Ready Capital Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: Bulk sale of $494 M legacy multifamily bridge assets generated $85 M in net proceeds and is expected to boost earnings by $0.05 per share this quarter, plus $0.02 per share from reinvestment.
  • Negative Sentiment: Consensual acquisition of the Portland mixed-use asset (including the Ritz Carlton) cost $10 M in cash with a $5.3 M or $0.03 per share negative carry drag in Q2 as the company works to stabilize occupancy and sales.
  • Positive Sentiment: Actions in the capital markets—including collapsing two CRE CLOs for $71 M in improved financing terms and securing an additional $175 M of SBA/USDA warehouse capacity—have generated $221 M in liquidity to fund new loan originations.
  • Neutral Sentiment: The CRE loan portfolio is now segmented into a $5.4 B core arm (hold-to-maturity) and a $695 M non-core arm for accelerated liquidation, with core yields at 10.9% and non-core yields at –10.7%.
  • Neutral Sentiment: SBA 7(a) originations slowed to $216 M in Q2 due to warehouse constraints, but management expects volumes to rebound above $325 M per quarter once new capacity and securitization plans are in place.
AI Generated. May Contain Errors.
Earnings Conference Call
Ready Capital Q2 2025
00:00 / 00:00

Transcript Sections

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Operator

Greetings. Welcome to Ready Capital's Second Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow today's formal presentation. As a reminder, today's conference is being recorded.

Operator

At this time, I'll now turn the conference over to Andrew Alphorn, Chief Financial Officer. Andrew, you may begin.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Thank you, operator, and good morning to those of you on the call. Some of our comments today will be forward looking statements within the meaning of the federal securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of risks that could impact our future operating results and financial condition.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

During the call, we will discuss our non GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter twenty twenty five earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Zausner, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capacity.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. In the second quarter, we completed three initiatives to continue the repositioning of the company's balance sheet coming out of this CRE cycle, the financial benefit of which will be visible in the second half of the year and beyond. First, as part of the broader strategy, each loan in both the core and noncore portfolios is evaluated to determine whether the NPV of asset sale is more accretive to improving net interest margin by disposing of low yield assets and reinvesting in new originations versus traditional on balance sheet asset management strategies such as loan modification. In this regard, we completed our first bulk sale earlier this week, selling $494,000,000 of legacy multifamily bridge assets, generating net proceeds of $85,000,000 While the transaction settled in the third quarter, it reflects the sale process initiated in the second.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

The pool included 73% non core, 27% core, 40% were delinquent, 33% risk rated 40592% nonaccrual. An additional $26,000,000 of REO included in this trade is expected to settle by mid August. This transaction is strategically significant, eliminating 100% of the 2021 vintage syndicated loans while allowing potential upside through retention of a preferred return if certain performance targets are met by the buyer. The pro form a financial benefit is twofold: an immediate increase of $05 per share per quarter, representing the removal of the negative carry associated with these assets and longer term, an additional $02 per share per quarter from the reinvestment of the equity into market yielding loans. In the third quarter, the cumulative loss from the transaction will flow through distributable earnings with no material expected impact on book value per share as the transaction was reserved in the second quarter.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Second, we took ownership of the Portland, Oregon mixed use asset, which includes a Ritz Carlton hotel and branded residences along with Class A office and retail space through a consensual transaction that closed on July 21. We avoided a lengthy and costly foreclosure process with a net cash outlay in the third quarter of $10,000,000 Since taking title and assuming operating control, we're moving quickly to stabilize the asset. We partnered with institutional property manager, Lincoln Property Company, and are evaluating residential brokers and Ritz residence sales strategies. From a performance standpoint, in the second quarter, RevPAR at the hotel was $192 The retail component is 100% occupied. The office is 23% leased.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

And to date, 11 of the 132 residences were sold at an average price of $11.23 dollars per square foot. The negative carry from the asset was $5,300,000 or $03 per share for the quarter. ReadyCap fully intends to provide financial and operational support to maximize the value of this premier hospitality asset in the Portland market. Now third, we took steps in the capital markets to enhance liquidity and increase warehouse capacity to support loan origination. In our CRE business, we collapsed two of the five outstanding CRE CLOs, improving advance rate 7%, generating $71,000,000 in proceeds with nearly 100 basis point improvement in financing costs.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

