Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Except where the context suggests otherwise, the terms “Company,” “we,” “us” and “our” refer to Ready Capital Corporation and its subsidiaries. We make forward-looking statements in this Quarterly Report on Form 10-Q (the “Form 10-Q”) within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained therein. Forward-looking statements contained in this Form 10-Q reflect our current views about future events and are inherently subject to substantial risks and uncertainties, many of which are difficult to predict and beyond our control, that may cause our actual results to materially differ. These forward-looking statements include information about possible or assumed future results of our operations, financial condition, liquidity, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may,” “potential” or other comparable terminology, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words. Statements regarding the following subjects, among others, may be forward-looking, and the occurrence of events impacting these subjects, or otherwise impacting our business, may cause our financial condition, liquidity and consolidated results of operations to vary materially from those expressed in, or implied by, any such forward-looking statements:
● our investment objectives and business strategy;
● our ability to borrow funds or otherwise raise capital on favorable terms;
● our expected leverage;
● our expected investments;
● estimates or statements relating to, and our ability to make, future distributions;
● projected capital and operating expenditures;
● availability of qualified personnel;
● prepayment rates;
● projected default rates;
● increased rates of default and/or decreased recovery rates on our investments;
● changes in interest rates, interest rate spreads, the yield curve or prepayment rates;
● the impact of inflation on our business;
● changes in prepayments of our assets;
● our ability to achieve the expected synergies, cost savings and other benefits from recent acquisitions, including the acquisitions of Broadmark Realty Capital Inc. (“Broadmark”) , Madison One Capital, M1 CUSO and Madison One Lender Services (together, “Madison One”), and Funding Circle USA, Inc.;
● risks associated with achieving expected synergies, cost savings and other benefits from acquisitions and our increased scale;
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● risks related to integrating a construction lending platform into our existing operations and the origination and ownership of construction loans, which are subject to additional risks as compared to loans secured by existing structures or land, following the Broadmark Merger;
● risks associated with the divestiture of our Residential Mortgage Banking segment;
● market, industry and economic trends;
● our ability to compete in the marketplace;
● the availability of attractive risk-adjusted investment opportunities in lower-to-middle-market commercial real estate loans (“LMM”), loans guaranteed by the U.S. Small Business Administration (the “SBA”) under its Section 7(a) loan program (the “SBA Section 7(a) Program”), mortgage backed securities (“MBS”), residential mortgage loans and other real estate-related investments that satisfy our investment objectives and strategies;
● general volatility of the capital markets;
● changes in our investment objectives and business strategy;
● the availability, terms and deployment of capital;
● the availability of suitable investment opportunities;
● market developments and actions recently taken and which may be taken by the U.S. Government, the U.S. Department of the Treasury (“Treasury”) and the Board of Governors of the Federal Reserve System, the Federal Depositary Insurance Corporation, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association (“Ginnie Mae”), Federal Housing Administration (“FHA”) Mortgagee, United States Department of Agriculture (“USDA”), U.S. Department of Veterans Affairs (“VA”) and the U.S. Securities and Exchange Commission (“SEC”);
● applicable regulatory changes;
● changes in our assets, interest rates or the general economy;
● mortgage loan modification programs and future legislative actions;
● our ability to maintain our qualification as a real estate investment trust (“REIT”) and limitations on our business as a result of our qualifications as a REIT;
● our ability to maintain our exemption from qualification under the Investment Company Act of 1940, as amended (the “1940 Act”);
● factors described in our annual report on Form 10-K, including those set forth under the captions “Risk Factors” and “Business”;
● our dependence on our external advisor, Waterfall Asset Management, LLC (“Waterfall” or the “Manager”), and our ability to find a suitable replacement if we or Waterfall were to terminate the management agreement we have entered into with Waterfall (the “management agreement”);
● the degree and nature of our competition, including competition for LMM loans, MBS, residential mortgage loans, construction loans and other real estate-related investments that satisfy our investment objectives and strategies;
● geopolitical events such as acts of terrorism, war or other military conflict, and the related impact on macroeconomic conditions;
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● the impact of pandemics and epidemics, such as the coronavirus (“COVID-19”) pandemic, on our business and operations, financial condition, results of operations, liquidity and capital resources; and
● the impact of pandemics or epidemics on our borrowers, the real estate industry and global markets.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and we caution readers not to place undue reliance on any forward-looking statements. These forward-looking statements apply only as of the date of this Form 10-Q. We are not obligated, and do not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law. Refer to Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (our “Form 10-K”).
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our interim consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five main sections:
● Overview
● Results of Operations
● Liquidity and Capital Resources
● Contractual Obligations and Off-Balance Sheet Arrangements
● Critical Accounting Estimates
The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and accompanying Notes included in Part I, Item 1, “Financial Statements,” of this Form 10-Q and with Items 6, 7, 8, and 9A of our Form 10-K. Refer to “Forward-Looking Statements” in this Form 10-Q and in our Form 10-K and “Critical Accounting Estimates” in our Form 10-K for certain other factors that may cause actual results to differ, materially, from those anticipated in the forward-looking statements included in this Form 10-Q.
Overview
Our Business
We are a multi-strategy real estate finance company that originates, acquires, finances, and services LMM loans, SBA loans, construction loans and, to a lesser extent, MBS collateralized primarily by LMM loans, or other real estate-related investments. Our loans generally range in original principal amounts up to $40 million and are used by businesses to purchase real estate used in their operations or by investors seeking to acquire multi-family, office, retail, mixed use or warehouse properties. Our objective is to provide attractive risk-adjusted returns to our stockholders primarily through dividends, as well as through capital appreciation. In order to achieve this objective, we continue to grow our investment portfolio and believe that the breadth of our full-service real estate finance platform will allow us to adapt to market conditions and deploy capital in our asset classes and segments with the most attractive risk-adjusted returns.
Our Residential Mortgage Banking segment meet the criteria to be classified as held for sale and presented as a discontinued operation. For all periods presented, the operating results for these operations have been removed from continuing operations. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted. We report our activities in the following two operating segments:
● LMM Commercial Real Estate . We originate LMM loans across the full life-cycle of an LMM property including construction, bridge, stabilized and agency loan origination channels through our subsidiary, ReadyCap Commercial. These originated loans are generally held-for-investment or placed into securitization structures. As part of this segment, we originate and service multi-family loan products under the Freddie Mac SBL program. These originated loans are held for sale, and subsequently sold to Freddie Mac. We provide construction and permanent financing for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds through Red Stone, a subsidiary. In addition, we acquire LMM loans as part of our business strategy. We hold performing LMM loans to term and seek to maximize the value of the non-performing LMM loans acquired by us through borrower-based resolution strategies. We typically
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acquire non-performing loans at a discount to their unpaid principal balance (“UPB”) when we believe that resolution of the loans will provide attractive risk-adjusted returns.
● Small Business Lending . We acquire, originate and service owner-occupied loans guaranteed by the SBA under the SBA Section 7(a) Program and government guaranteed loans focused on the USDA through our subsidiary, ReadyCap Lending. We hold an SBA license as one of only 17 non-bank SBLCs and have been granted preferred lender status by the SBA. These originated loans are either held-for-investment, placed into securitization structures, or sold.
We are organized and conduct our operations to qualify as a REIT under the Code. To qualify as a REIT, we are required to annually distribute substantially all of our net taxable income, excluding capital gain, to stockholders. To the extent that we do not distribute all of our net capital gain, or distribute at least 90%, but less than 100%, of our REIT taxable income, as adjusted, we will be required to pay U.S. federal corporate income tax on the undistributed income. We are organized in a traditional UpREIT format pursuant to which we serve as the general partner of, and conduct substantially all of our business through, our operating partnership. We also intend to operate our business in a manner that will permit us to be excluded from registration as an investment company under the 1940 Act.
For additional information on our business, refer to Part I, Item 1, “Business” in our Form 10-K.
