Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
Commission File Number: 001-35808
READY CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Maryland
90-0729143
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
1251 Avenue of the Americas, 50th Floor, New York, NY 10020
(Address of Principal Executive Offices, Including Zip Code)
(212) 257-4600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
RC
New York Stock Exchange
Preferred Stock, 6.25% Series C Cumulative Convertible, par value $0.0001 per share
RC PRC
Preferred Stock, 6.50% Series E Cumulative Redeemable, par value $0.0001 per share
RC PRE
6.20% Senior Notes due 2026
RCB
5.75% Senior Notes due 2026
RCC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
The Company has 168,214,839 shares of common stock, par value $0.0001 per share, outstanding as of August 7, 2024.
TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
4
Item 1.
Financial Statements (Unaudited)
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Operations
5
Unaudited Consolidated Statements of Comprehensive Income (Loss)
6
Unaudited Consolidated Statements of Changes in Equity
7
Unaudited Consolidated Statements of Cash Flows
9
Notes to the Consolidated Financial Statements (Unaudited)
10
Note 1. Organization
Note 2. Basis of Presentation
11
Note 3. Summary of Significant Accounting Policies
Note 4. Recent Accounting Pronouncements
22
Note 5. Business Combinations
23
Note 6. Loans and Allowance for Credit Losses
25
Note 7. Fair Value Measurements
32
Note 8. Servicing Rights
36
Note 9. Discontinued Operations and Assets and Liabilities Held for Sale
37
Note 10. Secured Borrowings
38
Note 11. Senior Secured Notes and Corporate Debt, net
39
Note 12. Guaranteed Loan Financing
41
Note 13. Variable Interest Entities and Securitization Activities
42
Note 14. Interest Income and Interest Expense
43
Note 15. Derivative Instruments
44
Note 16. Real Estate Owned, Held for Sale
45
Note 17. Agreements and Transactions with Related Parties
46
Note 18. Other Assets and Other Liabilities
47
Note 19. Other Income and Operating Expenses
49
Note 20. Redeemable Preferred Stock and Stockholders’ Equity
Note 21. Earnings per Share of Common Stock
52
Note 22. Offsetting Assets and Liabilities
53
Note 23. Financial Instruments with Off-Balance Sheet Risk, Credit Risk, and Certain Other Risks
54
Note 24. Commitments, Contingencies and Indemnifications
56
Note 25. Income Taxes
Note 26. Segment Reporting
57
Note 27. Subsequent Events
59
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
60
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
77
Item 4.
Controls and Procedures
80
2
PART II.
OTHER INFORMATION
81
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Default Upon Senior Securities
Mine Safety Disclosures
82
Item 5.
Other Information
Item 6.
Exhibits
83
SIGNATURES
86
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2024
December 31, 2023
Assets
Cash and cash equivalents
$
226,286
138,532
Restricted cash
29,971
30,063
Loans, net (including $0 and $9,348 held at fair value)
3,444,879
4,020,160
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
Mortgage-backed securities
30,174
27,436
Investment in unconsolidated joint ventures (including $6,974 and $7,360 held at fair value)
134,602
133,321
Derivative instruments
14,382
2,404
Servicing rights
119,768
102,837
Real estate owned, held for sale
187,883
252,949
Other assets
379,413
300,175
Assets of consolidated VIEs (net of valuation allowance of $9,448 and $0)
6,250,570
6,897,145
Assets held for sale (refer to Note 9)
423,894
454,596
Total Assets
11,774,333
12,441,217
Liabilities
Secured borrowings
2,311,969
2,102,075
Securitized debt obligations of consolidated VIEs, net
4,407,241
5,068,453
Senior secured notes, net
417,040
345,127
Corporate debt, net
767,271
764,908
Guaranteed loan financing
782,345
844,540
Contingent consideration
3,926
7,628
2,638
212
Dividends payable
53,119
54,289
Loan participations sold
89,532
62,944
Due to third parties
1,995
3,641
Accounts payable and other accrued liabilities
204,766
207,481
Liabilities held for sale (refer to Note 9)
332,265
333,157
Total Liabilities
9,374,107
9,794,455
Preferred stock Series C, liquidation preference $25.00 per share (refer to Note 20)
8,361
Commitments & contingencies (refer to Note 24)
Stockholders’ Equity
Preferred stock Series E, liquidation preference $25.00 per share (refer to Note 20)
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
Additional paid-in capital
2,287,684
2,321,989
Retained earnings (deficit)
(92,319)
124,413
Accumulated other comprehensive loss
(13,880)
(17,860)
Total Ready Capital Corporation equity
2,292,880
2,539,937
Non-controlling interests
98,985
98,464
Total Stockholders’ Equity
2,391,865
2,638,401
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity
See Notes To Unaudited Consolidated Financial Statements
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except share data)
2024
2023
Interest income
234,119
231,004
466,473
446,972
Interest expense
(183,167)
(170,221)
(366,972)
(329,089)
Net interest income before recovery of (provision for) loan losses
50,952
60,783
99,501
117,883
Recovery of (provision for) loan losses
18,871
(19,427)
45,415
(12,693)
Net interest income after recovery of (provision for) loan losses
69,823
41,356
144,916
105,190
Non-interest income
Net realized gain (loss) on financial instruments and real estate owned
7,250
23,878
26,118
35,453
Net unrealized gain (loss) on financial instruments
(1,357)
(1,411)
3,275
(7,046)
Valuation allowance, loans held for sale
(80,987)
—
(227,167)
Servicing income, net of amortization and impairment of $4,678 and $8,375 for the three and six months ended June 30, 2024, and $2,412 and $4,171 for the three and six months ended June 30, 2023, respectively
3,271
5,039
7,029
9,681
Gain (loss) on bargain purchase
(18,306)
229,894
Income on unconsolidated joint ventures
1,139
33
1,607
689
Other income
6,597
18,632
22,423
39,024
Total non-interest income (expense)
(82,393)
276,065
(185,021)
307,695
Non-interest expense
Employee compensation and benefits
(17,799)
(22,414)
(36,213)
(42,141)
Allocated employee compensation and benefits from related party
(3,000)
(2,500)
(5,500)
(4,826)
Professional fees
(6,033)
(5,533)
(13,098)
(11,076)
Management fees – related party
(6,198)
(5,760)
(12,846)
(10,841)
Incentive fees – related party
(71)
(1,791)
Loan servicing expense
(11,012)
(10,894)
(23,806)
(19,049)
Transaction related expenses
(1,592)
(13,966)
(2,242)
(14,859)
Other operating expenses
(21,802)
(9,557)
(51,989)
(22,166)
Total non-interest expense
(67,436)
(70,695)
(145,694)
(126,749)
Income (loss) from continuing operations before benefit (provision) for income taxes
(80,006)
246,726
(185,799)
286,136
Income tax benefit (provision)
48,579
(2,194)
78,790
(3,095)
Net income (loss) from continuing operations
(31,427)
244,532
(107,009)
283,041
Discontinued operations (refer to Note 9)
Income (loss) from discontinued operations before benefit (provision) for income taxes
(3,699)
11,788
(1,812)
9,747
925
(2,947)
453
(2,437)
Net income (loss) from discontinued operations
(2,774)
8,841
(1,359)
7,310
Net income (loss)
(34,201)
253,373
(108,368)
290,351
Less: Dividends on preferred stock
1,999
2,000
3,998
3,999
Less: Net income attributable to non-controlling interest
1,820
4,490
1,937
6,325
Net income (loss) attributable to Ready Capital Corporation
(38,020)
246,883
(114,303)
280,027
Earnings per common share from continuing operations - basic
(0.21)
1.80
(0.67)
2.24
Earnings per common share from discontinued operations - basic
(0.02)
0.07
(0.01)
0.06
Total earnings per common share - basic
(0.23)
1.87
(0.68)
2.30
Earnings per common share from continuing operations - diluted
1.70
2.11
Earnings per common share from discontinued operations - diluted
Total earnings per common share - diluted
1.76
2.17
Weighted-average shares outstanding
Basic
168,653,741
131,651,125
170,343,303
121,219,982
Diluted
169,863,975
141,583,837
171,513,556
131,096,368
Dividends declared per share of common stock
0.30
0.40
0.60
0.80
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) - net change by component:
Derivative financial instruments (cash flow hedges)
(1,440)
2,493
4,805
(1,312)
Foreign currency translation
(116)
674
(723)
1,452
Other comprehensive income (loss)
(1,556)
3,167
4,082
140
Comprehensive income (loss)
(35,757)
256,540
(104,286)
290,491
Less: Comprehensive income attributable to non-controlling interests
1,806
4,528
1,964
6,322
Comprehensive income (loss) attributable to Ready Capital Corporation
(37,563)
252,012
(106,250)
284,169
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended June 30, 2024
Preferred Series E
Common Stock
Additional Paid-
Retained Earnings
Accumulated Other
Total Ready Capital
Non-controlling
Total Stockholders'
Shares
Amount
In Capital
(Deficit)
Comprehensive Loss
Corporation Equity
Interests
Equity
Balance at March 31, 2024
4,600,000
170,445,333
2,307,303
(3,546)
(12,335)
2,402,817
97,065
2,499,882
Dividend declared:
Common stock ($0.30 per share)
(50,753)
OP units
(368)
$0.390625 per Series C preferred share
(131)
$0.406250 per Series E preferred share
(1,868)
Contributions, net
600
Stock-based compensation
60,154
496
Conversion of OP units into common stock
15,000
126
(126)
Share repurchases
(2,353,215)
(20,236)
Reallocation of non-controlling interest
(5)
(3)
(8)
8
(36,021)
Other comprehensive loss
(1,542)
(14)
Balance at June 30, 2024
168,167,272
Three Months Ended June 30, 2023
Balance at March 31, 2023
110,745,658
1,687,631
(6,532)
(12,353)
1,780,135
100,197
1,880,332
Common stock ($0.40 per share)
