Ready Capital Q2 FY26 earnings call RC

Ready Capital has made significant progress on its balance sheet repositioning strategy, achieving 81% of its target liquidity objective. This was driven by generating approximately $1.9 billion of cash through various actions, including the sale of a $167 million construction portfolio, securitization of $158 million in SBA 7(a) loans, and disposition of $445 million in CRE assets. These funds were primarily used to pay down $1.7 billion of asset-level and corporate debt. The company does not anticipate further large portfolio sales, instead focusing on optimizing existing financings and portfolio runoff to meet remaining 2026 debt maturities.

The legacy CRE loan book stands at approximately $2.7 billion across 172 positions, with an additional $218 million of CMBS exposure. About $1 billion (37%) of this book consists of sub- and non-performing assets, which management believes are best managed on-balance sheet due to a greater net present value compared to secondary market sales. These non-performing loans have an average duration of 11 months and average mark-to-market LTVs of 82%, marked at 85%. The current equity held in these assets is $436 million, while performing loans have leveraged yields of 10.1%.

The Ritz property remains the largest REO asset, representing 66% of total REO and approximately 22% of quarter-end stockholders' equity. The stabilization strategy is progressing, with 50 condominium units sold and 3 under contract, bringing the sellout to 40% of the total. The hotel component continues to show linear improvement, with NOI of $1 million in the quarter, 12-month occupancy rising 10% to 52%, and room RevPAR increasing 20% to $244 year-over-year. Management will determine the optimal path forward, including potential monetization, in coming quarters.

Capital constraints at the start of Q2 FY26 limited SBA 7(a) origination volume to $82 million. However, the recent securitization of $158 million in SBA 7(a) loans has addressed these constraints, providing $500 million of additional funding capacity for future production. The company has since originated $43 million of 7(a) loans and has a money-out pipeline of $78 million, expecting steady growth towards an annual target of $1.5 billion in originations. More frequent SBA 7(a) ABS offerings are planned to accelerate capital levels.

Ready Capital is implementing a targeted cost optimization program to align its cost structure with its go-forward business model. This includes organizational efficiency initiatives, divestiture of non-core businesses, and deeper integration of CRE lending with its external manager, Waterfall. These actions are expected to materially lower the operating expense ratio and improve operating leverage, with a targeted 25% to 35% reduction in OpEx. Management believes these initiatives, combined with legacy asset runoff and SBA growth, will return the company to profitability.