Acquisitions
Madison One. On June 5, 2024, the Company acquired Madison One Capital, M1 CUSO and Madison One Lender Services (together, “Madison One”), a leading originator and servicer of USDA and SBA guaranteed loan products, for an initial purchase price of approximately $32.9 million paid in cash (the “Madison One Acquisition”). Approximately $3.6 million of the initial purchase price was paid as bonuses to certain key Madison One personnel in cash. Additional purchase price payments, including cash payments and the issuance of shares of common stock of the Company, may be made over the four years following the acquisition date contingent upon the Madison One business achieving certain performance metrics. Part of the Company’s strategy in acquiring Madison One included the value of the anticipated synergies arising from the acquisition and the value of the acquired assembled workforce, neither of which qualify for recognition as an intangible asset. Refer to Notes 1 and 5, included in Part I, Item 1, “Financial Statements,” of this Form 10-Q, for more information about the Madison One Acquisition and the assets acquired and liabilities assumed as a result of the Madison One Acquisition.
Broadmark. On May 31, 2023, the Company, Broadmark Realty Capital Inc., a Maryland corporation (“Broadmark”), and RCC Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the operating partnership (“RCC Merger Sub”), completed a merger (such transaction, the “Broadmark Merger”) in which Broadmark merged with and into RCC Merger Sub, with RCC Merger Sub remaining as a wholly owned subsidiary of the operating partnership. As a result of the Broadmark Merger, the number of directors on the Company's board of directors (the “Board”) increased by three members, from nine to twelve, with the three additional directors each having served on the board of directors of Broadmark immediately prior to the effective time of the Broadmark Merger. The Broadmark Merger further diversified our business by expanding on our residential and commercial construction lending platforms. Refer to Notes 1 and 5, included in Part I, Item 1, “Financial Statements,” of this Form 10-Q, for more information about the Broadmark Merger and the assets acquired and liabilities assumed as a result of the Broadmark Merger.
Factors Impacting Operating Results
We expect that our results of operations will be affected by a number of factors and will primarily depend on the level of interest income from our assets, the market and fair value of our assets and the supply of, and demand for, LMM loans, SBA loans, USDA loans, construction loans, MBS and other assets we may acquire in the future, demand for housing, population trends, construction costs, the availability of alternative real estate financing from other lenders, changes in credit spreads, and the financing and other costs associated with our business. These factors may have an impact on our ability to originate new loans or the performance of our existing loan portfolio. Our net investment income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates, the rate at which our distressed assets are liquidated and the prepayment speed of our performing assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by our available borrowing capacity, conditions in the financial markets, credit losses in excess of initial estimates or unanticipated credit events experienced by borrowers whose loans are held directly by us or are included in
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our MBS. Difficult market conditions as well as inflation, energy costs, geopolitical issues, health epidemics and outbreaks of contagious diseases, unemployment and the availability and cost of credit are factors which could also impact our operating results. For additional information about certain risks we face, including market risk, credit risk, interest rate risk, liquidity risk, off-balance sheet risk and prepayment risk, refer to Note 23, included in Part I, Item 1, “Financial Statements,” and Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-Q, as well as Part I, Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2023.
Changes in Market Interest Rates. We own and expect to acquire or originate fixed rate mortgages and floating rate mortgages with maturities ranging from two to 30 years. Our loans typically have amortization periods of 15 to 30 years or balloon payments due in two to 10 years. Fixed rate mortgage loans bear interest that is fixed for the term of the loan and we typically utilize derivative financial and hedging instruments in an effort to hedge the interest rate risk associated with such fixed rate mortgages. As of June 30, 2024, all fixed rate loans are match funded in securitization. Floating rate mortgage loans generally have an adjustable interest rate equal to the sum of a fixed spread plus an index rate, such as the Secured Overnight Financing Rate (“SOFR”), which typically resets monthly. As of June 30, 2024, approximately 82% of the loans in our portfolio were floating rate mortgages, and 18% were fixed rate mortgages, based on UPB.
Current market conditions. The second quarter was generally characterized by persisting macroeconomic concerns including uncertainty about the commercial real estate sector, inflation, interest rates, and geopolitical tensions. Although the full impact of these changes remains uncertain and difficult to predict, concerns and uncertainties about the economic outlook may adversely impact our financial condition, results of operations and cash flows.
Results of Operations
Key Financial Measures and Indicators
As a real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared per share, distributable earnings, return on equity, and net book value per share. As further described below, distributable earnings is a measure that is not prepared in accordance with GAAP. We use distributable earnings to evaluate our performance and determine dividends, excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan activity and operations. Refer to “—Non-GAAP Financial Measures” below for a reconciliation of net income to distributable earnings.
The table below sets forth certain information on our operating results.
Three Months Ended June 30,
Six Months Ended June 30,
($ in thousands, except share data)
2024
2023
2024
2023
Net Income (loss) from continuing operations
$
(31,427)
$
244,532
$
(107,009)
$
283,041
Earnings per common share from continuing operations - basic
$
(0.21)
$
1.80
$
(0.67)
$
2.24
Earnings per common share from continuing operations - diluted
$
(0.21)
$
1.70
$
(0.67)
$
2.11
Distributable earnings
$
16,631
$
51,283
$
70,607
$
89,432
Distributable earnings per common share - basic
$
0.07
$
0.36
$
0.37
$
0.67
Distributable earnings per common share - diluted
$
0.07
$
0.35
$
0.37
$
0.65
Dividends declared per common share
$
0.30
$
0.40
$
0.60
$
0.80
Dividend yield (1)
14.7
%
14.2
%
14.7
%
14.2
%
Return on equity from continuing operations
(6.1)
%
48.7
%
(9.8)
%
31.0
%
Distributable return on equity
2.6
%
9.3
%
7.4
%
8.8
%
Book value per common share
$
12.97
$
14.52
$
12.97
$
14.52
(1) Dividend yield is based on the respective period end closing share price.
Our Loan Pipeline
We have a large and active pipeline of potential acquisition and origination opportunities that are in various stages of our investment process. We refer to assets as being part of our acquisition or origination pipeline if (i) an asset or portfolio opportunity has been presented to us and we have determined, after a preliminary analysis, that the assets fit within our investment strategy and exhibit the appropriate risk/reward characteristics (ii) in the case of acquired loans, we have executed a non-disclosure agreement (“NDA”) or an exclusivity agreement and commenced the due diligence process or we have executed more definitive documentation, such as a letter of intent (“LOI”); and (iii) in the case of originated loans, we have issued an LOI, and the borrower has paid a deposit.
We operate in a competitive market for investment opportunities and competition may limit our ability to originate or acquire the potential investments in the pipeline. The consummation of any of the potential loans in the pipeline depends upon, among other things, one or more of the following: available capital and liquidity, our Manager’s allocation policy, satisfactory completion of our due diligence investigation and investment process, approval of our Manager’s Investment
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Committee, market conditions, our agreement with the seller on the terms and structure of such potential loan, and the execution and delivery of satisfactory transaction documentation. Historically, we have acquired less than a majority of the assets in our pipeline at any one time and there can be no assurance the assets currently in our pipeline will be acquired or originated by us in the future.
The table below presents information on our investment portfolio originations and acquisitions (based on fully committed amounts).