(53,212)
(617)
(1,869)
Shares issued pursuant to merger transaction
62,229,429
637,223
637,229
Offering costs
(108)
(2)
(110)
Equity component of 2017 convertible note issuance
(76)
(1)
(77)
356,317
3,689
52,742
567
(567)
(1,732,222)
(18,712)
3,635
(57)
3,578
(3,578)
Net income
248,883
Other comprehensive income
3,129
Balance at June 30, 2023
171,651,924
2,313,849
187,139
(9,281)
2,603,102
99,960
2,703,062
Six Months Ended June 30, 2024
Balance at December 31, 2023
172,276,105
Common stock ($0.60 per share)
(102,429)
(740)
$0.78125 per Series C preferred share
(262)
$0.81250 per Series E preferred share
(3,736)
(1,981)
(18)
582
386,072
4,606
105,000
983
(983)
(4,597,924)
(40,271)
395
(75)
320
(320)
(110,305)
4,055
27
Six Months Ended June 30, 2023
Balance at December 31, 2022
110,523,641
1,684,074
4,994
(9,369)
1,791,088
99,146
1,890,234
Common stock ($0.80 per share)
(97,882)
(1,255)
(3,737)
Distributions, net
(100)
Equity issuances
125
(127)
(129)
(191)
(194)
689,787
8,636
(1,843,675)
(20,094)
3,636
(55)
3,581
(3,581)
284,026
143
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Net income (loss) from discontinued operations, net of tax
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Amortization of premiums, discounts, and debt issuance costs, net
23,548
17,982
3,768
3,915
Provision for (recovery of) loan losses
(45,415)
12,693
Impairment loss on real estate owned, held for sale
26,102
3,418
Repair and denial reserve (recovery)
606
(944)
Paid-in-kind accrued interest
(28,547)
Provision for loan losses on purchased future receivables
2,118
4,232
Loans, held for sale, net
48,911
32,585
227,167
Net income (loss) of unconsolidated joint ventures, net of distributions
(808)
472
Realized (gains) losses, net
(25,491)
(35,928)
Unrealized (gains) losses, net
(3,318)
5,599
Bargain purchase gain (loss)
18,306
(229,894)
Changes in operating assets and liabilities:
4,399
13,665
Assets of consolidated VIEs (excluding loans, net), accrued interest and due from servicers
(23,249)
(13,142)
Receivable from third parties
3,624
(7,878)
(70,970)
(15,601)
(3,681)
(25,339)
Net cash provided by operating activities from continuing operations
50,061
48,876
Net cash used for operating activities from discontinued operations
(25,554)
(11,637)
Net cash provided by operating activities
24,507
37,239
Cash Flows From Investing Activities:
Origination of loans
(505,224)
(518,209)
Proceeds from disposition and principal payment of loans
1,044,121
793,937
Funding of real estate, held for sale
(981)
(3,968)
Proceeds from sale of real estate, held for sale
34,684
34,782
Investment in unconsolidated joint ventures
(2,245)
(9,387)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
1,772
5,052
Proceeds from liabilities under participation agreements
25,697
Payment of liabilities under participation agreements
(1,474)
(6,242)
Net cash provided by (used for) business acquisitions
(32,063)
38,710
Net cash provided by investing activities from continuing operations
564,287
334,675
Net cash provided by (used for) investing activities from discontinued operations
60,709
(1,056)
Net cash provided by investing activities
624,996
333,619
Cash Flows From Financing Activities:
Proceeds from secured borrowings
1,620,500
3,360,360
Repayment of secured borrowings
(1,409,193)
(3,860,660)
Repayment of the Paycheck Protection Program Liquidity Facility borrowings
(11,206)
(90,173)
Proceeds from issuance of securitized debt obligations of consolidated VIEs
988,837
Repayment of securitized debt obligations of consolidated VIEs
(681,336)
(500,261)
Proceeds from senior secured note
72,118
Repayment of guaranteed loan financing
(62,195)
(49,120)
Payment of deferred financing costs
(7,047)
(21,127)
Payment of contingent consideration
(9,000)
Proceeds from issuance of equity, net of issuance costs
108
Common stock repurchased
(39,190)
(18,102)
Settlement of share-based awards in satisfaction of withholding tax requirements
(1,081)
(2,104)
Dividend payments
(107,167)
(123,932)
Net cash used for financing activities from continuing operations
(625,815)
(325,274)
Net cash provided by (used for) financing activities from discontinued operations
(1,059)
46,338
Net cash used for financing activities
(626,874)
(278,936)
Net increase in cash, cash equivalents, and restricted cash including cash classified within assets held for sale
22,629
91,922
Less: Net increase in cash and cash equivalents within assets held for sale
6,096
11,785
Net increase in cash, cash equivalents, and restricted cash
16,533
80,137
Cash, cash equivalents, and restricted cash beginning balance
262,506
273,604
Cash, cash equivalents, and restricted cash ending balance
279,039
353,741
Supplemental disclosures:
Cash paid for interest
355,012
311,667
Cash paid (received) for income taxes
(11,940)
648
Non-cash investing activities
Loans transferred from loans, net to loans, held for sale
719,623
1,635
Loans transferred to real estate owned, held for sale
18,711
24,388
Contingent consideration in connection with acquisitions
Non-cash financing activities
Shares and OP units issued in connection with merger transactions
Conversion of OP units to common stock
Cash, cash equivalents, and restricted cash reconciliation
197,651
29,179
Cash, cash equivalents, and restricted cash in assets of consolidated VIEs
22,782
126,911
NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Ready Capital Corporation (the “Company” or “Ready Capital” and together with its subsidiaries “we,” “us” and “our”), is a Maryland corporation. The Company is a multi-strategy real estate finance company that originates, acquires, finances and services lower-to-middle-market commercial real estate (“LMM”) loans, Small Business Administration (“SBA”) loans, construction loans, and to a lesser extent, mortgage-backed securities (“MBS”) collateralized primarily by LMM loans, or other real estate-related investments. LMM loans represent a special category of commercial loans, sharing both commercial and residential loan characteristics. LMM loans are generally secured by first mortgages on commercial properties, but because LMM loans are also often accompanied by collateralization of personal assets and subordinate lien positions, aspects of residential mortgage credit analysis are utilized in the underwriting process.
The Company is externally managed and advised by Waterfall Asset Management, LLC (“Waterfall” or the “Manager”), an investment advisor registered with the United States Securities and Exchange Commission (“SEC”) under the Investment Advisors Act of 1940, as amended.
Sutherland Partners, L.P. (the “operating partnership”) holds substantially all of the Company’s assets and conducts substantially all of the Company’s business. As of June 30, 2024 and December 31, 2023, the Company owned approximately 99.3% and 99.2% of the operating partnership, respectively. The Company, as sole general partner of the operating partnership, has responsibility and discretion in the management and control of the operating partnership, and the limited partners of the operating partnership, in such capacity, have no authority to transact business for, or participate in the management activities of the operating partnership. Therefore, the Company consolidates the operating partnership.
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 United States Department of Agriculture (“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 Note 5 for assets acquired and liabilities assumed in the merger.
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.
At the effective time of the Broadmark Merger (the “Effective Time”), each share of common stock, par value $0.001 per share, of Broadmark (the “Broadmark Common Stock”) issued and outstanding immediately prior to the Effective Time (excluding any shares held by the Company, RCC Merger Sub or any of their respective subsidiaries) was automatically cancelled and converted into the right to receive from the Company 0.47233 (the “Exchange Ratio”) shares of its common stock, par value $0.0001 (“common stock”). No fractional shares of common stock were issued in the Broadmark Merger, and the value of any fractional interests to which a former holder of Broadmark Common Stock was otherwise entitled was paid in cash. In addition, RCC Merger Sub assumed Broadmark’s outstanding senior unsecured notes.
Each award of performance restricted stock units (each a “Broadmark Performance RSU Award”) granted by Broadmark under its 2019 Stock Incentive Plan (the “Broadmark Equity Plan”), as of the Effective Time, was automatically cancelled in exchange for the right to receive a number of shares of common stock equal to the product of (i) the number of shares of Broadmark Common Stock subject to such Broadmark Performance RSU Award based on the achievement of the applicable performance metric measured as of immediately prior to the Effective Time and (ii) the Exchange Ratio (rounded to the nearest whole share).
Each award of restricted stock units that was not a Broadmark Performance RSU Award granted pursuant to the Broadmark Equity Plan (each a “Broadmark RSU Award”) was assumed by the Company and converted into an award of restricted stock units with respect to a number of shares of common stock, equal to the product of (i) the total number of shares of Broadmark Common Stock subject to such Broadmark RSU Award as of immediately prior to the Effective Time and (ii) the Exchange Ratio (rounded to the nearest whole share), on the same terms and conditions as were applicable to such Broadmark RSU Award as of immediately prior to the Effective Time.