In our SBA business, two of the three warehouse lines pending approval with the SBA were approved, adding $75,000,000 of additional warehouse capacity that is expected to fund over $400,000,000 of seven production. Additionally, we closed $100,000,000 USDA warehouse facility for the second $100,000,000 facility anticipated to close in the third quarter. These two facilities will facilitate the ramp in USDA volume to our $300,000,000 annual target. Collectively, these three actions, sale of underperforming loans, taking ownership of the Portland asset to accelerate its stabilization and expanding our funding capacity, generated $221,000,000 of liquidity, providing capital for new loan originations to rebuild our NIM. As of the quarter end, the CRE loan portfolio totaled $6,100,000,000 now clearly segmented into two parts: a $5,400,000,000 core portfolio consisting of legacy loans favoring on balance sheet hold to maturity asset management strategies and a $695,000,000 non core portfolio consisting of lower yielding assets where asset management strategies favor accelerated liquidation.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

In the core portfolio, $527,000,000 of payoffs and liquidations reduced the portfolio 8% in the quarter. As expected, negative credit migration in the portfolio was muted, with only 17 loans totaling $71,000,000 transitioning to sixty day plus delinquency. 60% of this 50 basis point increase in the sixty day delinquency number was due to quarterly decline in the portfolio balance. Additionally, we modified 14 loans totaling $250,000,000 with a 14 basis point decline in expected yield on those assets. Regarding the earnings impact of the core portfolio, the leverage yield decreased 20 basis points quarter over quarter to 10.9%, producing $43,000,000 of net interest income or $0.26 per share.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Several quarters of reduced originations and loan payouts have reduced our CRE portfolio over 30% from its $10,500,000,000 peak in the 2023. As discussed previously, our Bridge portfolio was primarily financed via the issuance of static CRE CLOs with industry tight CLO triggers where weakening collateral performance resulted in loan payoffs, reducing senior bonds rather than providing capital for reinvestment. In turn, relative to the peer group, ReadyCap experienced more rapid deleveraging with less free cash flow to make loans. After a prolonged focus on stabilizing the portfolio, liquidating underperforming assets and collapsing five of our eight CLOs, we anticipate reentering the origination market in the third quarter. Originations will focus on high quality multifamily bridge loans underwritten at lower LTV and healthy in place debt yield, designed to rebuild the core portfolio and facilitate our return to the CLO market in early twenty twenty six.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Current lending margins of SOFR plus two seventy five to 300 and a CLO AAA market spreads under 150 basis points support projected retained yields of 13% to 15%. Additionally, we continue to leverage our external manager Waterfalls infrastructure to also allocate capital to more liquid CRE debt securities. In our noncore portfolio, we have met 78% of our second quarter disposition targets, of which 3% settled in the quarter with the remaining 97% closing post quarter end. In the second quarter, dollars 9,600,000.0 of loans were liquidated at 105% premium to our mark, generating $3,800,000 of liquidity. Post settlement of the bulk sale, the noncore portfolio was reduced by an additional 52 percent to $333,000,000 of carrying value consisting of 39 loans with an average price of $79 The quarterly yield on the non core portfolio was negative 10.7%, resulting in a cost of $5,300,000 or negative zero three dollars per share.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

However, the continued liquidation of the non core portfolio will minimize its financial drag. As of today, the combined non core and REO portfolios totaled 12% of the company's investments, down approximately 25% from the beginning of the year. In our SBA business, as anticipated from the prior quarter's earnings call, quarterly origination volume decreased to $216,000,000 due solely to capital constraints as we awaited on approval of increased warehouse capacity from the SBA. In addition to the approvals received to date, we anticipate an additional $100,000,000 in warehouse capacity currently pending SBA approval. A planned future securitization to retain seven unguaranteed interest would provide additional liquidity to fully fund the business.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