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2024
2023
2024
2023
Loan originations:
LMM loans
$
256,485
$
511,603
$
516,161
$
922,119
SBA loans
217,258
120,839
414,417
213,135
Total loan investment activity
$
473,743
$
632,442
$
930,578
$
1,135,254
Balance Sheet Analysis and Metrics
(in thousands)
June 30, 2024
December 31, 2023
$ Change
% Change
Assets
Cash and cash equivalents
$
226,286
$
138,532
$
87,754
63.3
%
Restricted cash
29,971
30,063
(92)
(0.3)
Loans, net (including $0 and $9,348 held at fair value)
3,444,879
4,020,160
(575,281)
(14.3)
Loans, held for sale (including $89,380 and $81,599 held at fair value and net of valuation allowance of $217,719 and $0)
532,511
81,599
450,912
552.6
Mortgage-backed securities
30,174
27,436
2,738
10.0
Investment in unconsolidated joint ventures (including $6,974 and $7,360 held at fair value)
134,602
133,321
1,281
1.0
Derivative instruments
14,382
2,404
11,978
498.3
Servicing rights
119,768
102,837
16,931
16.5
Real estate owned, held for sale
187,883
252,949
(65,066)
(25.7)
Other assets
379,413
300,175
79,238
26.4
Assets of consolidated VIEs (net of valuation allowance of $9,448 and $0)
6,250,570
6,897,145
(646,575)
(9.4)
Assets held for sale
423,894
454,596
(30,702)
(6.8)
Total Assets
$
11,774,333
$
12,441,217
$
(666,884)
(5.4)
%
Liabilities
Secured borrowings
2,311,969
2,102,075
209,894
10.0
Securitized debt obligations of consolidated VIEs, net
4,407,241
5,068,453
(661,212)
(13.0)
Senior secured notes, net
417,040
345,127
71,913
20.8
Corporate debt, net
767,271
764,908
2,363
0.3
Guaranteed loan financing
782,345
844,540
(62,195)
(7.4)
Contingent consideration
3,926
7,628
(3,702)
(48.5)
Derivative instruments
2,638
212
2,426
1,144.3
Dividends payable
53,119
54,289
(1,170)
(2.2)
Loan participations sold
89,532
62,944
26,588
42.2
Due to third parties
1,995
3,641
(1,646)
(45.2)
Accounts payable and other accrued liabilities
204,766
207,481
(2,715)
(1.3)
Liabilities held for sale
332,265
333,157
(892)
(0.3)
Total Liabilities
$
9,374,107
$
9,794,455
$
(420,348)
(4.3)
%
Preferred stock Series C, liquidation preference $25.00 per share
8,361
8,361
—
—
Commitments & contingencies
Stockholders’ Equity
Preferred stock Series E, liquidation preference $25.00 per share
111,378
111,378
—
—
Common stock, $0.0001 par value, 500,000,000 shares authorized, 168,167,272 and 172,276,105 shares issued and outstanding, respectively
17
17
—
—
Additional paid-in capital
2,287,684
2,321,989
(34,305)
(1.5)
Retained earnings (deficit)
(92,319)
124,413
(216,732)
(174.2)
Accumulated other comprehensive loss
(13,880)
(17,860)
3,980
22.3
Total Ready Capital Corporation equity
2,292,880
2,539,937
(247,057)
(9.7)
Non-controlling interests
98,985
98,464
521
0.5
Total Stockholders’ Equity
$
2,391,865
$
2,638,401
$
(246,536)
(9.3)
%
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity
$
11,774,333
$
12,441,217
$
(666,884)
(5.4)
%
As of June 30, 2024, total assets in our consolidated balance sheet were $11.8 billion, a decrease of $667 million from December 31, 2023, primarily reflecting a decrease in Assets of consolidated VIEs and Loans, net, partially offset by an increase in Loans, held for sale. Assets of consolidated VIEs decreased $647 million, due to paydowns on securitized loans. Loans, net decreased $575 million, primarily due to loans transferred to Loans, held for sale. Loans, held for sale increased $451 million, primarily due to loans transferred from Loans, net.
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As of June 30, 2024, total liabilities in our consolidated balance sheet were $9.4 billion, a decrease of $420 million from December 31, 2023, primarily reflecting a decrease in Securitized debt obligations of consolidated VIEs, net, partially offset by an increase in Secured borrowings. Securitized debt obligations of consolidated VIEs, net decreased $661 million due to paydowns on securitized loans. Secured borrowings increased $210 million due to increased borrowings on originations of loans, partially offset by payments.
As of June 30, 2024, total stockholders’ equity was $2.4 billion, a decrease of $247 million from December 31, 2023, primarily due to common stock repurchased through the Company’s share repurchase program.
Selected Balance Sheet Information by Business Segment. The table below presents certain selected balance sheet data by each of our two business segments, with the remaining amounts reflected in Corporate –Other .
(in thousands)
LMM Commercial Real Estate
Small Business Lending
Total
June 30, 2024
Assets
Loans, net
$
8,268,951
$
1,222,169
$
9,491,120
Loans, held for sale
698,122
71,281
769,403
MBS
30,174
—
30,174
Investment in unconsolidated joint ventures
134,602
—
134,602
Servicing rights
84,441
35,327
119,768
Real estate owned, held for sale
191,294
—
191,294
Liabilities
Secured borrowings
2,122,954
189,015
2,311,969
Securitized debt obligations of consolidated VIEs
4,269,180
138,061
4,407,241
Senior secured notes, net
405,371
11,669
417,040
Corporate debt, net
767,271
—
767,271
Guaranteed loan financing
—
782,345
782,345
Loan participations sold
89,532
—
89,532
In the table above,
● Loans, net includes assets of consolidated VIEs and excludes allowance for loan losses.
● Loans, held for sale includes assets of consolidated VIEs, net of valuation allowance.
● Real estate owned, held for sale includes assets of consolidated VIEs.
Statement of Operations Analysis and Metrics
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2024
2023
$ Change
2024
2023
$ Change
Interest income
LMM commercial real estate
$
202,047
$
212,233
$
(10,186)
$
402,810
$
410,272
$
(7,462)
Small business lending
32,072
18,771
13,301
63,663
36,700
26,963
Total interest income
$
234,119
$
231,004
$
3,115
$
466,473
$
446,972
$
19,501
Interest expense
LMM commercial real estate
(158,344)
(160,503)
2,159
(317,229)
(309,997)
(7,232)
Small business lending
(24,823)
(9,718)
(15,105)
(49,743)
(19,092)
(30,651)
Total interest expense
$
(183,167)
$
(170,221)
$
(12,946)
$
(366,972)
$
(329,089)
$
(37,883)
Net interest income before recovery of loan losses
$
50,952
$
60,783
$
(9,831)
$
99,501
$
117,883
$
(18,382)
Recovery of (provision for) loan losses
LMM commercial real estate
14,414
(17,415)
31,829
45,169
(9,286)
54,455
Small business lending
4,457
(2,012)
6,469
246
(3,407)
3,653
Total recovery of (provision for) loan losses
$
18,871
$
(19,427)
$
38,298
$
45,415
$
(12,693)
$
58,108
Net interest income after recovery of (provision for) loan losses
$
69,823
$
41,356
$
28,467
$
144,916
$
105,190
$
39,726
Non-interest income (loss)
LMM commercial real estate
(85,383)
24,769
(110,152)
(208,329)
34,325
(242,654)
Small business lending
19,871
21,122
(1,251)
40,189
42,865
(2,676)
Corporate - other
(16,881)
230,174
(247,055)
(16,881)
230,505
(247,386)
Total non-interest income (loss)
$
(82,393)
$
276,065
$
(358,458)
$
(185,021)
$
307,695
$
(492,716)
Non-interest expense
LMM commercial real estate
(31,266)
(24,453)
(6,813)
(74,714)
(46,663)
(28,051)
Small business lending
(17,292)
(19,231)
1,939
(35,399)
(36,322)
923
Corporate - other
(18,878)
(27,011)
8,133
(35,581)
(43,764)
8,183
Total non-interest expense
$
(67,436)
$
(70,695)
$
3,259
$
(145,694)
$
(126,749)
$
(18,945)
Net income (loss) before provision for income taxes
LMM commercial real estate
(58,532)
34,631
(93,163)
(152,293)
78,651
(230,944)
Small business lending
14,285
8,932
5,353
18,956
20,744
(1,788)
Corporate - other
(35,759)
203,163
(238,922)
(52,462)
186,741
(239,203)
Total net income (loss) before provision for income taxes
$
(80,006)
$
246,726
$
(326,732)
$
(185,799)
$
286,136
$
(471,935)
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Results of Operations – Supplemental Information. Realized and unrealized gains (losses) on financial instruments are recorded in the consolidated statements of operations and classified based on the nature of the underlying asset or liability.
The table below presents the components of realized and unrealized gains (losses) on financial instruments.