Each holder of a warrant (whether designated as public warrants, private warrants or otherwise) representing the right to purchase shares of Broadmark Common Stock (each a “Broadmark Warrant”) had the right to exercise such Broadmark Warrant at any time prior to the Effective Time in exchange for Broadmark Common Stock, in accordance with, and subject to, the terms and conditions of the agreement governing such Broadmark Warrant. Following the Effective Time, each Broadmark Warrant that was outstanding as of the Effective Time was assumed by the Company and entitles each holder thereof to receive, upon exercise of such assumed Broadmark Warrant, a number of shares of common stock equal to the product of (i) the total number of shares of Broadmark Common Stock that such holder would have been entitled to receive had such holder exercised such Broadmark Warrant immediately prior to the Effective Time and (ii) the Exchange Ratio. The per share price under each Broadmark Warrant was adjusted by dividing the per share purchase price under such Broadmark Warrant as of immediately prior to the Effective Time by the Exchange Ratio and rounding down to the nearest cent.
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. The Broadmark Merger further diversified our business by expanding our residential and commercial construction lending platforms. Refer to Note 5 for assets acquired and liabilities assumed in the Broadmark Merger.
REIT Status
The Company qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with its first taxable year ended December 31, 2011. To maintain its tax status as a REIT, the Company distributes dividends equal to at least 90% of its taxable income in the form of distributions to shareholders.
The unaudited interim consolidated financial statements herein, referred to as the “consolidated financial statements”, as of June 30, 2024 and December 31, 2023 and for the three and six months ended June 30, 2024 and 2023, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)—as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC.
The accompanying consolidated financial statements, including the notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted. In the opinion of management, the accompanying consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim period or the entire year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC.
Use of estimates
Preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates and assumptions are based on the best available information however, actual results could be materially different.
Basis of consolidation
The accompanying consolidated financial statements of the Company include the accounts and results of operations of the operating partnership and other consolidated subsidiaries and variable interest entities (“VIEs”) in which the Company is the primary beneficiary. The consolidated financial statements are prepared in accordance with ASC 810, Consolidation (“ASC 810”). Intercompany balances and transactions have been eliminated.
Reclassifications
Certain amounts reported for the prior periods in the accompanying consolidated financial statements have been reclassified in order to conform to the current period’s presentation.
The Company accounts for cash and cash equivalents in accordance with ASC 305, Cash and Cash Equivalents. The Company defines cash and cash equivalents as cash, demand deposits, and short-term, highly liquid investments with original maturities of 90 days or less when purchased. Cash and cash equivalents are exposed to concentrations of credit risk. The Company deposits cash with institutions believed to have highly valuable and defensible business franchises, strong financial fundamentals, and predictable and stable operating environments.
Restricted cash represents cash held by the Company as collateral against its derivatives, borrowings under repurchase agreements, borrowings under credit facilities and other financing agreements with counterparties, construction and mortgage escrows, as well as cash held for remittance on loans serviced for third parties. Restricted cash is not available for general corporate purposes but may be applied against amounts due to counterparties under existing swaps and repurchase agreement borrowings, returned to the Company when the restriction requirements no longer exist or at the maturity of the swap or repurchase agreement.
Loans, net
Loans, net consists of loans, held-for-investment, net of allowance for credit losses, and loans, held at fair value.
Loans, held-for-investment. Loans, held-for-investment are loans acquired from third parties (“acquired loans”), loans originated by the Company that it does not intend to sell, or securitized loans that were previously originated. Certain securitized loans remain on the Company’s balance sheet because the securitization vehicles are consolidated under ASC 810. Acquired loans are recorded at the valuation at the time of acquisition and are accounted for under ASC 310, Receivables (“ASC 310”).
The Company uses the interest method to recognize, as a constant effective yield adjustment, the difference between the initial recorded investment in the loan and the principal amount of the loan. The calculation of the constant effective yield necessary to apply the interest method uses the payment terms required by the loan contract, and prepayments of principal are not anticipated to shorten the loan term.
Loans, held at fair value. Loans, held at fair value represent certain loans originated by the Company for which the fair value option has been elected. Interest is recognized as interest income in the consolidated statements of operations when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the consolidated statements of operations.
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, loan-to-value (“LTV”) ratio and economic conditions. The allowance for credit losses increases through provisions charged to earnings and reduced by charge-offs, net of recoveries.
The Company utilizes 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 databases 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. The Company 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.
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Significant inputs to the Company’s 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, including unemployment rates, interest rates, commercial real estate prices, and others. These estimates may change in future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio.
In certain instances, the Company considers relevant loan-specific qualitative factors to certain loans to estimate its CECL expected credit losses. The Company considers loan investments to be “collateral-dependent” loans if they 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. For such loans that the Company determines that foreclosure of the collateral is probable, the Company measures 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 the Company determines foreclosure is not probable, the Company applies 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 the Company has 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. The Company’s determination of adequacy of the allowance for credit losses is based on quarterly evaluations of the above factors. Accordingly, the provision for credit losses will vary from period to period based on management’s ongoing assessment of the adequacy of the allowance for credit losses.
Non-accrual loans. A loan is generally placed on non-accrual status when it is probable that principal and interest will not be collected under the original contractual terms. At that time, interest income is no longer accrued. Non-accrual loans consist of loans for which principal or interest has been delinquent for 90 days or more and for which specific reserves are recorded, including purchased credit-deteriorated (“PCD”) loans. Interest income accrued, but not collected, at the date loans are placed on non-accrual status is reversed, unless the loan is expected to be fully recoverable by the collateral or is in the process of being collected. Interest income is subsequently recognized only to the extent it is received in cash or until the loan qualifies for return to accrual status. However, where there is doubt regarding the ultimate collectability of loan principal, all cash received is applied to reduce the carrying value of such loans. Loans are restored to accrual status when contractually current and the collection of future payments is reasonably assured. In certain instances, the Company may make exceptions to placing a loan on non-accrual status if the loan is in the process of a modification. For construction loans that have been delinquent for 90 days or more, interest income may continue to accrue if it is probable that principal and interest will be collected in full, either through payments or payments in kind, under the terms of the agreement.
Loan modifications made to borrowers experiencing financial difficulty. In situations where economic or legal circumstances may cause a borrower to experience significant financial difficulties, the Company may grant concessions for a period of time to the borrower that it would not otherwise consider. These modified terms may include interest rate reductions, principal forgiveness, term extensions, and other-than-insignificant payment delay intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral. The Company monitors the performance of loans modified to borrowers experiencing financial difficulty and considers loans that are 30 days past due to be in payment default.
Loans, held for sale
Loans are classified as held for sale if there is an intent to sell in the near-term. These loans are recorded at the lower of amortized cost or fair value, unless the fair value option has been elected at the time of origination or acquisition. If the loan’s fair value is determined to be less than its amortized cost, a non-recurring fair value adjustment may be recorded through a valuation allowance. For loans originated through the LMM Commercial Real Estate and Small Business Lending segments, for which the fair value option has been elected, changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the consolidated statements of operations. Loans, held for sale for which the fair value option has been elected are predominantly classified as level 2 in the fair value hierarchy. For originated SBA loans, the guaranteed portion is held at fair value. Interest is recognized as interest income in the consolidated statements of operations when earned and deemed collectible.
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Paycheck Protection Program loans
Paycheck Protection Program (“PPP”) loans were originated in response to the COVID-19 pandemic. The Company has elected the fair value option for the loans originated by the Company for the first round of the program. Interest is recognized in the consolidated statements of operations as interest income when earned and deemed collectible. Although PPP includes a 100% guarantee from the federal government and principal forgiveness for borrowers if the funds were used for defined purposes, changes in fair value are recurring and are reported as net unrealized gains (losses) on financial instruments in the consolidated statements of operations.
The Company’s loan originations in the second round of the program are accounted for as loans, held-for-investment under ASC 310. Loan origination fees and related direct loan origination costs are capitalized into the initial recorded investment in the loan and are deferred over the loan term. The Company recognizes the difference between the initial recorded investment and the principal amount of the loan as interest income using the effective yield method. The effective yield is determined based on the payment terms required by the loan contract as well as with actual and expected prepayments from loan forgiveness by the federal government.
The Company accounts for MBS as trading securities and carries them at fair value under ASC 320, Investments-Debt and Equity Securities (“ASC 320”). The Company’s MBS portfolio is comprised of asset-backed securities collateralized by interest in, or obligations backed by, pools of LMM loans, which are guaranteed by the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”), or guaranteed by federally sponsored enterprises, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Purchases and sales of MBS are recorded as of the trade date. MBS securities pledged as collateral against borrowings under repurchase agreements are included in mortgage-backed securities on the consolidated balance sheets.
MBS are recorded at fair value as determined by market prices provided by independent broker dealers or other independent valuation service providers. The fair values assigned to these investments are based upon available information and may not reflect amounts that may be realized. The fair value adjustments on MBS are reported within net unrealized gain (loss) on financial instruments in the consolidated statements of operations. Mortgage-backed securities are classified as level 2 in the fair value hierarchy.
Subject to maintaining qualification as a REIT for U.S. federal income tax purposes, the Company utilizes derivative financial instruments, comprised of interest rate swaps and FX forwards as part of its risk management strategy. The Company accounts for derivative instruments under ASC 815, Derivatives and Hedging (“ASC 815”). All derivatives are reported as either assets or liabilities in the consolidated balance sheets at the estimated fair value with the changes in the fair value recorded in earnings unless hedge accounting is elected. As of June 30, 2024 and December 31, 2023, the Company had offset $41.7 million and $34.4 million of cash collateral payable against gross derivative asset positions, respectively.