In 2024, we originated $1,100,000,000 of SBA seven loans, and the platform has continued to carry the infrastructure and cost to originate more. Our current SBA pipeline in closing totals $173,000,000 Now in terms of the outlook, there are three primary items that we expect to contribute to earnings improvement. First, the increase in new originations with capital generated from continued liquidation of the noncore portfolio and other lower yielding assets to further growth in net interest margin. Second, stabilization of the Portland mixed use asset, important for both reducing the current negative financial drag and to facilitate liquidation of the hospitality, office and residential components. And third, a return of SBA seven lending volumes to over $325,000,000 per quarter and the long awaited entry of Ready Capital to the USDA market at scale. We expect modest earnings growth in the 2025 from these initiatives relative to the first and second quarter results.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Assuming no significant deterioration in the macro environment, we expect to maintain our current dividend level until our earnings profile warrants an increase. With that, I'll turn it over to Andrew to go through quarterly results.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Thanks, Tom. For the second quarter, we reported a GAAP loss from continuing operations of $0.31 per common share. Distributable earnings were a loss of $0.14 per common share and $0.10 per common share excluding realized losses on asset sales. Several key factors impacted our quarterly results. First, net interest income increased to $17,000,000 in the quarter.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

The improvement was due to a full quarter of interest income from the UDF transaction and lower interest expense from lower leverage and a five basis point reduction in borrowing costs, which averaged 6.8% for the quarter. In the core portfolio, the interest yield was 8.1% and the cash yield was 6.1%. The interest yield in the non core portfolio was 2.4%. Second, gain on sale income net of variable costs increased $2,500,000 to 22,700,000.0 The change was the result of higher USDA and Freddie affordable volume offset by lower SBA 7A volumes due to the pending approval of warehouse line increases with the SBA. The income was driven by the sale of $121,200,000 of guaranteed SBA seven loans at average premiums of 9.9%, the sale of $151,000,000 of Freddie Mac loans at premiums of two sixty five basis points and the sale of $41,900,000 of USDA production at premiums averaging 9.7%.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Realized gains from normal operations were offset by $8,900,000 of realized losses from the sale of assets, all of which were adequately reserved for in previous quarters. Third, operating costs from normal operations were $58,000,000 representing a 5% increase from the previous quarter. Fourth, the combined provision for loan loss and valuation allowance increased $48,400,000 The additional $39,700,000 valuation allowance was due to pricing adjustments on the trade Tom mentioned, which settled this week. The $173,000,000 cumulative valuation allowance related to this trade will flip to a realized loss in the third quarter and be included in distributable earnings. The $8,600,000 provision for loan loss was due to a net increase in the general provision of $800,007,800,000 of specific reserves on assets which experienced deterioration in the quarter.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

And last, other items of significance included a $14,400,000 reduction in the bargain purchase gain related to the closing of the UDF IV merger, dollars 6,500,000.0 of non cash impairment of the SBA and USDA servicing assets related to movements in the discount rate and a $41,600,000 tax benefit from losses associated with a loan pool sale. Income from normal operations net of tax, which can be found on page 11 of the financial supplement, decreased $6,700,000 to a $7,300,000 loss in the quarter. Recurring revenue increases of $809,000 due to higher net interest income and higher gain on sale revenue were offset by a $7,500,000 increase in operating costs due to higher accruals and a $4,800,000 reduction in the tax benefit. On the balance sheet, a few key items to highlight. First, we completed the sale of our residential mortgage banking business, GMFS.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Proceeds from the sale included cash equal to the adjusted book value of the business and an earn out over the next thirty months. The transaction resulted in a cumulative loss and disposition of 3,000,000 And second, we continue to reduce our short to medium term debt maturities. In the quarter, we retired $50,000,000 of corporate debt using proceeds raised from the upsize of our initial Q1 $220,000,000 senior secured issuance. As of today, we have a total of $650,000,000 of corporate debt maturing through 2026, including current maturities of $132,000,000 We are focused on extending those maturities over the upcoming quarters. Book value per share was $10.44 at quarter end, down $0.17 from March 31.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

The decline was primarily due to the dividend and coverage shortfall, partially offset by the repurchase of 8,500,000 shares at an average price of $4.41 which offset the reduction in book value per share by $0.31 per share. Liquidity remains strong with unrestricted cash at over $150,000,000 and just under $1,000,000,000 of total unencumbered assets. With that, we will open the line for questions.

