Ready Capital RC Q1 2026 Earnings Transcript

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DATE

Friday, May 8, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• Chairman & Chief Executive Officer — Thomas Capasse
• Chief Financial Officer — Andrew Ahlborn
• Chief Credit Officer — Dominick D. Scali

TAKEAWAYS

• Loan Sales and Liquidity Generation -- Year-to-date cash from loan sales and liquidations totaled $1.4 billion, yielding $270 million in net liquidity.
• Debt Retirement -- Over $1.1 billion in warehouse debt was paid down, and $184 million in corporate debt was retired.
• Loan Portfolio Disposition -- 48 loans sold with a $1 billion unpaid principal balance, generating $177 million in net liquidity; 66% were performing and 30% were non- or sub-performing loans.
• Portfolio Runoff -- Runoff of $550 million in assets provided $93 million in net liquidity.
• Liquidity Plan -- Incremental $400 million in projected liquidity expected from the sale or runoff of $2 billion–$2.5 billion of CRE loans and REO assets by year-end.
• Corporate Debt -- $184 million in bonds were retired in February and April, leaving $450 million in 2026 maturities outstanding.
• Book Value Per Share -- Declined to $7.43 from $8.79 at year-end, principally due to a $0.42 per share loss on loan sales, a $0.47 loss on CECL reserves and valuation allowances, and a $0.36 loss from operations.
• GAAP Loss -- First quarter GAAP loss from continuing operations was $1.25 per common share.
• Distributable Earnings -- Distributable loss was $1 per common share, or $0.33 excluding realized losses on asset sales.
• Recurring Revenue -- Recurring revenue reached $16.2 million, compared to $41.5 million in the prior quarter, with a $28.5 million decline in net interest income partially offset by a $3 million rise in other income.
• Operating Expenses -- Expenses increased $7.8 million quarter over quarter to $67.7 million, driven by $6.7 million in nonrecurring advance payments related to CLO collapses and a $3.9 million decrease in the tax benefit.
• Leverage -- Total leverage at quarter-end was 3x, with expectations to stabilize at 2.5x once the transition is complete.
• Unencumbered Assets and Liquidity -- Quarter-end liquidity was $200 million, and unencumbered assets totaled $730 million.
• Asset Base Outlook -- Total assets are expected to decrease from $6.3 billion to approximately $4 billion following anticipated loan portfolio reductions.
• CRE Portfolio Composition -- After executing the liquidity plan and repaying remaining maturities, management expects a $2 billion legacy CRE portfolio, including $800 million–$900 million of non- and sub-performing loans and REO.
• Quarterly Earnings Drag -- Non- and sub-performing loans and REO assets create a $0.06 per share quarterly earnings drag and $9.3 million in cash outflows per quarter.
• Ritz Property -- Represents 18% of quarter-end stockholders' equity; 43 units sold and 4 under contract, for a 36% sellout of 132 units; average year-to-date condo sale price was $745 per square foot versus $900 for all units sold; hotel occupancy rose 5% year over year to 46%, ADR increased 1% to $482, and RevPAR grew 13% to $221.
• SBA 7(a) Lending -- First quarter SBA 7(a) originations were limited by warehouse capacity, with a $158 million securitization expected to enable $500 million in incremental volume in the second half, targeting a return to historical production of $1.1 billion.
• SBA Platform ROE -- The small business platform has historically delivered 300–500 basis points of core ROE in addition to CRE net interest margin.
• CLO Collapses -- Three CLOs totaling $900 million of collateral were collapsed, and a new $500 million CRE warehouse facility was added.
• Deferred Tax Asset -- The balance sheet includes a $201.6 million deferred tax asset and a $16.7 million tax receivable.
• Business Model Transition -- Focus will increasingly shift toward middle market CRE debt and SBA 7(a) lending, with higher average investment size and increased integration with Waterfall Asset Management.
• Fee Income -- $172 million in originations year-to-date for Waterfall and third parties, including a new $1 billion flow arrangement, supports fee-based income during reduced net interest margin periods.