Interest rate swap agreements. An interest rate swap is an agreement between two counterparties to exchange periodic interest payments where one party to the contract makes a fixed-rate payment in exchange for a floating-rate payment from the other party. The dollar amount each party pays is an agreed-upon periodic interest rate multiplied by a pre-determined dollar principal (notional amount). No principal (notional amount) is exchanged between the two parties at the trade initiation date and only interest payments are exchanged over the life of the contract. The fair value adjustments are reported within net unrealized gain (loss) on financial instruments, while the related interest income or interest expense are reported within net realized gain (loss) on financial instruments in the consolidated statements of operations. Interest rate swaps are classified as Level 2 in the fair value hierarchy.
FX forwards. FX forwards are agreements between two counterparties to exchange a pair of currencies at a set rate on a future date. Such contracts are used to convert the foreign currency risk to U.S. dollars to mitigate exposure to fluctuations in FX rates. The fair value adjustments are reported within net unrealized gain (loss) on financial instruments in the consolidated statements of operations. FX forwards are classified as Level 2 in the fair value hierarchy.
Hedge accounting. As a general rule, hedge accounting is permitted where the Company is exposed to a particular risk, such as interest rate risk, that causes changes in the fair value of an asset or liability or variability in the expected future cash flows of an existing asset, liability, or forecasted transaction that may affect earnings.
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To qualify as an accounting hedge under the hedge accounting rules (versus an economic hedge where hedge accounting is not applied), a hedging relationship must be highly effective in offsetting the risk designated as being hedged. Cash flow hedges are used to hedge the exposure to the variability in cash flows from forecasted transactions, including the anticipated issuance of securitized debt obligations. ASC 815 requires that a forecasted transaction be identified as either: 1) a single transaction, or 2) a group of individual transactions that share the same risk exposures for which they are designated as being hedged. Hedges of forecasted transactions are considered cash flow hedges since the price is not fixed, hence involve variability of cash flows.
For qualifying cash flow hedges, the change in the fair value of the derivative (the hedging instrument) is recorded in other comprehensive income (loss) (“OCI”) and is reclassified out of OCI and into the consolidated statements of operations when the hedged cash flows affect earnings. These amounts are recognized consistent with the classification of the hedged item, primarily interest expense (for hedges of interest rate risk). If the hedge relationship is terminated, then the value of the derivative recorded in accumulated other comprehensive income (loss) (“AOCI”) is recognized in earnings when the cash flows that were hedged affect earnings, so long as the forecasted transaction remains probable of occurring.
Hedge accounting is generally terminated at the debt issuance date because the Company is no longer exposed to cash flow variability subsequent to issuance. Accumulated amounts recorded in AOCI at that date are then released to earnings in future periods to reflect the difference in 1) the fixed rates economically locked in at the inception of the hedge and 2) the actual fixed rates established in the debt instrument at issuance. Because of the effects of the time value of money, the actual interest expense reported in earnings will not equal the effective yield locked in at hedge inception multiplied by the par value. Similarly, this hedging strategy does not actually fix the interest payments associated with the forecasted debt issuance.
Servicing rights initially represent the fair value of expected future cash flows for performing servicing activities for others. The fair value considers estimated future servicing fees and ancillary revenue, offset by estimated costs to service the loans, and generally declines over time as net servicing cash flows are received, effectively amortizing the servicing right asset against contractual servicing and ancillary fee income.
Servicing rights are recognized upon sale of loans, including a securitization of loans accounted for as a sale in accordance with U.S. GAAP, if servicing is retained. For servicing rights, gains (losses) related to servicing rights retained is included in net realized gain (loss) in the consolidated statements of operations.
Servicing rights are accounted for under ASC 860, Transfers and Servicing (“ASC 860”). A significant portion of the Company’s multi-family servicing rights are under the Freddie Mac program.
Servicing rights are initially recorded at fair value and subsequently carried at amortized cost. Servicing rights are amortized in proportion to and over the expected service period, or term of the loans, and are evaluated for potential impairment quarterly.
For purposes of testing servicing rights for impairment, the Company first determines whether facts and circumstances exist that would suggest the carrying value of the servicing asset is not recoverable. If so, the Company then compares the net present value of servicing cash flow to its carrying value. The estimated net present value of servicing cash flows 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 the consolidated statements of operations for the amount by which carrying value exceeds the net present value of servicing cash flows.
The Company estimates the fair value of servicing rights by determining the present value of future expected servicing cash flows using modeling techniques that incorporate management’s best estimates of key variables including estimates regarding future net servicing cash flows, forecasted loan prepayment rates, delinquency rates, and return requirements commensurate with the risks involved. Cash flow assumptions are modeled using internally forecasted revenue and expenses, and where possible, the reasonableness of assumptions is periodically validated through comparisons to market data. Prepayment speed estimates are determined from historical prepayment rates or obtained from third-party industry data. Return requirement assumptions are determined using data obtained from market participants, where available, or based on current relevant interest rates plus a risk-adjusted spread. The Company also considers other factors that can
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impact the value of the servicing rights, such as surety provider termination clauses and servicer terminations that could result if the Company failed to materially comply with the covenants or conditions of its servicing agreements and did not remedy the failure. Since many factors can affect the estimate of the fair value of servicing rights, the Company regularly evaluates the major assumptions and modeling techniques used in its estimate and reviews these assumptions against market comparables, if available. The Company monitors the actual performance of its servicing rights by regularly comparing actual cash flow, credit, and prepayment experience to modeled estimates.
Real estate owned, held for sale includes purchased real estate and real estate acquired in full or partial settlement of loan obligations, generally through foreclosure, that is being marketed for sale. Real estate owned, held for sale is recorded at acquisition at the property’s estimated fair value less estimated costs to sell.
After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, real estate owned, held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged through impairment.
The Company records a gain or loss from the sale of real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction price is probable. Once these criteria are met, the real estate is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. This adjustment is based on management’s estimate of the fair value of the loan extended to the buyer to finance the sale.
According to ASC 323, Equity Method and Joint Ventures, investors in unincorporated entities such as partnerships and unincorporated joint ventures generally shall account for their investments using the equity method of accounting if the investor has the ability to exercise significant influence over the investee. Under the equity method, the Company recognizes its allocable share of the earnings or losses of the investment monthly in earnings and adjusts the carrying amount for its share of the distributions that exceeds its allocable share of earnings.
Investments held to maturity
The Company accounts for held to maturity investments under ASC 320. Such securities are accounted for at amortized cost and reviewed on a quarterly basis to determine if an allowance for credit losses should be recorded in the consolidated statements of operations.
Purchased future receivables
The Company provides working capital advances to small businesses through the purchase of their future revenues. The Company enters into a contract with the business whereby the Company pays the business an upfront amount in return for a specific amount of the business’s future revenue receivables, known as payback amounts. The payback amounts are primarily received through daily payments initiated by automated clearing house transactions.
Revenues from purchased future receivables are realized when funds are received under each contract. The allocation of the amount received is determined by apportioning the amount received based upon the factor (discount) rate of the business’s contract. Management believes that this methodology best reflects the effective interest method.
The CECL method the Company utilizes is an aging schedule where estimating expected life-time credit losses is determined on the basis of how long a receivable has been outstanding. Where there is doubt regarding the ultimate collectability, the allowance for credit losses increases through provisions recorded in the consolidated statements of operations and reduced by charge-offs, net of recoveries. Purchased future receivables that have been delinquent for 90 days or more are considered uncollectible and subsequently charged off. While the Company has a formal methodology to determine the adequate and appropriate level of the allowance for credit losses, estimates involve judgment and assumptions as to various factors, including current economic conditions and inherent risk in the portfolio. The Company’s determination of adequacy of the allowance for credit losses is based on quarterly evaluations of the above factors. Accordingly, the provision for credit losses will vary from period to period based on management’s ongoing assessment of the adequacy of the allowance for credit losses.
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Intangible assets
The Company accounts for intangible assets under ASC 350, Intangibles- Goodwill and Other (“ASC 350”). The Company’s intangible assets include an SBA license, capitalized software, a broker network, trade names, customer relationships and an acquired favorable lease. The Company capitalizes software costs expected to result in long-term operational benefits, such as replacement systems or new applications that result in significantly increased operational efficiencies or functionality as well as costs related to internally developed software expected to be sold, leased or otherwise marketed under ASC 985-20, Software- costs of software to be sold, leased, or marketed. All other costs incurred in connection with internal use software are expensed as incurred. The Company initially records its intangible assets at cost or fair value and will test for impairment if a triggering event occurs. Intangible assets are included within other assets in the consolidated balance sheets. The Company amortizes intangible assets with identified estimated useful lives on a straight-line basis over their estimated useful lives.
Goodwill
Goodwill represents the excess of the consideration transferred over the fair value of net assets, including identifiable intangible assets, at the acquisition date. Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate a potential impairment exists.
In assessing goodwill for impairment, the Company follows ASC 350, which permits a qualitative assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill, or the Company chooses not to perform the qualitative assessment, then the Company compares the fair value of that reporting unit with its carrying value, including goodwill, in a quantitative assessment. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss measured as the excess of the reporting unit’s carrying value, including goodwill, over its fair value. The estimated fair value of the reporting unit is derived based on valuation techniques the Company believes market participants would use for each of the reporting units.
The qualitative assessment requires judgment to be applied in evaluating the effects of multiple factors, including actual and projected financial performance of the reporting unit, macroeconomic conditions, industry and market conditions and relevant entity specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. In the second quarter of 2024, as a result of the qualitative assessment, the Company determined that it was more likely than not that the estimated fair value of each of the reporting units exceeded its respective estimated carrying value. Therefore, goodwill for each reporting unit was not impaired and a quantitative test was not required.
