration and will be realized. And we're also looking at joint ventures and other ideas, quasi-securitizations to accelerate that effort. The second thing is obviously 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 3 approaches. One is just a natural reduction in staffing and vendors associated with the portfolio runoff; two, the second thing being divestiture of ancillary businesses, all of which are in flight; and the third is integration with the external manager's CRE lending businesses to source investments. Those 3 things will result in a targeted 25% to 35% reduction in OpEx. So those are the 3 legs of the stool, the runoff of the legacy book, focus on the -- and doubling down on the SBA business and the OpEx rightsizing in that context, which will enable us to return to profitability.

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.