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RISKS

• GAAP and distributable losses were reported, with distributable loss at $1 per share, reflecting continued near-term earnings pressure during the repositioning plan.
• Book value per share decreased significantly due to realized losses on loan sales, heightened CECL reserves, and operational deficits.
• Management stated, "We expect net interest income to be negative as we move through this transition period," indicating pressure on core profitability.
• Non- and sub-performing loans and REO assets impose a $0.06 per share quarterly earnings drag and $9.3 million in quarterly cash outflows.
• Increasing nonperformers quarter over quarter, with Dominick D. Scali noting an "8 percentage points" rise, driven partly by asset sale dynamics and credit migration in the legacy book.
• Operating expenses increased $7.8 million quarter over quarter due to nonrecurring payments related to CLO resolutions.

SUMMARY

Management reaffirmed the multi-quarter liquidity and deleveraging plan, highlighting significant loan portfolio reductions and asset sales as central to balance sheet repositioning. Executives outlined a strategic transition toward a lower-leverage, capital-efficient business model concentrating on middle market CRE debt and SBA lending, with operational streamlining and increased Waterfall Asset Management integration. The call explained that the upcoming $158 million SBA 7(a) securitization is designed to restore origination capacity, projecting a rebound in small business loan production in the second half of the year. Deferred tax asset recoverability remains linked to the timing and profitability of SBA and CRE business line normalization, as discussed in direct management responses. Segment-level book value volatility and core profitability risks were addressed candidly, with asset runoff and higher average investment size cited as future stabilizers.

• Management views post-transition ROE growth as led by the small business and SBA lending platform, historically generating 300–500 basis points of added return alongside CRE margin.
• Detailed pricing and progress in the Ritz property underscored deliberate monetization strategies, with updated inventory sales and occupancy data influencing projected equity outcomes.
• Fee-based originations for Waterfall and third parties currently supplement compressed net interest margins, with a $1 billion flow arrangement supporting revenue during portfolio realignment.
• Future operating expense reductions are anticipated through business simplification and tighter integration with the external manager.

INDUSTRY GLOSSARY

• CRE: Commercial Real Estate; encompasses income-producing property and loans secured by such properties.
• REO: Real Estate Owned; property acquired by the lender through foreclosure or deed-in-lieu that is held on the balance sheet.
• CLO: Collateralized Loan Obligation; a security backed by a pool of loans, frequently used to finance CRE assets in this sector.
• CECL: Current Expected Credit Loss; accounting standard for estimating credit impairment on financial instruments.
• SBA 7(a): Loan program backed by the U.S. Small Business Administration, providing credit to small businesses; loans can be securitized for institutional investment.
• ADR: Average Daily Rate; hotel industry metric reflecting the average rental income per paid occupancy.
• RevPAR: Revenue Per Available Room; hotel performance metric calculated by multiplying ADR by occupancy rate.
• ROE: Return on Equity; financial performance metric representing net income as a percentage of stockholders' equity.
• Flow Arrangement: Loan origination partnership/agreement facilitating regular sale of originated loans to a third party.

Full Conference Call Transcript

Thomas Capasse: Thank you, Andrew. Good morning, everyone, and thank you for joining today's call. The first quarter of 2026 represents ongoing progress in our balance sheet repositioning strategy initiated in the fourth quarter of '25. First, year-to-date, we have generated $1.4 billion in cash from loan sales and liquidations. These proceeds have facilitated the paydown of over $1.1 billion in warehouse debt and generated $270 million in net liquidity, which was utilized to retire $184 million of corporate debt. Second, we are continuing to resolve non- and subscriptions-performing positions to reduce earnings drag and facilitate recycling into current market-yielding opportunities.

And third, we are transitioning the business model toward a lower leverage, more capital-efficient platform that positions the company for long-term sustainable earnings growth. As we stated in the fourth quarter of 2025, our liquidity plan is projected to span 4 quarters, and we are confident it is the right approach to reset the company's platform for success in the future. We began the year with $650 million of corporate debt across 4 different 2026 maturities. Given the company's current cost of funds and performance of the legacy portfolio, we made the decision to delever the balance sheet with aggressive asset management focused primarily on loan sales.

We retired our $117 million, 5.75% senior unsecured bond in February and our $67 million, 6.2% senior unsecured bond in April, leaving $450 million across our fourth quarter '26 maturities. Year-to-date, we have generated liquidity from 2 primary sources. First, the sale of 48 loans with total unpaid principal balance of approximately $1 billion across 4 transactions for a net liquidity of $177 million. These sales consisted of 66% performing and 30% non and sub-performing loans. Second, portfolio runoff of $550 million provided $93 million in net liquidity. As we look forward, our liquidity plan contemplates an incremental $400 million liquidity from the sale and runoff of $2 billion to $2.5 billion of CRE loans and REO assets through year-end.