Deferred financing costs
Costs incurred in connection with secured borrowings are accounted for under ASC 340, Other Assets and Deferred Costs. Deferred costs are capitalized and amortized using the effective interest method over the respective financing term with such amortization reflected on the Company’s consolidated statements of operations as a component of interest expense. Secured Borrowings may include legal, accounting and other related fees. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Unamortized deferred financing costs related to securitizations and note issuances are presented in the consolidated balance sheets as a direct deduction from the associated liability.
Due from servicers
The loan-servicing activities of the Company’s LMM Commercial Real Estate segment are performed primarily by third-party servicers. SBA loans originated and held by the Company are internally serviced. The Company’s servicers hold substantially all of the cash owned by the Company related to loan servicing activities. These amounts include principal and interest payments made by borrowers, net of advances and servicing fees. Cash is generally received within 30 days of recording the receivable.
The Company is subject to credit risk to the extent any servicer with whom the Company conducts business is unable to deliver cash balances or process loan-related transactions on the Company’s behalf. The Company monitors the financial
condition of the servicers with whom the Company conducts business and believes the likelihood of loss under the aforementioned circumstances is remote.
Secured borrowings include borrowings under credit facilities and other financing agreements and repurchase agreements.
Borrowings under credit facilities and other financing agreements. Borrowings under credit facilities and other financing agreements are accounted for under ASC 470, Debt (“ASC 470”). The Company partially finances its loans, net through credit agreements and other financing agreements with various counterparties. These borrowings are collateralized by loans, held-for-investment and loans, held for sale and have maturity dates within two years from the consolidated balance sheet date. If the fair value (as determined by the applicable counterparty) of the collateral securing these borrowings decreases, the Company may be subject to margin calls during the period the borrowings are outstanding. In instances where margin calls are not satisfied within the required time frame the counterparty may retain the collateral and pursue collection of any outstanding debt. Interest accrued in connection with credit facilities is recorded as interest expense in the consolidated statements of operations.
Borrowings under repurchase agreements. Borrowings under repurchase agreements are accounted for under ASC 860. Investment securities financed under repurchase agreements are treated as collateralized borrowings, unless they meet sale treatment or are deemed to be linked transactions. As of the current period ended, the Company had no such repurchase agreements that have been accounted for as components of linked transactions. All securities financed through a repurchase agreement have remained on the Company’s consolidated balance sheets as an asset and cash received from the lender has been recorded on the Company’s consolidated balance sheets as a liability. Interest accrued in connection with repurchase agreements is recorded as interest expense in the consolidated statements of operations.
Paycheck Protection Program Liquidity Facility borrowings
The Paycheck Protection Program Liquidity Facility (“PPPLF”) is a government loan facility created to enable the distribution of funds for PPP whereby the Company received advances from the Federal Reserve through the PPPLF. The Company accounts for borrowings under the PPPLF under ASC 470. Interest accrued in connection with PPPLF is recorded as interest expense in the consolidated statements of operations.
The Company has engaged in several securitization transactions accounted for under ASC 810. Securitization involves transferring assets to a special purpose entity or securitization trust, which typically qualifies as a VIE. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The consolidation of the VIE includes the VIE’s issuance of senior securities to third parties, which are shown as securitized debt obligations of consolidated VIEs in the consolidated balance sheets.
Debt issuance costs related to securitizations are presented as a direct deduction from the carrying value of the related debt liability. Debt issuance costs are amortized using the effective interest method and are included in interest expense in the consolidated statements of operations.
The Company accounts for secured debt offerings, net of issuance costs, under ASC 470. These senior secured notes are collateralized by loans, MBS, and retained interests of consolidated VIE’s. Interest accrued in connection with senior secured notes is recorded as interest expense in the consolidated statements of operations.
The Company accounts for corporate debt offerings, net of issuance costs, under ASC 470. Interest accrued in connection with corporate debt is recorded as interest expense in the consolidated statements of operations.
Certain partial loan sales do not meet the definition of a “participating interest” under ASC 860 and therefore, do not qualify as a sale. Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment in the consolidated balance sheets and the proceeds from the portion sold is recorded as guaranteed loan financing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded as interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the accompanying consolidated statements of operations.
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The Company accounts for certain liabilities recognized in relation to mergers and acquisitions as contingent consideration whereby the fair value of this liability is dependent on certain criteria. Contingent consideration is classified as Level 3 in the fair value hierarchy with fair value adjustments reported within other income (loss) in the consolidated statements of operations.
The Company accounts for loan participations sold, which represents an interest in a loan receivable sold, as a liability on the consolidated balance sheets as these arrangements do not qualify as a sale under U.S. GAAP. Such liabilities are non-recourse and remain on the consolidated balance sheets until the loan is repaid.
Due to third parties primarily relates to funds held by the Company to advance certain expenditures necessary to fulfill the Company’s obligations under its existing indebtedness or to be released at the Company’s discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans. While retained, these balances earn interest in accordance with the specific loan terms with which they are associated.
Repair and denial reserve
The repair and denial reserve represents the potential liability to the SBA in the event that the Company is required to make the SBA whole for reimbursement of the guaranteed portion of SBA loans. The Company may be responsible for the guaranteed portion of SBA loans if there are lien and collateral issues, unauthorized use of proceeds, liquidation deficiencies, undocumented servicing actions or denial of SBA eligibility. This reserve is calculated using an estimated frequency of a repair and denial event upon default, as well as an estimate of the severity of the repair and denial as a percentage of the guaranteed balance.
Variable interest entities
VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. The entity that is the primary beneficiary is required to consolidate the VIE. An entity is deemed to be the primary beneficiary of a VIE if the entity has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.
In determining whether the Company is the primary beneficiary of a VIE, both qualitative and quantitative factors are considered regarding the nature, size and form of its involvement with the VIE, such as its role establishing the VIE and ongoing rights and responsibilities, the design of the VIE, its economic interests, servicing fees and servicing responsibilities, and other factors. The Company performs ongoing reassessments to evaluate whether changes in the entity’s capital structure or changes in the nature of its involvement with the entity result in a change to the VIE designation or a change to its consolidation conclusion.
Non-controlling interests are presented on the consolidated balance sheets and the consolidated statements of operations and represent direct investment in the operating partnership by third parties, including operating partnership units issued to satisfy a portion of the purchase price in connection with a series of mergers (collectively, the “Mosaic Mergers”), pursuant to which the company acquired a group of privately held, real estate structured finance opportunities funds, with a focus on construction lending (collectively, the “Mosaic Funds”), managed by MREC Management, LLC. In addition, the Company has non-controlling interests from investments in consolidated joint ventures whereby, net income or loss is generally based upon relative ownership interests or contractual arrangements.
Fair value option
ASC 825, Financial Instruments (“ASC 825”) provides a fair value option election that allows entities to make an election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument
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and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in the consolidated balance sheets from those instruments using another accounting method.
The Company has elected the fair value option for certain loans held-for-sale originated by the Company that it intends to sell in the near term. The fair value elections for loans, held for sale originated by the Company were made due to the short-term nature of these instruments. The Company additionally elected the fair value option for certain investments in unconsolidated joint ventures due to their short-term tenor.
Earnings per share
Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from the Company’s share-based compensation, consisting of unvested restricted stock units (“RSUs”), unvested restricted stock awards (“RSAs”), performance-based equity awards, as well as the dilutive impact of convertible preferred stock and contingent equity rights (“CERs”) under the if-converted method and warrants under the treasury stock method. Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.
All of the Company’s unvested RSUs, unvested RSAs and preferred stock contain rights to receive non-forfeitable dividends and, thus, are participating securities. Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities.
Income taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s consolidated financial statements or tax returns. The Company assesses the recoverability of deferred tax assets through evaluation of carryback availability, projected taxable income and other factors as applicable. Significant judgment is required in assessing the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns as well as the recoverability of amounts recorded, including deferred tax assets.
The Company provides for exposure in connection with uncertain tax positions, which requires significant judgment by management including determination, based on the weight of the tax law and available evidence, that it is more-likely-than-not that a tax result will be realized. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense on the consolidated statements of operations. As of the date of the consolidated balance sheets, the Company has accrued no taxes, interest or penalties related to uncertain tax positions. In addition, changes in this position in the next 12 months are not anticipated.
Revenue recognition
Under ASC 606 Revenue Recognition (“ASC 606”), revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognized through the following five-step process:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Most of the Company’s revenue streams, such as revenue associated with financial instruments, including interest income, realized or unrealized gains on financial instruments, loan servicing fees, loan origination fees, among other revenue streams, follow specific revenue recognition criteria and therefore the guidance referenced above does not have a material impact on the consolidated financial statements. In addition, revisions to existing accounting rules regarding the determination of whether a company is acting as a principal or agent in an arrangement and accounting for sales of nonfinancial assets where the seller has continuing involvement, did not materially impact the Company. A further description of the revenue recognition criteria is outlined below.
20
Interest income. Interest income on loans, held-for-investment, loans, held at fair value, loans, held for sale, and MBS, at fair value is accrued based on the outstanding principal amount and contractual terms of the instrument. Discounts or premiums associated with the loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on contractual cash flows through the maturity date of the investment.