Operator

Thank you. We'll now be conducting a question and answer session. You may press 2 if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions.

Operator

The first question is from the line of Crispin Love with Piper Sandler. Please proceed with your questions.

Crispin Love
Crispin Love
Director - Equity Research at Piper Sandler Companies

Thank you. Good morning, everyone. First, Tom, you mentioned that you're reentering the origination market in the third quarter and you said you expect modest earnings growth. I was wondering if you could just put a little bit of a finer point on that. Does that mean that you still expect distributable earnings losses in the near term?

Crispin Love
Crispin Love
Director - Equity Research at Piper Sandler Companies

And then when do you think you can get to profitability and then closer to dividend coverage?

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Yeah, I'll let Andrew touch on that. But with one adjunct comment, which is the origination team is gearing up to target, if you will, new vintage multifamily bridge, probably about a five point lower attachment point and higher debt yields than in the peak of this last cycle. And that'll take some the pathway for that is probably like one hundred and twenty days. However, in the interim, we have access to the external managers' significant CMBS trading capabilities. So we would look to deploy cash immediately into those instruments to provide some kind of, if you will, the first leg of the rebuilding the NIM. So Andrew, maybe with that backdrop, maybe touch on Christian's question regarding the ramp in the earnings.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Good morning, Christian. So if you start from what I'll call normalized earnings in the quarter, which were a loss of $04 and the difference between that and distributable being mainly things like MSR impairment. There are a couple of items that Tom mentioned in his prepared remarks that are sort of already baked. The first is that JV sale where the negative carry will increase the reduction in negative carry will increase EPS by $05 a quarter. We anticipate that the reinvestment of that equity, which will occur over the third and fourth quarters to generate another $02 So that'll bridge the gap into positive, what I'll call normalized earnings.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

There are a couple of other items that happened in the third quarter. One, paid off a $75,000,000 repo on the retained interest of one of our CLOs, that's going to generate a penny. And then you move into production increases in our small business lending segments. So our expectation is once the USDA platform gets to a normalized ramp of roughly $300,000,000 annually, that will increase earnings $02 a share. And the return of SBA volume to where we were running at the '4 is expected to increase earnings another $03 to $05 Now some of that is going to be offset by obviously the need to refinance the corporate debt where if you just take the delta between where the cost from the debt today and where we priced our last deal we expect it to increase decrease earnings $03 to $05 So those are the most immediate term ramps.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Know growth from there is going to come from turnover of the portfolio as Todd mentioned.

Crispin Love
Crispin Love
Director - Equity Research at Piper Sandler Companies

Perfect. Thanks Andrew. I appreciate you laying all that out. And then on the bulk sale of legacy bridge loans, can you first describe the type of buyer here broadly? And then how much is left to sell?

Crispin Love
Crispin Love
Director - Equity Research at Piper Sandler Companies

And I think you might have said that the that's all from the 2021 vintage. And then also if you can just dig into a little bit the pricing of that sale versus initial originated values and then pricing prior to those 2Q final marks.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Yeah, I'll let maybe, Adam, you could tackle this. But just as a preparatory comment, Christian, in the private funds market and the external manager, we see this firsthand. But there's been a lot of money raised in real estate private equity, which is targeting the multifamily sector, which is viewed as fundamentally solid in terms of the supply demand dynamics and basically in 'twenty five and 'twenty six, the oversupply from the boom years of 'twenty one through 'twenty three are now working its way through the market. You're starting to see firmness in rents. So anyway, it's a long awaited way of saying that probably been at least $3.400000000000 dollars of opportunity capital that is looking for these assets.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

And what they'll do is they'll look to undertake to purchase the debt essentially to own and operate the properties. So with that backdrop, Adam, maybe just provide some additional color.