Based on current projections, we believe these remaining actions, along with current liquidity are sufficient to retire our remaining '26 maturities and satisfy the future cash flow needs of the business. Post completion of our liquidity plan and the payment of our fourth quarter debt maturities, we believe that the remaining legacy CRE portfolio will total approximately $2 billion. We anticipate this will include $800 million, $900 million of sub and nonperforming loans and REO assets, which we believe have a better net present value via exit from aggressive asset management strategies versus sale at current market discounts.

This sub-portfolio of non- and sub-performing assets has a current quarterly earnings drag of approximately $0.06 per share with cash outflows of $9.3 million per quarter. Furthermore, we expect the anticipated long-term benefits of our repositioning plan will be a reset balance sheet to allow for future earnings growth and a more conservative leverage profile anticipated to stabilize around 2.5x. Upon the expected second quarter completion of the final CRE loan pool sale contemplated in our liquidity plan, we anticipate the material book value pressure that the company has experienced in the past several quarters will be substantially behind us. We also expect several changes to the business model that we will discuss in greater detail in subsequent quarters.

First, we intend to focus our investment activity on allocations to CRE sectors where we see best relative value. We expect average investment size to double relative to our historical average of $17 million. Similarly, we expect that our financing strategy will be more opportunistic and less securitization driven. Each change is intended to help scale the business with a more efficient operational footprint and allow us to be flexible in pursuing market opportunities. Second, we intend to simplify our business model through increased integration with our external manager, Waterfall Asset Management and to refocus on 2 core businesses, middle market CRE debt investing and SBA 7(a) lending.

During this period of constrained investing, we can generate fee income in lieu of net interest margin by originating for Waterfall, where we have funded $172 million year-to-date and for third parties, including through our new $1 billion flow arrangement. In the future, as we recycle legacy assets to generate liquidity for CRE investing, we expect that a combination of our rightsized CRE operations in concert with allocation from waterfall's CRE desk will result in a lower operating expense ratio. And third, we intend to increase capital allocation to our small business lending platform, which we expect to represent 20% of the company's capital going forward.

Sequentially, we believe that the high relative ROE of this business will lead the earnings recovery over the period that the legacy CRE portfolio is recycled into new vintage CRE investments. Historically, the small business platform has provided 300 to 500 basis points of core ROE alongside the CRE net interest margin. I would also like to provide an update on 2 additional items. First, the Ritz property remains our largest single equity allocation, representing 18% of quarter end stockholders' equity. On the condominiums, we have sold 43 units and have additional 4 units under contract, which would bring our total sellout to 36% of the 132 total units.

The average selling price of the 32 condos sold year-to-date was $745 per square foot compared to $900 per square foot for all condos sold. This is a deliberate pricing strategy designed to drive momentum towards the full sellout at higher average prices. The hotel's occupancy increased 5% year-over-year to 46%, marking steady progress towards our 60% target. This increased occupancy, along with a 1% increase in ADR to $482 resulted in a 13% increase in RevPAR to $221. Separately, lower SBA 7(a) originations in the first quarter reflected the prioritization of capital to debt repayment, limiting new SBA deployment to existing warehouse capacity. We anticipate that will change with the pending launch of our $158 million SBA 7(a) securitization.

We expect second quarter securitization to generate capacity for $500 million of incremental go-forward volume, resulting in the second half of the year climbing towards historical production levels, which were $1.1 billion in 2024. We continue to take deliberate steps to enhance liquidity and strengthen the platform. Specifically, we have generated 67% of our target liquidity and begun to streamline business lines to reduce operating costs in conjunction with greater integration with our external manager, Waterfall. There's certainly more work ahead, but we are encouraged by the progress made to date and remain focused on disciplined execution. With that said, I'll now turn it over to Andrew for a detailed review of the quarterly results.

Andrew Ahlborn: First quarter earnings and balance sheet reflect the continued effects of the repositioning plan outlined in Tom's remarks. For the quarter, we reported a GAAP loss from continuing operations of $1.25 per common share. Distributable earnings were a loss of $1 per common share and $0.33 per common share, excluding realized losses on asset sales. At quarter end, book value per share was $7.43 versus $8.79 at year-end. The change was primarily due to a $0.42 per share loss on loan sales settled in the quarter, a $0.47 per share loss on additional CECL reserves and valuation allowances and a $0.36 per share loss from operations.