Employee retention credit consulting income. In connection with the Coronavirus Aid, Relief and Economic Security Act, which provided numerous stimulus measures including the employee retention credit (“ERC”), the Company provided consulting services whereby ERC requests received were processed on the client’s behalf. Income related to ERC consulting are recorded in accordance with ASC 606 and recognized when the performance obligation has been satisfied. In addition, the Company estimates an allowance for doubtful accounts in accordance with ASC 310 using historical data and other relevant factors, such as collection rate, to determine the uncollectible reserve rate. While the Company has a formal methodology to determine the adequate and appropriate level of the allowance for doubtful accounts, estimates of losses involve judgment and assumptions as to various factors, including current economic conditions. Accordingly, the provision for losses will vary from period to period based on management's ongoing assessment of the adequacy of the allowance for doubtful accounts. Employee retention credit consulting income is reported as other income and the provision for losses is reported as other expense in the consolidated statements of operations.
Realized gains (losses). Upon the sale or disposition (not including the prepayment of outstanding principal balance) of loans or securities, the excess (or deficiency) of net proceeds over the net carrying value or cost basis of such loans or securities is recognized as a realized gain (loss).
Origination income and expense. Origination income represents fees received for origination of either loans, held at fair value, loans, held for sale, or loans, held-for-investment. For loans held, at fair value, and loans, held for sale, pursuant to ASC 825 the Company reports origination fee income as revenue and fees charged and costs incurred as expenses. These fees and costs are excluded from the fair value. For originated loans, held-for-investment, under ASC 310 the Company defers these origination fees and costs at origination and amortizes them under the effective interest method over the life of the loan. Origination fees and expenses for loans, held at fair value and loans, held for sale, are presented in the consolidated statements of operations as components of other income and operating expenses. The amortization of net origination fees and expenses for loans, held-for-investment are presented in the consolidated statements of operations as a component of interest income.
21
Assets and liabilities held for sale
The Company classifies long-lived assets or a disposal group to be sold as held for sale in the period when all the necessary criteria are met. The criteria includes (i) management, having the authority to approve the action, commits to a plan to sell the asset or the disposal group (ii) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated (iv) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year (v) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group, if material, in the line items assets or liabilities held for sale, respectively, on the consolidated balance sheets. A long-lived asset or disposal group that is classified as held for sale is measured at the lower of its cost or estimated fair value less any costs to sell. The fair values of assets held for sale are assessed each reporting period and changes in such fair values are reported as an adjustment to the carrying value of the asset or disposal group with an offset on the consolidated statements of operations, to the extent that any subsequent changes in fair value do not exceed the cost basis of the asset or disposal group. Any loss resulting from the transfer of long-lived assets or disposal groups to assets held for sale is recognized in the period in which the held for sale criteria are met.
Discontinued operations
The results of operations of long-lived assets or a disposal group that the Company has either disposed of or has classified as held for sale is reported as discontinued operations on the consolidated statements of operations if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results.
Foreign currency transactions
Assets and liabilities denominated in non-U.S. currencies are translated into U.S. dollars using foreign currency exchange rates prevailing at the end of the reporting period. Revenue and expenses are translated at the average exchange rates for each reporting period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of taxes, in the consolidated statements of comprehensive income (loss).
ASU 2024-01, Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards Issued March 2024
This ASU clarifies how to determine whether profits interest and similar awards should be accounted for as share-based payment arrangements. The ASU is effective in reporting periods beginning after December 15, 2024, including interim periods within the fiscal year, on a prospective or retrospective basis. Early adoption is permitted. The Company is currently assessing the impact upon adoption of this standard on the consolidated financial statements.
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures Issued December 2023
This ASU improves income tax disclosure requirements, primarily through standardization of rate reconciliation categories and disaggregation of income taxes paid by jurisdiction. The ASU is effective in reporting periods beginning after December 15, 2024 on a prospective or retrospective basis. Early adoption is permitted. The Company is currently assessing the impact upon adoption of this standard on the consolidated financial statements.
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures Issued November 2023
This ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”). The ASU is effective in reporting periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. Early adoption is permitted. The Company is currently assessing the impact upon adoption of this standard on the consolidated financial statements.
ASU 2023-05, Business Combinations- Joint Venture Formations (Topic 805): Recognition and Initial Measurement Issued August 2023
This ASU applies to the formation of a “joint venture” or a “corporate joint venture” and requires a joint venture to initially measure all contributions received upon its formation at fair value and is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis. The Company is currently assessing the impact of the adoption of this standard on the consolidated financial statements.
Madison One Acquisition
On June 5, 2024 the Company acquired Madison One, a lending originator and servicer in the government guaranteed loan industry focusing on USDA and SBA guaranteed loan products. Refer to Note 1 for more information about the Madison One Acquisition. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.
The table below summarizes the fair value of assets acquired and liabilities assumed from the Madison One Acquisition.
June 5, 2024
721
16,304
Other assets:
10,400
Other
303
Total assets acquired
27,811
978
Total liabilities assumed
Net assets acquired
26,833
(600)
Net assets acquired, net of non-controlling interests
26,233
The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.
Fair value of net assets acquired
Cash paid
32,868
Total consideration transferred
36,794
10,561
Broadmark Merger
On May 31, 2023, the Company completed a merger with Broadmark, a specialty real estate finance company that specialized in originating and servicing residential and commercial construction loans. Refer to Note 1 for more information about the Broadmark Merger. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.
The table below summarizes the fair value of assets acquired and liabilities assumed from the Broadmark Merger.
Preliminary Purchase Price Allocation
Measurement Period Adjustments
Updated Purchase Price Allocation
772,954
(8,587)
764,367
158,911
(23,671)
135,240
17,107
(7,151)
9,956
987,682
(39,409)
948,273
98,028
22,531
819
23,350
120,559
121,378
867,123
(40,228)
826,895
In a business combination, the initial allocation of the purchase price is considered preliminary and therefore, is subject to change until the end of the measurement period. The final determination occurred within one year of the merger date. Because the measurement period for the Broadmark Merger remained open until May 31, 2024, certain fair value estimates changed once all information necessary to make a final fair value assessment was received. The amounts presented in the table above pertained to the preliminary purchase price allocation reported at the time of the Broadmark Merger based on information that was available to management at the time the consolidated financial statements were prepared. The preliminary purchase price allocation changed as the Company completed its analysis of the fair value of the assets acquired and liabilities assumed, which impacts the consolidated financial statements. Subsequent to the determination of the preliminary purchase price allocation, the Company recorded a measurement period adjustment based on the updated valuations obtained by decreasing net assets acquired and the total bargain purchase gain related to this transaction by $40.2 million.
The table below illustrates the aggregate consideration transferred, net assets acquired, and the related bargain purchase gain.
Preliminary Purchase
Price Allocation
Consideration transferred based on the value of common stock issued
Bargain purchase gain
189,666
In the table above, the bargain purchase gain represents the fair value of the assets acquired and liabilities assumed in the Broadmark Merger which exceeds the fair value of the 62.2 million shares of common stock issued at $10.24 per share at the Effective Time. Gain on bargain purchase is recognized in the consolidated statements of operations.
The following pro-forma income and earnings (unaudited) of the combined company are presented as if the Broadmark Merger had occurred on January 1, 2024 and January 1, 2023.
Selected Financial Data
246,245
486,050
(172,876)
(333,860)
(22,360)
(17,327)
276,813
309,307
(66,239)
(65,526)
(144,101)
(132,242)
Income (loss) before provision for income taxes
(78,809)
262,296
(184,206)
311,928
Income tax benefit (expense)
(5,141)
(5,532)
(30,230)
257,155
(105,416)
306,396
24
Non-recurring pro-forma transaction costs directly attributable to the Broadmark Merger were $1.2 million for both the three months ended June 30, 2024 and 2023 and $1.6 million for both the six months ended June 30, 2024 and 2023, and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the Broadmark Merger.
Loans includes (i) loans held for investment that are accounted for at amortized cost net of allowance for credit losses, (ii) loans held at fair value under the fair value option, (iii) loans held for sale that are accounted for at the lower of cost or fair value net of valuation allowance and (iv) loans held for sale at fair value under the fair value option. The classification for a loan is based on product type and management’s strategy for the loan.
Loan portfolio
The table below summarizes the classification, unpaid principal balance (“UPB”), and carrying value of loans held by the Company including loans of consolidated VIEs.
Carrying Value
UPB
Loans
Bridge
1,267,122
1,270,125
1,444,770
1,448,281
Fixed rate
186,857
184,707
247,476
241,674
Construction
841,695
842,854
1,207,783
1,212,526
Freddie Mac
9,500
9,719
SBA - 7(a)
1,020,826
1,028,043
995,974
1,003,323
162,155
164,043
196,087
198,499
Total Loans, before allowance for loan losses
3,478,655
3,489,772
4,101,590
4,114,022
Allowance for loan losses
(33,776)
(81,430)
Total Loans, net
Loans in consolidated VIEs
4,804,452
4,816,128
5,370,251
5,389,535
773,230
772,576
790,068
790,967
201,343
214,415
213,892
227,636
233,440
234,224
257,289
258,029
Total Loans, in consolidated VIEs, before allowance for loan losses
6,012,465
6,037,343
6,631,500
6,666,167
Allowance for loan losses on loans in consolidated VIEs
(11,056)
(20,175)
Total Loans, net, in consolidated VIEs
6,001,409
6,611,325
251,836
251,375
38,051
39,826
356,753
359,208
12,046
12,266
20,955
20,729
71,281
65,842
59,421
55,769
20,263
20,021
1,223
1,297
Total Loans, held for sale, before valuation allowance
750,230
748,538
77,795
Valuation allowance
(217,719)
Total Loans, held for sale
Loans, held for sale in consolidated VIEs
19,173
Valuation allowance on loans, held for sale in consolidated VIEs
(9,448)
Total Loans, held for sale in consolidated VIEs
9,725
Total
9,988,524
10,294,826
10,713,084
10,857,984
In the table above, loans with the “Other” classification are generally LMM acquired loans that have nonconforming characteristics for the Fixed rate, Bridge, Construction, or Freddie Mac classifications due to loan size, rate type, collateral, or borrower criteria.