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2024
2023
$ Change
2024
2023
$ Change
Realized gain (loss) on financial instruments
Realized gain on loans - Freddie Mac and CMBS
$
291
$
643
$
(352)
$
638
$
895
$
(257)
Creation of MSRs - Freddie Mac
380
558
(178)
658
782
(124)
Realized gain on loans - SBA
14,103
6,479
7,624
24,538
11,718
12,820
Creation of MSRs - SBA
3,703
2,044
1,659
6,386
3,555
2,831
Creation of MSRs - Red Stone
503
4,751
(4,248)
1,958
7,609
(5,651)
Realized gain on derivatives
4,478
10,430
(5,952)
8,870
14,116
(5,246)
Realized loss on MBS
—
—
—
(12)
—
(12)
Net realized gain (loss) - all other
(16,208)
(1,027)
(15,181)
(16,918)
(3,222)
(13,696)
Net realized gain on financial instruments
$
7,250
$
23,878
$
(16,628)
$
26,118
$
35,453
$
(9,335)
Unrealized gain (loss) on financial instruments
Unrealized loss on loans - Freddie Mac and CMBS
(78)
(1,383)
1,305
(219)
(4,051)
3,832
Unrealized gain (loss) on loans - SBA
141
(734)
875
1,786
(260)
2,046
Unrealized loss on derivatives
(789)
(81)
(708)
(413)
(3,618)
3,205
Unrealized gain on MBS
292
846
(554)
2,078
1,056
1,022
Net unrealized gain (loss) - all other
(923)
(59)
(864)
43
(173)
216
Net unrealized gain (loss) on financial instruments
$
(1,357)
$
(1,411)
$
54
$
3,275
$
(7,046)
$
10,321
LMM Commercial Real Estate Segment Results.
Q2 2024 versus Q2 2023. Interest income of $202.0 million represented a decrease of $10.2 million, primarily due to decreased loan balances, partially offset by increases in interest rates. Interest expense of $158.3 million represented a decrease of $2.2 million, driven by decreased debt balances, partially offset by increases in interest rates. Recovery of loan losses of $14.4 million represented an increase of $31.8 million, primarily due to loans transferred to Loans, held for sale. Non-interest loss of $85.4 million represented an increase of $110.2 million, primarily due to the valuation allowance related to the transfer of Loans, net to Loans, held for sale. Non-interest expense of $31.3 million represented an increase of $6.8 million, due to an increase in charge-offs of real estate acquired in settlement of loans, partially offset by a decrease in employee compensation and benefits.
YTD 2024 versus YTD 2023. Interest income of $402.8 million represented a decrease of $7.5 million, primarily due to decreased loan balances, partially offset by increases in interest rates. Interest expense of $317.2 million represented an increase of $7.2 million, driven by increases in interest rates. Recovery of loan losses of $45.2 million represented an increase of $54.5 million, primarily due to loans transferred to Loans, held for sale. Non-interest loss of $208.3 million represented an increase of $242.7 million, primarily due to the valuation allowance related to the transfer of Loans, net to Loans, held for sale. Non-interest expense of $74.7 million represented an increase of $28.1 million, due to increases in charge-offs of real estate acquired in settlement of loans and loan servicing expenses.
Small Business Lending Segment Results.
Q2 2024 versus Q2 2023. Interest income of $32.1 million represented an increase of $13.3 million, primarily due to increases in interest rates and increased loan balances. Interest expense of $24.8 million represented an increase of $15.1 million, driven by increases in interest rates and increased debt balances. Recovery of loan losses of $4.5 million represented an increase of $6.5 million, due to changes in the forecasted macroeconomic inputs for reserve modeling and a decrease in specific loan reserves. Non-interest income of $19.9 million represented a decrease of $1.3 million, primarily due to a decrease in employee tax credit consulting income and servicing income, partially offset by net realized gains on financial instruments. Non-interest expense of $17.3 million represented a decrease of $1.9 million, due to decreases in employee compensation and benefits.
YTD 2024 versus YTD 2023. Interest income of $63.7 million represented an increase of $27.0 million, primarily due to increases in interest rates and increased loan balances. Interest expense of $49.7 million represented an increase of $30.7 million, driven by increases in interest rates and increased debt balances. Recovery of loan losses of $0.2 million represented an increase of $3.7 million, due to changes in the forecasted macroeconomic inputs for reserve modeling and a decrease in specific loan reserves. Non-interest income of $40.2 million represented a decrease of $2.7 million, primarily due to a decrease in employee tax credit consulting income and servicing income, partially offset by net realized gains on
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financial instruments. Non-interest expense of $35.4 million was essentially unchanged from the respective prior year period.
Corporate – Other.
Q2 2024 versus Q2 2023. Non-interest loss of $16.9 million represented a decrease of $247.1 million, primarily due to a gain on bargain purchase recognized from the Broadmark Merger. Non-interest expense of $18.9 million represented a decrease of $8.1 million, primarily due to transaction related expenses for the Broadmark Merger.
YTD 2024 versus YTD 2023. Non-interest loss of $16.9 million represented a decrease of $247.4 million, primarily due to a gain on bargain purchase recognized from the Broadmark Merger. Non-interest expense of $35.6 million represented a decrease of $8.2 million, primarily due to transaction related expenses for the Broadmark Merger.
Non-GAAP financial measures
We believe that providing investors with distributable earnings, formerly referred to as core earnings, gives investors greater transparency into the information used by management in our financial and operational decision-making, including the determination of dividends.
We calculate distributable earnings as GAAP net income (loss) excluding the following:
i) any unrealized gains or losses on certain MBS not retained by us as part of our loan origination businesses
ii) any realized gains or losses on sales of certain MBS
iii) any unrealized gains or losses on Residential MSRs from discontinued operations
iv) any unrealized change in current expected credit loss reserve and valuation allowances
v) any unrealized gains or losses on de-designated cash flow hedges
vi) any unrealized gains or losses on foreign exchange hedges
vii) any unrealized gains or losses on certain unconsolidated joint ventures
viii) any non-cash compensation expense related to stock-based incentive plan
ix) one-time non-recurring gains or losses, such as gains or losses on discontinued operations, bargain purchase gains, or merger related expenses
In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains and losses on MBS acquired by us in the secondary market but is not adjusted to exclude unrealized gains and losses on MBS retained by us as part of our loan origination businesses, where we transfer originated loans into an MBS securitization and retain an interest in the securitization. In calculating distributable earnings, we do not adjust net income (in accordance with GAAP) to take into account unrealized gains and losses on MBS retained by us as part of our loan origination businesses because we consider the unrealized gains and losses that are generated in the loan origination and securitization process to be a fundamental part of this business and an indicator of the ongoing performance and credit quality of our historical loan originations. In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude realized gains and losses on certain MBS securities due to a variety of reasons which may include collateral type, duration, and size.
In addition, in calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains or losses on residential MSRs, held at fair value from discontinued operations. Servicing rights relating to our small business commercial business are accounted for under ASC 860, Transfer and Servicing . In calculating distributable earnings, we do not exclude realized gains or losses on commercial MSRs, as servicing income is a fundamental part of our business and an indicator of the ongoing performance.
Furthermore, we believe it is useful to present distributable earnings before realized losses on certain investments, such as charge-offs and losses realized on sales of real estate owned assets and LMM loans, to reflect our direct operating results. We utilize distributable earnings before realized losses as an additional performance metric to consider when assessing our ability to declare and pay dividends. Distributable earnings and distributable earnings before realized losses are non-U.S. GAAP financial measures and because these non-U.S. GAAP measures are incomplete measures of our financial performance and involve differences from net income computed in accordance with U.S. GAAP, they should be considered along with, but not as alternatives to, our net income as measures of our financial performance. In addition, because not all companies use identical calculations, our presentations of distributable earnings and distributable earnings before realized losses may not be comparable to other similarly-titled measures of other companies.
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To qualify as a REIT, we must distribute to our stockholders each calendar year dividends equal to at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. There are certain items, including net income generated from the creation of MSRs, that are included in distributable earnings but are not included in the calculation of the current year’s taxable income. These differences may result in certain items that are recognized in the current period’s calculation of distributable earnings not being included in taxable income, and thus not subject to the REIT dividend distribution requirement, until future years.
The table below presents a reconciliation of net income to distributable earnings before realized losses and distributable earnings.