The net loss from normal operations was impacted by the following revenue and expense items. On the revenue side, recurring revenue was $16.2 million compared to $41.5 million in the prior quarter. The change was driven by a $28.5 million reduction in net interest income, offset by a $3 million increase in other income. The decline in interest income was primarily impacted by the following items: First, the liquidation of approximately $1.8 billion of loans across the last 2 quarters resulted in a $16.5 million quarter-over-quarter reduction in net interest income.

Second, a $5.4 million reduction in cash receipts on loans currently on nonaccrual, the majority of which was driven by 2 loans totaling $230 million that are scheduled for second quarter liquidations. And third, the timing delay between liquidation of assets and the proceeding paydown of corporate debt. We expect net interest income to be negative as we move through this transition period with improvement coming from the continued reduction in nonaccrual loans in REO, the reduction of both asset level and corporate debt financing and the recycling of capital back into market yields. Over this period, we expect a greater percentage of revenue to come from gain on sale and fee revenue.

On the expense side, operating expenses increased $7.8 million quarter-over-quarter to $67.7 million. The change was primarily due to a $6.7 million increase in nonrecurring advance payments made to servicers upon the collapse of our remaining CLOs and a $3.9 million decrease in the tax benefit. Regarding RC's liquidity and capitalization, we remained active in repositioning our liabilities. First quarter activities included collapsing 3 CLOs totaling $900 million of collateral, the addition of a new $500 million CRE warehouse facility and the renewal of an additional 2 facilities. Current total leverage is 3x, and we ended the quarter with $200 million of liquidity and $730 million of unencumbered assets. With that, we will open the line for questions.

Operator: [Operator Instructions] And our first question is from the line of Jade Rahmani with KBW.

Jade Rahmani: Where do you expect balance sheet total assets to end after you're done with the planned asset sales? What size balance sheet do you expect Ready Capital to have?

Thomas Capasse: Andrew, do you want to touch on the pro forma?

Andrew Ahlborn: Yes. And the total assets, as Tom said in his remarks, we expect another $2 billion to $2.5 billion reduction in the loan portfolio. So based on current total assets of roughly $6.3 billion, we'd expect that number to come down closer to $4 billion.

Jade Rahmani: Okay. Do you have a range of pro forma book value per share you expect the $2 billion, $2.5 billion further reduction to result in?

Thomas Capasse: We're not providing guidance at this -- Yes, go ahead -- Andrew.

Andrew Ahlborn: Yes. What I would say is the change in book value between the first quarter and where we end up in the second quarter base is going to be highly dependent on -- how much of that $2.5 billion we end up selling to cover the remaining liquidity needs to get through the '26 maturities. So there's a little bit of variability based on the execution of those upcoming trades.

Jade Rahmani: The remaining $800 million to $900 million of subperforming loans, that's not including any of the REO.

Andrew Ahlborn: That includes...

Thomas Capasse: That includes the REO portfolio.

Jade Rahmani: That includes the Portland REO?

Andrew Ahlborn: That's correct.

Jade Rahmani: Okay. And then just lastly, in other assets of $466 million, do you have the balance of deferred tax assets and tax receivables? Because my worry is that there's write-down risk for those assets as the recoverability in earnings is reduced driven by ongoing operating losses and the lack of earnings to materialize those deferred tax assets.

Andrew Ahlborn: Yes. The current deferred tax asset on the balance sheet is a little over $200 million. It's $201.6 million. And the tax receivable is $16.7 million. What I would say is there is a heavy focus on growing the SBA business. And as Tom mentioned, it's really been limited by the existing warehouse capacity as that opens up, I would expect that business to return towards profitability more similar to where we were running in '24. So we do think that, that deferred tax asset has value. But certainly, we are aware of the magnitude.

Thomas Capasse: Yes. I mean just to add to Andrew's remarks, there's a clear path forward for earnings -- recovery in earnings sequentially over a relatively short period of time, led by the SBA small business, which has historically thrown off around 300 to 500 basis points of ROE. Secondly, there will be OpEx reductions consistent with the simplification of the business model. And thirdly, the remaining nonperforming assets post the final tranche of the loan sales is a relatively small pool of assets to include the Ritz, which is experiencing positive financial momentum. And that is about a 2-year underlying duration of those assets is probably about 1.5 years.