Loan vintage and credit quality indicators
The Company monitors the credit quality of its loan portfolio based on primary credit quality indicators, such as delinquency rates. Loans that are 30 days or more past due, provide an indication of the borrower’s capacity and willingness to meet its financial obligations. Total Loans, net includes Loans, net in consolidated VIEs and a specific allowance for loan losses of $8.2 million, including $1.9 million of PCD loan reserves as of June 30, 2024, and a specific allowance for loan losses of $57.1 million, including $21.4 million of PCD loan reserves, as of December 31, 2023.
The tables below summarize the classification, UPB, carrying value and gross write-offs of loans by year of origination.
Carrying Value by Year of Origination
2022
2021
2020
Pre 2020
6,086,253
231,149
255,672
2,669,676
2,643,443
176,563
93,405
6,069,908
957,283
110,625
181,427
90,094
576,876
959,022
107,206
156,856
103,290
12,866
459,407
839,625
1,242,458
94,112
148,941
344,158
283,853
109,300
238,443
1,218,807
398,267
6,330
2,801
4,614
7,375
8,600
365,824
395,544
Total Loans, before general allowance for loan losses
9,527,115
331,591
514,620
3,285,929
3,219,388
397,423
1,733,955
9,482,906
General allowance for loan losses
(36,618)
9,446,288
Gross write-offs
1,273
1,492
2,890
533
5,511
11,699
2019
Pre 2019
6,837,816
323,648
2,956,697
2,949,521
288,647
166,266
111,303
6,796,082
1,032,641
4,007
110,800
207,510
90,794
318,077
300,642
1,031,830
108,218
253,100
182,920
73,370
434,151
128,876
1,180,635
3,810
5,690
1,230,959
151,878
353,871
318,208
115,019
76,080
189,622
1,204,678
456,528
2,599
4,877
18,549
8,708
43,724
374,776
453,233
10,780,189
590,350
3,679,345
3,680,518
582,228
1,038,298
1,105,219
10,675,958
(44,473)
10,631,485
100
950
3,236
258
360
25,731
30,635
The tables below present delinquency information on loans, net by year of origination.
Current
9,103,724
330,985
497,155
3,168,095
3,029,683
380,511
1,664,385
9,070,814
30 - 59 days past due
45,971
505
124
16,759
13,408
15,112
45,908
60+ days past due
377,420
101
17,341
101,075
176,297
16,912
54,458
366,184
9,632,399
574,507
3,351,046
3,409,643
495,433
881,868
875,348
9,587,845
172,355
59,988
80,684
510
22,586
7,148
171,498
975,435
15,261
268,311
190,191
86,285
133,844
222,723
916,615
26
The table below presents delinquency information on loans, net by portfolio.
30-59 days past due
60+ dayspast due
Non-Accrual Loans
90+ days past due and Accruing
5,752,441
25,074
292,393
103,996
119,009
933,012
3,500
22,510
22,511
803,198
15,182
21,245
19,578
1,667
1,192,886
262
25,659
43,484
389,277
1,890
4,377
2,822
192,391
120,676
Percentage of loans outstanding
95.6%
0.5%
3.9%
100%
2.0%
1.3%
6,186,367
87,163
522,552
339,073
986,755
21,798
23,277
13,928
782,123
49,694
348,818
241,751
82,781
2,695
1,179,231
8,619
16,828
30,549
40
443,869
4,224
5,140
6,005
634,001
82,821
89.8%
1.6%
8.6%
5.9%
0.8%
In addition to delinquency rates, the current estimated LTV ratio, geographic distribution of the loan collateral and collateral concentration are primary credit quality indicators that provide insight into a borrower’s capacity and willingness to meet its financial obligation. High LTV loans tend to have higher delinquency rates than loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral considers factors such as the regional economy, property price changes and specific events such as natural disasters, which will affect credit quality. The collateral concentration of the loan portfolio considers economic factors or events may have a more pronounced impact on certain sectors or property types.
The table below presents quantitative information on the credit quality of loans, net.
LTV(1)
0.0 – 20.0%
20.1 – 40.0%
40.1 – 60.0%
60.1 – 80.0%
80.1 – 100.0%
Greater than 100.0%
2,243
85,672
721,964
4,974,660
179,286
106,083
3,227
30,987
437,170
466,402
19,940
1,296
21,019
4,521
147,031
569,839
91,895
5,320
13,798
69,428
218,269
353,621
228,658
335,033
108,028
135,847
67,757
67,845
14,729
1,338
148,315
326,455
1,592,191
6,432,367
534,508
449,070
3.4%
16.8%
67.8%
5.6%
4.8%
2,308
97,309
756,353
5,781,651
82,517
75,944
5,222
36,021
449,804
517,628
19,965
3,190
25,173
94,856
532,730
355,631
119,191
53,054
2,995
6,505
10,627
56,061
172,743
404,102
226,327
334,818
127,310
159,386
81,291
68,451
14,124
2,671
170,640
443,633
1,995,916
7,133,968
462,124
469,677
4.2%
18.7%
66.8%
4.3%
4.4%
(1) LTV is calculated by dividing the current carrying amount by the most recent collateral value received. The most recent value for performing loans is often the third-party as-is valuation utilized during the original underwriting process.
The table below presents the geographic concentration of loans, net, secured by real estate.
Geographic Concentration (% of UPB)
Texas
18.8
%
18.6
California
11.8
11.4
Arizona
7.5
6.1
Florida
7.3
6.4
Georgia
6.8
7.1
Oregon
6.7
5.9
New York
4.6
4.8
North Carolina
4.3
4.1
Ohio
3.4
3.2
Washington
2.8
26.0
29.0
100.0
The table below presents the collateral type concentration of loans, net.
Collateral Concentration (% of UPB)
Multi-family
62.3
60.9
SBA
13.0
Mixed Use
8.5
8.4
Industrial
5.3
Retail
Office
3.5
4.4
Lodging
1.6
1.7
4.7
The table below presents the collateral type concentration of SBA loans within loans, net.
22.0
23.4
Gasoline Service Stations
12.7
12.8
Eating Places
6.6
6.2
Child Day Care Services
5.6
Offices of Physicians
3.7
General Freight Trucking, Local
Grocery Stores
2.3
Coin-Operated Laundries and Drycleaners
1.9
Beer, Wine, and Liquor Stores
1.3
Funeral Service & Crematories
1.1
1.4
39.8
37.5
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 ratios, and economic conditions.
The table below presents the allowance for loan losses by loan product and impairment methodology.
Fixed Rate
General
12,732
5,415
5,840
10,204
2,427
36,618
Specific
1,666
1,065
181
3,362
51
PCD
1,889
Ending balance
14,398
6,480
7,910
13,566
2,478
44,832
17,302
7,884
3,722
12,679
2,886
44,473
18,939
5,714
5,726
5,188
35,710
21,422
36,241
13,598
30,870
17,867
3,029
101,605
28
The table below presents a summary of the changes in the allowance for loan losses.
Beginning balance
13,181
7,264
23,755
20,579
2,644
67,423
Provision for (recoveries of) loan losses
1,217
(784)
(12,579)
(4,409)
(166)
(16,721)
Charge-offs and sales
(3,266)
(2,680)
(5,946)
Recoveries
76
40,319
9,085
373
15,110
2,893
67,780
Provision for loan losses
3,538
4,523
7,935
2,012
466
18,474
PCD(1)
27,617
(1,404)
(402)
(1,806)
89
43,857
12,204
35,925
16,809
3,359
112,154
Recoveries of loan losses
(21,843)
(4,489)
(18,215)
(246)
(485)
(45,278)
(2,629)
(4,745)
(4,259)
(66)
(11,699)
204
49,905
6,531
17,334
14,299
2,450
90,519
(5,437)
7,177
7,872
3,407
909
PCD (1)
(611)
(1,504)
(16,898)
(1,015)
(20,028)
118
(1) Refer to Note 5 for further details on assets acquired and liabilities assumed in connection with the Broadmark Merger.
The table above excludes $0.6 million and $3.6 million of allowance for loan losses on unfunded lending commitments as of June 30, 2024 and June 30, 2023, respectively. Refer to Note 3 – Summary of Significant Accounting Policies for more information on accounting policies, methodologies and judgment applied to determine the allowance for loan losses and lending commitments.
Non-accrual loans
A loan is placed on nonaccrual status when it is probable that principal and interest will not be collected under the original contractual terms. At that time, interest income is no longer accrued.
The table below presents information on non-accrual loans.
With an allowance
178,046
607,292
Without an allowance
14,345
26,709
Total recorded carrying value of non-accrual loans
Allowance for loan losses related to non-accrual loans
(9,499)
(50,796)
UPB of non-accrual loans
203,666
688,282
June 30, 2023
Interest income on non-accrual loans for the three months ended
6,841
Interest income on non-accrual loans for the six months ended
14,690
Loan modifications made to borrowers experiencing financial difficulty
In certain situations, the Company may provide loan modifications to borrowers experiencing financial difficulty. These modifications may include interest rate reductions, principal forgiveness, term extensions, and other-than-insignificant payment delays intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral.
Three months ended June 30, 2024. During the three months ended June 30, 2024, the Company entered into 20 loan modifications with an aggregate carrying value of $519.0 million, or 5.5% of total loans, net. These modified loans include a combination of changes to the contractual terms which were in the form of term extensions, other-than-insignificant payment delays, and interest reductions.