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Yeah, yeah, sure. Good morning, Christian. The partners here are a multifamily operator with a few thousand units and a fund partner that has AUM of about $1,500,000,000 They came together and are the buyer of this portfolio. From a price perspective, the price is around 77 of the UPB. And I think it's important to highlight here that this portfolio had a sponsor concentration of specifically two syndicators, GVA and Tides.

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

We are virtually removing 100% of exposure to those two sponsors. And I think as Tom highlighted in his remarks, about 40% of that portfolio was sixty plus days delinquent. Non core, 31% core. Sorry, 31% of the sixty plus was in non core. And there was REO in here as well of about 31,000,000 in this portfolio.

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Don't know, Chris, if you have other questions or I answered you here.

Crispin Love
Crispin Love
Director - Equity Research at Piper Sandler Companies

Yeah, just one last kind of quick follow-up. Is there anything left from the 2021 vintage in your portfolio, either core or non core?

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Yes, there certainly is in the core portfolio.

Crispin Love
Crispin Love
Director - Equity Research at Piper Sandler Companies

Great. Thank you. I appreciate taking my questions.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Sure.

Operator

The next questions are from the line of Doug Harter with UBS. Please proceed with your questions.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Thanks and good morning. You talked about kind of SBA volumes picking up. Can you talk about what is going to be the driver of that and your confidence as to the timing as to when you're going to start to see that?

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Well, if you look at the industry volume, when the new administration came in there was an industry wide decline in volume. I think was what Andrew was like 1015% metric. I'm referring to the seven program, which typically runs 25,000,000,000 to $30,000,000,000 per year based on annual approval by authorization by Congress. And that was mainly due to changes in some of the Biden error rules called published standard operating procedure regarding small loans in particular. So the industry has undergone those changes and has rebooted credit guidelines, which are incrementally more conservative.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

I'll point out that we preemptively in our small loan program actually implemented those guidelines about three months ahead of the SBA's changes. So we feel comfortable there. So we're going to see a ramp and demand for we were just seeing demand for small business loans, especially M and A or business acquisitions remains strong. And of course, we're a leader in the small loan program via our fintech I business. So the main constraint we have faced has been the approval of warehouse lines by the SBA.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Obviously, there are some constraints with the turnover in the government throughout the government agencies adapting. So we now see a path forward to sequentially increase the lines. The next line limit is, I think, is slated for around $175,100,000,000 dollars So that's what, from an industry perspective and from our own specific perspective, is what's accounted for the drop in this quarter's seven originations. And bolted onto that, however, is the ramp in our USDA business, which is a top three lender historically. And that will add an incremental increase in the P and L in our small business segment.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

So Andrew, I don't know if you would add to that.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yeah, I think you will see volumes in the third quarter remain somewhat consistent with where they are in the second quarter. As Tom mentioned, the pending approval of that third warehouse line with the FAA will certainly open up capacity. But the full ramp back to, you know, what a targeted 1,200,000,000 to $1,500,000,000 in annual originations is really going to come from, you know, clearing the existing warehouse lines through some capital markets transaction, as Tom mentioned. Whether that be a normal way securitization of seven loans, which we've done a handful of or participation sales, that will be the driver to really increase the capital needed to get back to those levels. So I would expect a ramp back there to happen more towards the back half of the second half of the year.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Yeah. And just one last comment on SBA. We are fully supportive of the regulatory changes under the new administration. And there is a bill before Congress to increase the guarantee from the cap from 5,000,000 to $10,000,000 for manufacturing facilities. And we're working we're targeting to the extent that we support that legislation.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

And to the extent it's proved, we're developing targeted origination strategies around that. So there is some upside in terms of going into the fourth quarter and early twenty twenty six.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. Appreciate that. And then on the unsecured issuance, can you just talk about your plans there given the higher costs you're seeing there now? Does that market still make sense financially? Or is it important part of the capital structure that you want to continue even though the costs are elevated today?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes. If you look at the $650,000,000 we have coming due, around $300,000,000 of that is unsecured, some of that being, you know, 25 par deals. So we think, you know, that market will play a part in the refinance of a portion of that $650,000,000 I do believe that the majority of that pending debt though will probably get placed through a secured issuance, whether it be utilizing the $100,000,000 still available on our Q1 issuance or new security. And when you look at unencumbered assets and even excess coverage in existing deals, there's a significant amount of what I'll call clean performing product to support those issues. And so, you know, we remain confident in the ability to refi those out, but certainly acknowledge that the increased cost of that debt, you know, will put pressure on the earnings as I described earlier.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. Appreciate it. Thank you.