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2024
2023
$ Change
2024
2023
$ Change
Net Income (loss)
$
(34,201)
$
253,373
$
(287,574)
$
(108,368)
$
290,351
$
(398,719)
Reconciling items:
Unrealized (gain) loss on MSR - discontinued operations
7,219
(8,818)
16,037
7,219
(2,725)
9,944
Unrealized gain on joint ventures
(626)
—
(626)
(661)
—
(661)
Increase (decrease) in CECL reserve
(24,574)
19,410
(43,984)
(56,755)
12,089
(68,844)
Increase in valuation allowance
80,987
—
80,987
227,167
—
227,167
Non-recurring REO impairment
8,474
—
8,474
23,986
—
23,986
Non-cash compensation
1,891
2,062
(171)
3,768
3,915
(147)
Merger transaction costs and other non-recurring expenses
4,852
14,177
(9,325)
6,783
15,910
(9,127)
Bargain purchase (gain) loss
18,306
(229,894)
248,200
18,306
(229,894)
248,200
Realized losses on sale of investments
22,355
—
22,355
22,355
—
22,355
Total reconciling items
$
118,884
$
(203,063)
$
321,947
$
252,168
$
(200,705)
$
452,873
Income tax adjustments
(47,799)
973
(48,772)
(52,940)
(214)
(52,726)
Distributable earnings before realized losses
$
36,884
$
51,283
$
(14,399)
$
90,860
$
89,432
$
1,428
Realized losses on sale of investments, net of tax
(20,253)
—
(20,253)
(20,253)
—
(20,253)
Distributable earnings
$
16,631
$
51,283
$
(34,652)
$
70,607
$
89,432
$
(18,825)
Less: Distributable earnings attributable to non-controlling interests
2,206
2,035
171
3,312
3,873
(561)
Less: Income attributable to participating shares
2,301
2,373
(72)
4,636
4,744
(108)
Distributable earnings attributable to common stockholders
$
12,124
$
46,875
$
(34,751)
$
62,659
$
80,815
$
(18,156)
Distributable earnings before realized losses on investments, net of tax per common share - basic and diluted
$
0.19
$
0.36
$
(0.17)
$
0.49
$
0.67
$
(0.18)
Distributable earnings per common share - basic
$
0.07
$
0.36
$
(0.29)
$
0.37
$
0.67
$
(0.30)
Distributable earnings per common share - diluted
$
0.07
$
0.35
$
(0.28)
$
0.37
$
0.65
$
(0.28)
Q2 2024 versus Q2 2023. Consolidated net loss of $34.2 million for the second quarter of 2024 represented a decrease of $287.6 million from the second quarter of 2023, primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale. Consolidated distributable earnings before realized losses of $36.9 million for the second quarter of 2024 represented a decrease of $14.4 million from the second quarter of 2023. The increase in the distributable earnings reconciling items is primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale. Consolidated distributable earnings of $16.6 million for the second quarter of 2024 represented a decrease of $34.7 million from the second quarter of 2023 due to certain charge-offs and losses realized on sales of real estate owned assets and LMM loans.
YTD 2024 versus YTD 2023. Consolidated net loss of $108.4 million for the six months ended June 30, 2024 represented a decrease of $398.7 million from the six months ended June 30, 2023, primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale. Consolidated distributable earnings before realized losses of $90.9 million for the six months ended June 30, 2024 represented an increase of $1.4 million from the six months ended June 30, 2023. The increase in the distributable earnings reconciling items is primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale. Consolidated distributable earnings of $70.6 million for the six months ended June 30, 2024 represented a decrease of $18.8 million from the six months ended June 30, 2023 due to certain charge-offs and losses realized on sales of real estate owned assets and LMM loans.
Incentive distribution payable to our Manager
Under the partnership agreement of our operating partnership, our Manager, the holder of the Class A special unit in our operating partnership, is entitled to receive an incentive distribution, distributed quarterly in arrears in an amount, not less
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than zero, equal to the difference between (i) the product of (A) 15% and (B) the difference between (x) IFCE (as described below) of our operating partnership, on a rolling four-quarter basis and before the incentive distribution for the current quarter, and (y) the product of (1) the weighted average of the issue price per share of common stock or operating partnership unit (“OP unit”) (without double counting) in all of our offerings multiplied by the weighted average number of shares of common stock outstanding (including any restricted shares of common stock and any other shares of common stock underlying awards granted under our 2013 Equity Incentive Plan, our 2023 Equity Incentive Plan and the Broadmark Equity Plan) and OP units (without double counting) in such quarter and (2) 8%, and (ii) the sum of any incentive distribution paid to our Manager with respect to the first three quarters of such previous four quarters; provided, however, that no incentive distribution is payable with respect to any calendar quarter unless cumulative IFCE is greater than zero for the most recently completed 12 calendar quarters.
The incentive distribution shall be calculated within 30 days after the end of each quarter and such calculation shall promptly be delivered to our Company. We are obligated to pay the incentive distribution 50% in cash and 50% in either common stock or OP units, as determined in our discretion, within five business days after delivery to our Company of the written statement from the holder of the Class A special unit setting forth the computation of the incentive distribution for such quarter. Subject to certain exceptions, our Manager may not sell or otherwise dispose of any portion of the incentive distribution issued to it in common stock or OP units until after the three-year anniversary of the date that such shares of common stock or OP units were issued to our Manager. The price of shares of our common stock for purposes of determining the number of shares payable as part of the incentive distribution is the closing price of such shares on the last trading day prior to the approval by our Board of the incentive distribution.
For purposes of determining the incentive distribution payable to the Manager, incentive fee core earnings (“IFCE”) is defined under the partnership agreement of the operating partnership as GAAP net income (loss) of the operating partnership excluding non-cash equity compensation expense, the expenses incurred in connection with the operating partnership's formation or continuation, the incentive distribution, real estate depreciation and amortization (to the extent that the Company forecloses on any properties underlying its assets) and any unrealized gains, losses, or other non-cash items recorded in the period, regardless of whether such items are included in other comprehensive income or loss, or in net income. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the independent directors.
Liquidity and Capital Resources
Liquidity is a measure of our ability to turn non-cash assets into cash and to meet potential cash requirements. We use significant cash to purchase LMM loans and other target assets, originate new LMM loans, pay dividends, repay principal and interest on our borrowings, fund our operations and meet other general business needs. Our primary sources of liquidity will include our existing cash balances, borrowings, including securitizations, re-securitizations, repurchase agreements, warehouse facilities, bank credit facilities and other financing agreements (including term loans and revolving facilities), the net proceeds of offerings of equity and debt securities, including our senior secured notes, corporate debt, and net cash provided by operating activities.
We are continuing to monitor the impact of rising interest rates, credit spreads and inflation on the Company, the borrowers underlying our real estate-related assets, the tenants in the properties we own, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of these economic events remain uncertain, rapidly changing and difficult to predict, the impact on our operations and liquidity also remains uncertain and difficult to predict.
Cash flow
Six Months Ended June 30, 2024. Cash and cash equivalents as of June 30, 2024, increased by $16.5 million to $279.0 million from December 31, 2023, primarily due to cash provided by investing and operating activities, partially offset by cash used for financing activities. The net cash provided by investing activities primarily reflected proceeds on disposition and principal payments of loans, partially offset by net cash used for loan originations. The net cash provided by operating activities reflected a valuation allowance related to the transfer of Loans, net to Loans, held for sale, partially offset by an increase in operating assets. The net cash used for financing activities primarily reflected repayments of securitized debt obligations of consolidated VIEs.
Six Months Ended June 30, 2023. Cash and cash equivalents as of June 30, 2023, increased by $80.1 million to $353.7 million from December 31, 2022, primarily due to cash provided by investing and operating activities, partially offset by
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cash used for financing activities. The net cash provided by operating activities primarily reflected net income and decreases in loans, held for sale, at fair value, provision for loan losses, and amortization of loan discounts, premiums, and deferred issuance costs, net, as well as decreases in derivative instruments, partially offset by a bargain purchase gain, realized gains on financial instruments, net, increases in other current assets and decreases in other current liabilities. The net cash provided by investing activities primarily reflected net proceeds from loans and REO and net proceeds provided from the Broadmark Merger partially offset by net investments in unconsolidated joint ventures, and payment of liabilities under participation agreements, net of proceeds received. The net cash used for financing activities primarily reflected dividend payments, net payments of secured borrowings including PPPLF, and share repurchases, partially offset by net proceeds received from securitized debt obligations.