Operator: [Operator Instructions] The next question is from the line of Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: I want to preface just saying that you're skiing down some very difficult terrain, and I got to give you kudos for navigating this so far. The nonperformers for the overall portfolio increased materially quarter-over-quarter. Why -- can you give some color as to why the core CRE portfolio deteriorated?

Andrew Ahlborn: Yes, I'll let Dom get into some of the details, but I will say that the -- to some extent, the legacy book traditional metrics like 60-plus are becoming not irrelevant, but less of a metric on loan quality because what we -- when we look to do a sale of assets, if it's subperforming with a relative, let's say, low single-digit debt yield, we won't -- we'll purposely execute asset management strategies, which improve the secondary market price of that sale, i.e., not providing additional modifications, et cetera. So that creates a roll rate that amplifies the additional impact of the denominator effect, which is the sale of performing loans. So Dom, maybe just touch on that as well.

Dominick D. Scali: Yes, sure. Just to stress what Tom was referencing, I think the designation with core and noncore as we work through this liquidity strategy is likely to become less relevant. But just to sort of give you some summary information. So if you look at Q4 quarter end compared to Q1 quarter end, I think we're up about 8 percentage points. As we identify assets for sale to generate liquidity, some of those assets will be and have been performing assets. So just keep that in mind.

But I'd say the breakout of that increase would be 1/3 sort of credit migration with a few assets sort of moving to sort of a workout stage, but the majority of that is predominantly situated with sort of a denominator effect as we sell through some of the performing loans.

Christopher Nolan: Okay. And then I guess, Andrew, what does all of the changing or deteriorating credit metrics and everything else mean for the reserve allowance going forward? And where do you see leverage ratios once this transition is over?

Andrew Ahlborn: Yes. We had an additional provision of a little under $71 million in the quarter. As we sell through this remaining portfolio, as Tom mentioned, the amount of loans on the book and particularly loans that are non- and sub-performing is going to be fairly limited. Somewhere between $300 million and $400 million and only across 30 or so line items. So we have pretty good line of sight into how those assets are going to perform. So you may see marginal increases in reserving around those. But I think the biggest change that is -- or effect that is remaining in the book is just the execution of the sales on the $2 billion to $2.5 billion portfolio.

And then leverage, we expect to stabilize around 2.5x.

Christopher Nolan: Great. And Tom, you mentioned less securitization. Does that mean less 7(a) securitization?

Thomas Capasse: No, I think the SBA securitizations are relative -- very liquid and there's a lot of demand in the ABS market. So that was more of a reference to the CRE, CLOs with a focus on a single sector, in this case, historically multifamily. Because the -- what's very important to understand is that kind of the third leg sequentially of the reboot of the earnings is going to come from recycling of these remaining and it's a very finite number of REO and NPL assets that have a negative drag of about 2 points currently on ROE.

We will -- we are integrating our operations, our current origination team, et cetera, with the external manager who has very large investment capacity around a broad array of CRE sectors, and we look at best relative value along the lines of becoming sector agnostic. And then to specifically answer your question, many times, those are -- those transactions are funded with nonrecourse bank debt, which matches the maturity of the underlying loans, which in turn are probably at most 3-year exposure. If you look at the external managers' trailing 5-year track record and types of investments.

So I think that -- but what's important to understand is once you free up equity from an NPL resolution, which we have finite plans for the small number of line items, that's immediately accretive because we could -- rather than building an origination pipeline, we are able to immediately get an allocation of that investment with -- from the external manager, which is immediately accretive. They're usually -- right now, those investments are running in the low to upper teens, probably in that 14 handle.

So anyway, that's -- just to answer your question, that's how our view is with respect to the positioning of a more -- if you will, a more conservative positioning of the liability management on unsecured basis.

Operator: At this time, I'll turn the floor back to management for closing comments.

Thomas Capasse: We appreciate everybody's time and focus on this call, and we look forward to the second quarter earnings call where as we continue to execute and complete our liquidity plan.

Operator: Thank you. Ladies and gentlemen, you may now disconnect your lines at this time. We thank you for your participation, and have a wonderful day.

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