Operator

Our next questions are from the line of Jade Rahmani with KBW. Please proceed with your questions.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Thank you very much. So much to go through here, but I'll try to be somewhat brief. Just on Portland, will the assets be held on the balance sheet at $432,000,000 And did the 5,300,000 carrying costs you cited reflect a full quarter impact? What's the 3Q estimate?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yeah, I can answer the first question, Jade, and then I'll let Adam talk about the operations. Yeah, the initial evaluation will be put on at that 04:25 and then evaluated for impairment going forward from there.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Okay. And then in the quarterly carrying cost estimate?

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Yeah. Jade, I'm sorry. Your your your question is what on on the 05/03?

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Yes. Is that a full quarter estimate for the carrying cost?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes. That was the full quarter impact.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

That affected the second quarter?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Correct. So 5,300,000.0 was in the second quarter.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

But you foreclosed in July?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes. But we were holding it as a nonperforming loan in the second quarter. So that's just the net expense.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Now that you own it, what will the carrying cost be?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes, I think that's a fairly good estimate going forward. There are a couple of things that we are working on to help reduce that. One is to lower the financing costs associated with that asset. And then obviously, as the loan stabilizes, whether it be leasing of the office or a reduction in the amount of unsold condos, that number will come down.

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Think, Jade, I think the material operating costs would be what we'd call good news money, where we get an office tenant and we're required to put up tenant improvements to get that tenant into the office space and improve their space. So again, think the material cost would be where the asset is improving significantly and we're putting in good news investment.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

How much capital will need to be put in across the three categories?

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

I'm sorry, missed that last comment.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

How much capital will need to be put in including marketing and sales spending?

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Look, we got the asset about two weeks ago. Our partner Lincoln, who we're partnering with on the asset management, the asset is putting together a budget. As of right now, again, the material spends are on marketing the condo units, which again, we're putting together a budget for that. That'll be a driver. The tenant improvements it depends on the type of tenant that comes in.

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

But we're looking at from a tenant improvement cost, probably around $150 a square foot to $200 a square foot for TIs, for the office tenants. And we've got approximately 66% remaining to lease up. And then yeah, I mean, there's other costs associated with the HOA on the condo and other aspects of marketing this property.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

But I think just as one comment, Adam, correct me if I'm wrong, but in relation to say, for example, office the future projected CapEx in relation to our basis, over 50% is a Ritz Carlton that opened up in October '3, which is on its way to stabilization. Trailing 12 RevPAR was a little over $200 So that per se doesn't require significant CapEx. And then the CapEx on the office, it's how many square feet of the 66% that's left, Adam?

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

Yeah, it's about 70,000.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

So it's 70,000 square feet. It's de minimis in relation to true office property. So that's, Jade, where you might have some CapEx. But again, that, along with maybe the marketing strategies around the residences, the branded residences, will incrementally have some CapEx. But nothing in relation much less than what you'd have with, for example, other sectors like the office space.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Okay. Secondly, just on the dividend, conveying some sentiment from institutional investors that I've been in touch with. The company has a very large deferred tax asset, so plenty of shield to avoid having to pay a dividend. So based on current management expectations, why not eliminate the dividend and reallocate that capital toward, number one, debt repayment because there's significant maturities at a very high cost that was referred to. And then number two, once you feel really comfortable, you could allocate that toward the buybacks, which are continuing, which would stabilize book value and protect the company's equity base.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

So right now, the dividend is still quite costly. It would seem to make more sense to suspend it and then recommence once we're kind of out of the woods in this period of stress?