Financing Strategy and Leverage
In addition to raising capital through offerings of our public equity and debt securities, we finance our investment portfolio through securitization and secured borrowings. We generally seek to match-fund our investments to minimize the differences in the terms of our investments and our liabilities. Our secured borrowings have various recourse levels including full recourse, partial recourse and non-recourse, as well as varied mark-to-market provisions including full mark-to-market, credit mark only and non-mark-to-market. Securitizations allow us to match fund loans pledged as collateral on a long-term, non-recourse basis. Securitization structures typically consist of trusts with principal and interest collections allocated to senior debt and losses on liquidated loans to equity and subordinate tranches, and provide debt equal to 50% to 90% of the cost basis of the assets.
We also finance originated Freddie Mac SBL with secured borrowings until the loans are sold, generally within 30 days.
As of June 30, 2024, we had a total leverage ratio of 3.5x and recourse leverage ratio of 1.0x. Our operating segments have different levels of recourse debt according to the differentiated nature of each segment. Our LMM Commercial Real Estate and Small Business Lending segments have recourse leverage ratios of 0.3x and 1.2x, respectively. The remaining recourse leverage ratio is from our corporate debt offerings.
Secured Borrowings
Credit Facilities and Other Financing Agreements. We utilize credit facilities and other financing arrangements to finance our business. The financings are collateralized by the underlying mortgages, assets, related documents, and instruments, and typically contain index-based financing rate and terms, haircut and collateral posting provisions which depend on the types of collateral and the counterparties involved. These agreements often contain customary negative covenants and financial covenants, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income.
The table below presents certain characteristics of our credit facilities and other financing arrangements.
Pledged Assets
Carrying Value at
Lenders (1)
Asset Class
Current Maturity (2)
Pricing (3)
Facility Size
Carrying Value
June 30, 2024
December 31, 2023
3
SBA loans
October 2024 - March 2025
SOFR + 2.83%
Prime - 0.82%
$
250,000
$
238,184
$
189,015
$
117,115
1
LMM loans - USD
February 2025
SOFR + 1.35%
80,000
2,652
2,645
20,729
1
LMM loans - Non-USD (4)
January 2025
EURIBOR + 3.00%
214,264
45,127
32,648
12,079
Total borrowings under credit facilities and other financing agreements
$
544,264
$
285,963
$
224,308
$
149,923
(1) Represents the total number of facility lenders.
(2) Current maturity does not reflect extension options available beyond original commitment terms.
(3) Asset class pricing is determined using an index rate plus a weighted average spread.
(4) Non-USD denominated credit facilities have been converted into USD for purposes of this disclosure.
Repurchase Agreements. Under the loan repurchase facilities and securities repurchase agreements, we may be required to pledge additional assets to our counterparties in the event that the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional assets or cash. Generally, the loan repurchase facilities and securities repurchase agreements contain a SOFR-based financing rate, term and haircuts depending on the types of collateral and the counterparties involved. The loan repurchase facilities also include financial maintenance covenants.
If the estimated fair values of the assets increase due to changes in market interest rates or other market factors, lenders may release collateral back to us. Margin calls may result from a decline in the value of the investments securing the loan
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repurchase facilities and securities repurchase agreements, prepayments on the loans securing such investments and from changes in the estimated fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of our Company and/or the performance of the assets in question. Historically, disruptions in the financial and credit markets have resulted in increased volatility in these levels, and this volatility could persist as market conditions continue to change. Should prepayment speeds on the mortgages underlying our investments or market interest rates suddenly increase, margin calls on the loan repurchase facilities and securities repurchase agreements could result, causing an adverse change in our liquidity position. To date, we have satisfied all of our margin calls and have never sold assets in response to any margin call under these borrowings.
Our borrowings under repurchase agreements are renewable at the discretion of our lenders and, as such, our ability to roll-over such borrowings are not guaranteed. The terms of the repurchase transaction borrowings under our repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association, as to repayment, margin requirements and the segregation of all assets we have initially sold under the repurchase transaction. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts and purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction, and cross default and setoff provisions.
We maintain certain assets, which, from time to time, may include cash, unpledged LMM loans, LMM ABS and short-term investments (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and collateral in excess of margin requirements held by our counterparties, or collectively, the “Cushion”, to meet routine margin calls and protect against unforeseen reductions in our borrowing capabilities. Our ability to meet future margin calls will be impacted by the Cushion, which varies based on the fair value of our investments, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs.
The table below presents certain characteristics of our repurchase agreements.
Pledged Assets
Carrying Value at
Lenders (1)
Asset Class
Current Maturity (2)
Pricing (3)
Facility Size
Carrying Value
June 30, 2024
December 31, 2023
9
LMM loans
November 2024 - November 2026
SOFR + 3.18%
$
4,306,000
$
2,828,152
$
1,758,071
$
1,677,885
1
LMM loans - Non-USD (4)
Matured
EURIBOR + 3.00%
—
—
—
45,031
7
MBS
July 2024 - June 2025
7.95%
329,590
596,798
329,590
229,236
Total borrowings under repurchase agreements
$
4,635,590
$
3,424,950
$
2,087,661
$
1,952,152
(1) Represents the total number of facility lenders.
(2) Current maturity does not reflect extension options available beyond original commitment terms.
(3) Asset class pricing is determined using an index rate plus a weighted average spread.
(4) Non-USD denominated repurchase agreements have been converted into USD for purposes of this disclosure.
Collateralized borrowings under repurchase agreements
The table below presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount of collateralized borrowings outstanding under repurchase agreements during the quarter and the highest balance of any month end during the quarter.
(in thousands)
Quarter End Balance
Average Balance in Quarter
Highest Month End Balance in Quarter
Q3 2022
2,870,807
2,887,318
2,940,474
Q4 2022
2,329,270
2,295,348
2,329,270
Q1 2023
1,959,888
2,094,621
2,371,413
Q2 2023
1,792,366
1,945,290
2,022,433
Q3 2023
1,915,878
1,876,204
1,915,879
Q4 2023
1,952,152
1,889,494
1,952,152
Q1 2024
1,998,132
1,956,153
1,998,132
Q2 2024
2,087,661
2,058,766
2,087,661
The net increase in the outstanding balances during the second quarter of 2024 was primarily due to increased borrowings to fund origination volumes.
Paycheck Protection Program Liquidity Facility borrowings. The Company uses the Paycheck Protection Program Liquidity Facility (“PPPLF”) from the Federal Reserve to finance PPP loans. The program charges an interest rate of 0.35%. As of June 30, 2024, we had approximately $24.8 million outstanding under this credit facility .
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Senior Secured Notes and Corporate Debt, Net
The table below presents information about senior secured notes and corporate debt issued through public and private transactions.
(in thousands)
Coupon Rate
Maturity Date
June 30, 2024
Senior secured notes principal amount (1)
4.50
%
10/20/2026
$
350,000
Term loan principal amount (2)
SOFR + 5.50
%
4/12/2029
75,000
Unamortized discount - Term loan
(2,740)
Unamortized deferred financing costs - Senior secured notes
(5,220)
Total senior secured notes, net
$
417,040
Corporate debt principal amount (3)
5.50
%
12/30/2028
110,000
Corporate debt principal amount (4)
6.20
%
7/30/2026
104,614
Corporate debt principal amount (4)
5.75
%
2/15/2026
206,270
Corporate debt principal amount (5)
6.125
%
4/30/2025
120,000
Corporate debt principal amount (6)
7.375
%
7/31/2027
100,000
Corporate debt principal amount (7)
5.00
%
11/15/2026
100,000
Unamortized discount - corporate debt
(5,730)
Unamortized deferred financing costs - corporate debt
(4,133)
Junior subordinated notes principal amount (8)
SOFR + 3.10
%
3/30/2035
15,000
Junior subordinated notes principal amount (9)
SOFR + 3.10
%
4/30/2035
21,250
Total corporate debt, net
$
767,271
Total carrying amount of debt
$
1,184,311
(1) Interest on the senior secured notes is payable semiannually on April 20 and October 20 of each year.
(2) Interest on the term loan is payable quarterly on January 12, April 12, July 12, and October 12 of each year.
(3) Interest on the corporate debt is payable semiannually on June 30 and December 30 of each year.
(4) Interest on the corporate debt is payable quarterly on January 30, April 30, July 30, and October 30 of each year.
(5) Interest on the corporate debt is payable semiannually on April 30 and October 30 of each year.
(6) Interest on the corporate debt is payable semiannually on January 31 and July 31 of each year.
(7) Interest on the corporate debt is payable semiannually on May 15 and November 15 of each year; assumed as part of the Broadmark Merger.
(8) Interest on the Junior subordinated notes I-A is payable quarterly on March 30, June 30, September 30, and December 30 of each year.
(9) Interest on the Junior subordinated notes I-B is payable quarterly on January 30, April 30, July 30, and October 30 of each year.
The table below presents the contractual maturities for senior secured notes and corporate debt.
(in thousands)
June 30, 2024
2024
$
—
2025
120,000
2026
760,884
2027
100,000
2028
110,000
Thereafter
111,250
Total contractual amounts
$
1,202,134
Unamortized deferred financing costs, discounts, and premiums, net
(17,823)
Total carrying amount of debt
$
1,184,311
ReadyCap Holdings 4.50% senior secured notes due 2026. On October 20, 2021, ReadyCap Holdings, an indirect subsidiary of the Company, completed the offer and sale of $350.0 million of its 4.50% Senior Secured Notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes are fully and unconditionally guaranteed by the Company, each direct parent entity of ReadyCap Holdings, and other direct or indirect subsidiaries of the Company from time to time that is a direct parent entity of Sutherland Asset III, LLC or otherwise pledges collateral to secure the Senior Secured Notes (collectively, the “SSN Guarantors”).
ReadyCap Holdings’ and the SSN Guarantors’ respective obligations under the Senior Secured Notes are secured by a perfected first-priority lien on certain capital stock and assets (collectively, the “SSN Collateral”) owned by certain subsidiaries of the Company.
The Senior Secured Notes are redeemable by ReadyCap Holdings’ following a non-call period, through the payment of the outstanding principal balance of the Senior Secured Notes plus a “make-whole” or other premium that decreases the closer the Senior Secured Notes are to maturity. ReadyCap Holdings is required to offer to repurchase the Senior Secured Notes at 101% of the principal balance of the Senior Secured Notes in the event of a change in control and a downgrade of the rating on the Senior Secured Notes in connection therewith, as set forth more fully in the note purchase agreement.
The Senior Secured Notes were issued pursuant to a note purchase agreement, which contains certain customary negative covenants and requirements relating to the collateral and our company, ReadyCap Holdings, and the SSN Guarantors, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and limitations on transactions with affiliates.
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Ready Term Holdings, LLC (“Ready Term Holdings”) term loan due 2029. On April 12, 2024, Ready Term Holdings, an indirect subsidiary of the Company, entered into a credit agreement which provides for a delayed draw term loan to the Company in an aggregate principal amount not to exceed $115.25 million (the “Term Loan”). The Term Loan is fully and unconditionally guaranteed by the Company and other direct or indirect subsidiaries of the Company from time to time that pledge collateral to secure the Term Loan (collectively, the “Term Loan Guarantors”).
Ready Term Holdings’ and the Term Loan Guarantors’ respective obligations under the Term Loan are secured by a perfected first-priority lien on certain capital stock and assets (collectively, the “Term Loan Collateral”) owned by certain subsidiaries of the Company.
The Term Loan matures on April 12, 2029, and may be drawn at any time on or prior to January 12, 2025, subject to the satisfaction of customary conditions. The Company borrowed $75.0 million in connection with the initial closing of the Term Loan. The Term Loan bears interest on the outstanding principal amount thereof at a rate equal to (a) SOFR plus 5.50% per annum or (b) base rate plus 4.50% per annum; provided that if at any time the Term Loan is rated below investment grade, the interest rate shall increase to (x) SOFR plus 6.50% per annum or (y) base rate plus 5.50% per annum until the rating is no longer below investment grade. In connection with the entry into the credit agreement, the Company also agreed to pay certain upfront fees on the initial borrowing date. The Company will also pay, with respect to any unused portion of the Term Loan, a commitment fee of 1.00% per annum.
The Term Loan was issued pursuant to a credit agreement, which contains certain customary representations and warranties and affirmative and negative covenants and requirements relating to the collateral and our Company, Ready Term Holdings, and the Term Loan Guarantors, including maintenance of a minimum asset coverage ratio.
Corporate debt.
We issue senior unsecured notes in public and private transactions. The notes are governed by a base indenture and supplemental indentures. Often, the notes are redeemable by us following a non-call period, through the payment of the outstanding principal balance plus a “make-whole” or other premium that typically decreases the closer the notes are to maturity. We are often required to offer to repurchase the notes, in some cases at 101% of the principal balance of the notes, in the event of a change in control or fundamental change pertaining to our company, as defined in the applicable supplemental indentures. The notes rank equal in right of payment to any of our existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness, other liabilities (including trade payables) and (to the extent not held by us) preferred stock, if any, of our subsidiaries. The supplemental indentures governing the notes often contain customary negative covenants and financial covenants relating to maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and limitations on transactions with affiliates.
In addition, in connection with the Broadmark Merger, RCC Merger Sub, a wholly owned subsidiary of the operating partnership, assumed Broadmark’s obligations on certain senior unsecured notes. The note purchase agreement governing these notes contains financial covenants that require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as other customary affirmative and negative covenants.
The Debt ATM Agreement
On May 20, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), pursuant to which it may offer and sell, from time to time, up to $100.0 million of the 6.20% 2026 Notes and the 5.75% 2026 Notes. Sales of the 6.20% 2026 Notes and the 5.75% 2026 Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act (the “Debt ATM Program”). The Agent is not required to sell any specific number of the notes, but the Agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between the Agent and the Company. No such sales through the Debt ATM Program were made during the three or six months ended June 30, 2024 or June 30, 2023.
Securitization transactions
Our Manager’s extensive experience in loan acquisition, origination, servicing and securitization strategies has enabled us to complete several securitizations of LMM and SBA loan assets since January 2011. These securitizations allow us to match fund the LMM and SBA loans on a long-term, non-recourse basis. The assets pledged as collateral for these
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securitizations were contributed from our portfolio of assets. By contributing these LMM and SBA assets to the various securitizations, these transactions created capacity for us to fund other investments.
The table below presents information on the securitization structures and related issued tranches of notes to investors.