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Yeah, mean, that's a fair question. And a lot of it has to do with our repositioning strategy. Right now, for example, in this quarter we achieved with a month or two delay the goal to eliminate half of our non core portfolio and the significant drag there. And you saw the bridge to covering the dividend. But maybe, Andrew, if you could just discuss in that context some color, some thoughts around Jade's question.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yeah, I think it's a good question. As I mentioned earlier to Chrisman's question, there is a bridge to an earnings profile assuming no further deterioration in the core portfolio that gets close to that coverage. Now it's going to take some time as I mentioned, but I think the Board will continue to evaluate the performance of the core portfolio as well as the progress in that walk I made earlier in evaluating the dividend.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Thanks very much.

Operator

The next question is from the line of Randy Binner with B. Riley Securities. Please proceed with your questions.

Randy Binner
Managing Director at B.Riley Securities

Hey, thanks. I think I just kind of have follow ups to some of the questions. I guess the first one, excuse me, is on just Andrew, going back to your walk, the EPS walk to dividend coverage. Did that I think at the end you said there was some negative for higher anticipated interest expenses kind of deal with the debt maturity for '26. Was the drag from the Portland property also contemplated in that EPS walk?

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes, so the current that EPS walk assumes, as I mentioned to Jade, that the Q2 negative carry of that stays somewhat consistent. To the extent there, as I mentioned, good news money that goes out, that may weigh but then results in higher revenue. So the drag is already included in that upfront number.

Randy Binner
Managing Director at B.Riley Securities

Okay. But it would mean it's at least two quarters, if not three quarters, the way I'm putting these numbers together before you'd be at 12.5¢.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

That's right.

Randy Binner
Managing Director at B.Riley Securities

Okay. Well, dividend question was covered. Just going back, I think Chris has asked about this, but I just want to make sure I'm crystal clear on this. So the 85 of net proceeds from the loan sale, that's I think in the answer there, it's some it was held at 77% of UPB. I don't know if I heard that correctly.

Randy Binner
Managing Director at B.Riley Securities

I'm just trying to understand, is it was it a you sold $494,000,000 worth and 85,000,000 was all the proceeds or there was that was the net proceeds after kind of other offsets? I just want to make sure it's clear on that.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes. So all of these assets were financed whether that be on warehouse or inside our CLOs. So roughly $3.00 $8,000,000 went to pay off our warehouse lenders and then there was another $128,000,000 that went to repurchase those loans out of the CLOs, which is how we get to the net under 5,000,000 of cash.

Randy Binner
Managing Director at B.Riley Securities

Got it. And then just on the you did issue the 50 and the 85 proceeds there. And so, Andrew, I heard you referred to the six fifty maturity wall coming up for 2026, but is it kind of when we talk to investors and think about it pro form a these raises, I mean, it really more like 600 or even lower? Would we assume that the 50,000,000 issued and then these proceeds would kind of pay down debt? Or is it is that going to other purposes and the $6.50 stands on its own and would be refied independently, if that makes sense?

Randy Binner
Managing Director at B.Riley Securities

I'm trying to handicap like what the right 26 maturity number is net of everything we've discussed on this call.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yes. No, understood. I do think that a portion of that $650,000,000 will come from just natural pay downs or repurchase in the market by the company. So I don't anticipate dealing with that maturity letter fully through the issuance of new debt. With that being said, not 100% of the cash flow coming off the portfolio is going to go towards delevering for the, you know, the simple fact that, rebuilding the net interest income, as Tom mentioned, is really important to getting the earnings profile going in the right direction.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

And we have confidence in that just based on a lot of the work we've done over the last few months on the accessibility of the markets to help deal with that six fifty. But to your point, I don't anticipate 100% of that being refiled. Some of that's going to come from us using the organic liquidity of the company to lower that amount.

Randy Binner
Managing Director at B.Riley Securities

Okay, great. That's all I had. Thank you.

Operator

The next question is from the line of Christopher Nolan, Ladenburg Thalmann. Please proceed with your question.

Christopher Nolan
SVP - Equity Research at Ladenburg Thalmann & Co. Inc

Hey, guys. Was the Portland asset acquired or was that legacy asset of Ready Capital?

Adam Zausmer
Adam Zausmer
Chief Credit Officer at Ready Capital

That was an asset that was acquired through the Mosaic merger.