(in millions)
Collateral Asset Class
Issuance
Active / Collapsed
Bonds Issued
Trusts (Firm sponsored)
Waterfall Victoria Mortgage Trust 2011-1 (SBC1)
LMM Acquired loans
February 2011
Collapsed
$
40.5
Waterfall Victoria Mortgage Trust 2011-3 (SBC3)
LMM Acquired loans
October 2011
Collapsed
143.4
Sutherland Commercial Mortgage Trust 2015-4 (SBC4)
LMM Acquired loans
August 2015
Collapsed
125.4
Sutherland Commercial Mortgage Trust 2018 (SBC7)
LMM Acquired loans
November 2018
Collapsed
217.0
ReadyCap Lending Small Business Trust 2015-1 (RCLT 2015-1)
Acquired SBA 7(a) loans
June 2015
Collapsed
189.5
ReadyCap Lending Small Business Loan Trust 2019-2 (RCLT 2019-2)
Originated SBA 7(a) loans,
Acquired SBA 7(a) loans
December 2019
Active
131.0
ReadyCap Lending Small Business Loan Trust 2023-3 (RCLT 2023-3)
Originated SBA 7(a) loans,
Acquired SBA 7(a) loans
July 2023
Active
132.0
Real Estate Mortgage Investment Conduits (REMICs)
ReadyCap Commercial Mortgage Trust 2014-1 (RCMT 2014-1)
LMM Originated conventional
September 2014
Collapsed
181.7
ReadyCap Commercial Mortgage Trust 2015-2 (RCMT 2015-2)
LMM Originated conventional
November 2015
Active
218.8
ReadyCap Commercial Mortgage Trust 2016-3 (RCMT 2016-3)
LMM Originated conventional
November 2016
Active
162.1
ReadyCap Commercial Mortgage Trust 2018-4 (RCMT 2018-4)
LMM Originated conventional
March 2018
Active
165.0
Ready Capital Mortgage Trust 2019-5 (RCMT 2019-5)
LMM Originated conventional
January 2019
Active
355.8
Ready Capital Mortgage Trust 2019-6 (RCMT 2019-6)
LMM Originated conventional
November 2019
Active
430.7
Ready Capital Mortgage Trust 2022-7 (RCMT 2022-7)
LMM Originated conventional
April 2022
Active
276.8
Waterfall Victoria Mortgage Trust 2011-2 (SBC2)
LMM Acquired loans
March 2011
Collapsed
97.6
Sutherland Commercial Mortgage Trust 2018 (SBC6)
LMM Acquired loans
August 2017
Active
154.9
Sutherland Commercial Mortgage Trust 2019 (SBC8)
LMM Acquired loans
June 2019
Active
306.5
Sutherland Commercial Mortgage Trust 2020 (SBC9)
LMM Acquired loans
June 2020
Collapsed
203.6
Sutherland Commercial Mortgage Trust 2021 (SBC10)
LMM Acquired loans
May 2021
Active
232.6
Collateralized Loan Obligations (CLOs)
Ready Capital Mortgage Financing 2017– FL1
LMM Originated bridge
August 2017
Collapsed
198.8
Ready Capital Mortgage Financing 2018 – FL2
LMM Originated bridge
June 2018
Collapsed
217.1
Ready Capital Mortgage Financing 2019 – FL3
LMM Originated bridge
April 2019
Collapsed
320.2
Ready Capital Mortgage Financing 2020 – FL4
LMM Originated bridge
June 2020
Collapsed
405.3
Ready Capital Mortgage Financing 2021 – FL5
LMM Originated bridge
March 2021
Active
628.9
Ready Capital Mortgage Financing 2021 – FL6
LMM Originated bridge
August 2021
Active
652.5
Ready Capital Mortgage Financing 2021 – FL7
LMM Originated bridge
November 2021
Active
927.2
Ready Capital Mortgage Financing 2022 – FL8
LMM Originated bridge
March 2022
Active
1,135.0
Ready Capital Mortgage Financing 2022 – FL9
LMM Originated bridge
June 2022
Active
754.2
Ready Capital Mortgage Financing 2022 – FL10
LMM Originated bridge
October 2022
Active
860.1
Ready Capital Mortgage Financing 2023 – FL11
LMM Originated bridge
February 2023
Active
586.0
Ready Capital Mortgage Financing 2023 – FL12
LMM Originated bridge
June 2023
Active
648.6
Trusts (Non-firm sponsored)
Freddie Mac Small Balance Mortgage Trust 2016-SB11
Originated agency multi-family
January 2016
Active
110.0
Freddie Mac Small Balance Mortgage Trust 2016-SB18
Originated agency multi-family
July 2016
Active
118.0
Freddie Mac Small Balance Mortgage Trust 2017-SB33
Originated agency multi-family
June 2017
Active
197.9
Freddie Mac Small Balance Mortgage Trust 2018-SB45
Originated agency multi-family
January 2018
Active
362.0
Freddie Mac Small Balance Mortgage Trust 2018-SB52
Originated agency multi-family
September 2018
Active
505.0
Freddie Mac Small Balance Mortgage Trust 2018-SB56
Originated agency multi-family
December 2018
Active
507.3
Key Commercial Mortgage Trust 2020-S3 (1)
LMM Originated conventional
September 2020
Active
263.2
(1) Contributed portion of assets into trust
We used the proceeds from the sale of the tranches issued to purchase and originate LMM and SBA loans. We are the primary beneficiary of all firm sponsored securitizations; therefore they are consolidated in our financial statements.
Contractual Obligations and Off-Balance Sheet Arrangements
Other than the items referenced above, there have been no material changes to our contractual obligations for the three months ended June 30, 2024. Refer to Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations," in the Company's Form 10-K for further details. As of the date of this Form 10-Q, we had no off-balance sheet arrangements, other than as disclosed.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made, based upon information available to us at that time. The following discussion describes the critical accounting estimates that apply to
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our operations and require complex management judgment. This summary should be read in conjunction with our accounting policies and use of estimates included in “Notes to Consolidated Financial Statements, Note 3 – Summary of Significant Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data,” in the Company’s Form 10-K.
Allowance for credit losses
The allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Such loans and lending commitments are reviewed quarterly considering credit quality indicators, including probable and historical losses, collateral values, LTV ratio and economic conditions. The allowance for credit losses increases through provisions charged to earnings and reduced by charge-offs, net of recoveries.
We utilize loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its loan portfolio. The Current Expected Credit Loss (“CECL”) forecasting methods used by the Company include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. We might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.
We estimate the CECL expected credit losses for our loan portfolio at the individual loan level. Significant inputs to our forecasting methods include (i) key loan-specific inputs such as LTV, vintage year, loan-term, underlying property type, occupancy, geographic location, and others, and (ii) a macro-economic forecast. These estimates may change in future periods based on available future macro-economic data and might result in a material change in our future estimates of expected credit losses for its loan portfolio.
In certain instances, we consider relevant loan-specific qualitative factors to certain loans to estimate its CECL expected credit losses. We consider loan investments that are both (i) expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) for which the borrower is experiencing financial difficulty, to be “collateral-dependent” loans. For such loans that we determine that foreclosure of the collateral is probable, we measure the expected losses based on the difference between the fair value of the collateral (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan as of the measurement date. For collateral-dependent loans that we determine foreclosure is not probable, we apply a practical expedient to estimate expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan.
While we have a formal methodology to determine the adequate and appropriate level of the allowance for credit losses, estimates of inherent loan losses involve judgment and assumptions as to various factors, including current economic conditions. Our determination of adequacy of the allowance for credit losses is based on quarterly evaluations of the above factors. Accordingly, the provision for loan losses will vary from period to period based on management's ongoing assessment of the adequacy of the allowance for credit losses.
Significant judgment is required when evaluating loans for impairment; therefore, actual results over time could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 6 – Loans and Allowance for Credit Losses” included in this Form 10-Q for results of our loan impairment evaluation.
Valuation of financial assets and liabilities carried at fair value
We measure our MBS, derivative assets and liabilities, and any assets or liabilities where we have elected the fair value option at fair value, including certain loans we have originated that are expected to be sold to third parties or securitized in the near term.
We have established valuation processes and procedures designed so that fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, that the valuation approaches are consistently applied, and the assumptions and inputs are reasonable. We also have established processes to provide that the valuation methodologies, techniques and approaches for investments that are categorized within Level 3 of the ASC 820 Fair Value Measurement fair value hierarchy (the “fair value hierarchy”) are fair, consistent and verifiable. Our processes provide a framework that ensures the oversight of our fair value methodologies, techniques, validation procedures, and results.
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When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Refer to “Notes to Consolidated Financial Statements, Note 7 – Fair Value Measurements” included in Item 8, “Financial Statements and Supplementary Data,” in the Form 10-K for a more complete discussion of our critical accounting estimates as they pertain to fair value measurements.
Servicing rights impairment
Servicing rights, at amortized cost, are initially recorded at fair value and subsequently carried at amortized cost.
For purposes of testing our servicing rights, carried at amortized cost, for impairment, we first determine whether facts and circumstances exist that would suggest the carrying value of the servicing asset is not recoverable. If so, we then compare the net present value of servicing cash flow with its carrying value. The estimated net present value of servicing cash flows of the intangibles is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, taking into consideration historical and forecasted loan prepayment rates, delinquency rates and anticipated maturity defaults. If the carrying value of the servicing rights exceeds the net present value of servicing cash flows, the servicing rights are considered impaired and an impairment loss is recognized in earnings for the amount by which carrying value exceeds the net present value of servicing cash flows. We monitor the actual performance of our servicing rights by regularly comparing actual cash flow, credit, and prepayment experience to modeled estimates.
Significant judgment is required when evaluating servicing rights for impairment; therefore, actual results over time could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 8 – Servicing Rights” included in this Form 10-Q for a more complete discussion of our critical accounting estimates as they pertain to servicing rights impairment.
Refer to “Notes to Consolidated Financial Statements, Note 4– Recent Accounting Pronouncements” included in Item 8, “Financial Statements and Supplementary Data,” in the Company’s Form 10-K for a discussion of recent accounting developments and the expected impact to the Company.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.