Christopher Nolan
SVP - Equity Research at Ladenburg Thalmann & Co. Inc

Okay. And then I guess looking back on all the Fast and Furious mergers that you guys did over the past years, and many of them seemed, at least to the outsider, more as a financing vehicle. Going forward, what's your M and A strategy? Has it changed when you come back to that, or is it still looking to capitalize on cheap under levered balance sheets?

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

I mean, beyond the M and A transactions, the history of Freddie Cap and the external managers has been since the GFC acquiring portfolios of distressed assets. And so I think that was a strategy leading into the rate rise and the turn in the credit cycle. Obviously, we have had less reliance on that since 2023, albeit we did have a very accretive acquisition of the UDF lot loan business where we would look at some point down the road to deploy additional capital because it's a very high ROE business with a lot less less exposure to the CRE market, more broadly speaking. But I would say we'd have less of a reliance in the near term on M and A unless it's highly accretive. And I'll add, Andrew, if you'd comment on that as well.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

Yeah, nothing to add.

Christopher Nolan
SVP - Equity Research at Ladenburg Thalmann & Co. Inc

And Tom, on that small business comment, should we look for the equity allocation to small business to increase in coming quarters?

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Yeah, we would look to continue to allocate equity to that business. As we said in the past, it has a lot of inherent leverage, given that you sell off 75% of the seven loans on a participation basis. And then you can under the SBA rules, can borrow against, I think, 60% of that. But to support it's a very high ROE business, very barriers to entry with limit on non bank licenses. And then, of course, there's the growth of the USDA business, which support loans what is it, Andrew, up to $50,000,000 or 25,000,000 I can't remember the exact number.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

But I'd say the long way to answer your question is yes, we would look to continue to allocate capital to that business where as to support growth in the volume.

Christopher Nolan
SVP - Equity Research at Ladenburg Thalmann & Co. Inc

Great. And then final question. I think Adam commented earlier about private equity entering into for multifamily. Should we look at that as sort of being opportunistic money given the large wall of maturing commercial real estate paper out there and the private equity is trying to get into the asset class on the cheap? Is it a cyclical play by private equity playing into multifamily?

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

Yeah, it's unequivocally a cyclical play. They bucket it as opportunistic CRE in the pension fund world. And as a result of that, Adam can come in, but we get constant reverse inquiries from the acquisition specialists at these CRE equity shops, given the fact that we have a significant rather than buying onesie twosies in the broker market, there's very few opportunities for bulk sales like we just executed today. So as a result of that, and it was part of the commentary in our prepared remarks, one of the things we do in the both, obviously the core, which is papers accelerated liquidation, but also the non core. Our asset managers will always have an overlay evaluation of looking at sale in the secondary market to the extent that the on balance sheet asset management strategies create a lower yield, and given the focus on rebuilding the net interest margin, if we can sell at a discount and then use that net proceeds to rapidly recover that discount versus on balance sheet, we would look to undertake bulk sales.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

But yeah, the reason that that opportunity exists is the cyclical influx of capital into targeting the multifamily space. And obviously, we have a large legacy book that can benefit from that.

Christopher Nolan
SVP - Equity Research at Ladenburg Thalmann & Co. Inc

Okay, thank you very much for taking my questions.

Andrew Ahlborn
Andrew Ahlborn
CFO at Ready Capital

No problem.

Operator

Thank you. We've reached the end of the question and answer session, and I'll turn the call back over to management for closing remarks.

Thomas Capasse
Thomas Capasse
Chairman, CEO & Chief Investment Officer at Ready Capital

And we appreciate everybody's time and look forward to the third quarter call.

Operator

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation and have a wonderful day.

Executives
Analysts
    • Crispin Love
      Director - Equity Research at Piper Sandler Companies
    • Douglas Harter
      Equity Research Analyst at UBS Group
    • Jade Rahmani
      Managing Director at Keefe, Bruyette & Woods (KBW)
    • Randy Binner
      Managing Director at B.Riley Securities
    • Christopher Nolan
      SVP - Equity Research at Ladenburg Thalmann & Co. Inc
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