There were 12 loans with an aggregate carrying value of $334.7 million, or 3.6% of loans, net, that were modified to include both term extensions and interest payment deferrals. The term extensions ranged between 3 and 27 months with a weighted average of 13 months added to the original loan term. Payment modifications include the reduction of interest payments to equal excess net operating income with the difference between the original rate and the interest collected due
29
at maturity. In most cases, cash management accounts are set up for the loans and default interest is waived. There was 1 loan with a carrying value of $75.0 million, or 0.8% of loans, net that was modified to include both a term extension and interest rate reduction. The term extension was for 18 months added to the original loan term and the interest rate decreased from SOFR + 3.25% to a fixed rate of 6.0% from June 2024 to December 2024 and 6.5% from January 2025 to July 2025. There were 3 loans with an aggregate carrying value of $58.3 million, or 0.6% of loans, net that were modified by interest payment deferrals. The number of interest payments deferred ranged between 10 and 28 months with a weighted average of 17 months and include periods before the modification date. Payment modifications include the reduction of interest payments to equal excess net operating income with the difference between the original rate and the interest collected due at maturity. In most cases, cash management accounts are set up for the loans and default interest is waived. There were 4 loans with an aggregate carrying value of $51.0 million, or 0.5% of loans, net that were modified by a term extension. The term extensions ranged between 10 and 24 months with a weighted average of 18 months added to the original loan term.
Of the loans that were modified during the three months ended June 30, 2024, substantially all were on accrual status. During the three months ended June 30, 2024, $7.2 million of total capital was invested by the borrowers, substantially all in the form of payment towards past due interest or contribution to various reserve accounts.
Six months ended June 30, 2024. During the six months ended June 30, 2024, the Company entered into 24 loan modifications with an aggregate carrying value of $555.6 million, or 5.9% of total loans, net. These modified loans include a combination of changes to the contractual terms which were in the form of term extensions, other-than-insignificant payment delays, and interest reductions.
There were 13 loans with an aggregate carrying value of $360.0 million, or 3.8% of loans, net, that were modified to include both term extensions and interest payment deferrals. The term extensions ranged between 3 and 27 months with a weighted average of 12 months added to the original loan term. Payment modifications include the reduction of interest payments to equal excess net operating income with the difference between the original rate and the interest collected due at maturity. In most cases, cash management accounts are set up for the loans and default interest is waived. There was 1 loan with a carrying value of $75.0 million, or 0.8% of loans, net that was modified to include both a term extension and interest rate reduction. The term extension was for 18 months added to the original loan term and the interest rate decreased from SOFR + 3.25% to a fixed rate of 6.0% from June 2024 to December 2024 and 6.5% from January 2025 to July 2025. There were 7 loans with an aggregate carrying value of $62.3 million, or 0.7% of loans, net that were modified to include term extensions. The term extensions ranged between 6 and 24 months with a weighted average of 17 months added to the original loan term. There were 3 loans with an aggregate carrying value of $58.3 million, or 0.6% of loans, net that were modified by interest payment deferrals. The number of interest payments deferred ranged between 10 and 28 months with a weighted average of 17 months and include payments for periods before the modification date. Payment modifications include the reduction of interest payments to equal excess net operating income with the difference between the original rate and the interest collected due at maturity. In most cases, cash management accounts are set up for the loans and default interest is waived.
Of the loans that were modified during the six months ended June 30, 2024, substantially all were on accrual status. During the six months ended June 30, 2024, $7.2 million of total capital was invested by the borrowers, substantially all in the form of payment towards past due interest or contribution to various reserve accounts.
Three months ended June 30, 2023. During the three months ended June 30, 2023, the Company entered into 5 loan modifications with an aggregate carrying value of $382.0 million, or 3.7% of total loans, net. These modified loans include a combination of changes to the contractual terms which were in the form of term extensions and other-than-insignificant payment delays.
There were 4 loans with an aggregate carrying value of $381.9 million, or 3.7% of loans, net that were modified by a term extension. The term extensions ranged between 12 and 36 months with a weighted average of 18 months added to the original loan term. The largest loan with a carrying value of $357.4 million was modified in May 2023 to extend the maturity date of the loan from June 2023 to December 2024, or 18 months. The borrower was required to contribute $17.0 million, or 3.9% of the total carrying value of the loan, towards various reserve accounts. There was 1 loan with a carrying value of $0.1 million, or less than 0.1% of loans, net that was modified by interest payment deferrals of 9 months.
Of the loans that were modified during the three months ended June 30, 2023, substantially all were on accrual status as of June 30, 2024.
30
Six months ended June 30, 2023. During the six months ended June 30, 2023, the Company entered into 12 loan modifications with an aggregate carrying value of $434.4 million, or 4.2% of total loans, net. These modified loans include a combination of changes to the contractual terms which were in the form of term extensions and other-than-insignificant payment delays.
There were 9 loans with an aggregate carrying value of $405.2 million, or 3.9% of loans, net that were modified by term extensions. The term extensions ranged between 12 and 120 months with a weighted average of 18 months added to the original loan term. The largest loan with a carrying value of $357.4 million was modified in May 2023 to extend the maturity date of the loan from June 2023 to December 2024, or 18 months. The borrower was required to contribute $17.0 million, or 3.9% of the total carrying value of the loan, towards various reserve accounts. There was 1 SBA loan with a carrying value of less than $0.1 million with a 10 year term extension, which is included in the range. There was 1 loan with a carrying value of $28.4 million, or 0.3% of loans, net, that was modified to include both a term extension and an interest payment deferral. The loan was modified by a term extension for 18 months added to the original loan term and an interest payment deferral of 12 months. There were 2 loans with an aggregate carrying value of $0.8 million, or less than 0.1% of loans, net that were modified by interest payment deferrals. The payment deferrals ranged between 6 and 9 months with a weighted average of 6 months.
Of the loans that were modified during the six months ended June 30, 2023, substantially all were on accrual status as of June 30, 2024.
The remaining elements of the Company’s modification programs are generally considered insignificant and do not have a material impact on financial results.
Allowance for loan losses. The Company’s allowance for loan losses reflects estimates of expected life-time loan losses, which considers historical loan losses including losses from modified loans to borrowers experiencing financial difficulty. The Company continues to estimate the allowance for loan losses after modification using loan-specific inputs. As of June 30, 2024 and June 30, 2023, substantially all of the modified loans were performing in accordance with the modified contractual terms.
All loans with modifications disclosed in the previous twelve months are performing in accordance with their modified terms as of June 30, 2024.
On loans for which the Company determines foreclosure of the collateral is probable, expected losses are measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. As of June 30, 2024 and December 31, 2023, the Company’s total carrying amount of loans in the foreclosure process was $65.8 million and $95.0 million, respectively.
Lending commitments. For the three and six months ended June 30, 2024, lending commitments to borrowers experiencing financial difficulty for which the Company has modified the loan terms were $22.8 million and $23.3 million, respectively. For the three and six months ended June 30, 2023, lending commitments to borrowers experiencing financial difficulty for which the Company has modified the loan terms were not material.
PCD loans
During the three months ended June 30, 2023, the Company acquired PCD loans in connection with the Broadmark merger. Subsequent to the determination of the preliminary purchase price allocation, based on updated valuations obtained, the Company recorded a measurement period adjustment of $5.2 million to increase the PCD allowance. Refer to Note 5 for further details on assets acquired and liabilities assumed in connection with the Broadmark Merger.
The table below presents a reconciliation of the Company’s purchase price with the par value of the purchased loans.
244,932
38,750
283,682
(27,617)
(5,245)
(32,862)
Non-credit discount
(6,035)
(3,342)
(9,377)
Purchase price of loans classified as PCD
211,280
30,163
241,443
The Company did not acquire any PCD loans during the three months ended June 30, 2024.
31
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP has a three-level hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). The Company’s valuation techniques for financial instruments use observable and unobservable inputs. Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.
Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.
Level 3 — One or more pricing inputs is significant to the overall valuation and unobservable. Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of financial instruments. Fair value for these investments is determined using valuation methodologies that consider a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
Valuation techniques of Level 3 investments vary by instrument type, but are generally based on an income, market or cost-based approach. The income approach predominantly considers discounted cash flows which is the measure of expected future cash flows in a default scenario, implied by the value of the underlying collateral, where applicable, and current performance whereas the market-based approach predominantly considers pull-through rates, industry multiples and the UPB. Fair value measurements of loans are sensitive to changes in assumptions regarding prepayments, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market.
The fair value of the contingent consideration in connection with mergers and acquisitions was determined using a Monte Carlo simulation model which considers various potential results based on Level 3 inputs, including management’s latest estimates of future operating results. Fair value measurements of the contingent consideration liability are sensitive to changes in assumptions related to earnings before tax, discount rate and risk-free rate of return. Contingent consideration also consists of CERs issued pursuant to the Mosaic Mergers. Pursuant to the CER agreement, if, as of the revaluation date, the sum of the updated fair value of the acquired portfolio less all advances made on such assets, plus all principal payments, return of capital and liquidation proceeds received on such assets exceeds the initial discounted fair value of the acquired portfolio, then the Company will issue to the CER holders, with respect to each CER, a number of shares of common stock equal to 90% of the lesser of the valuation excess and the discount amount, divided by the number of initially issued CERs divided by the Company share value, with cash being paid in lieu of any fractional shares of common stock otherwise due to such holder. In addition, each CER holder will be entitled to receive a number of additional shares of common stock equal to (i) the amount of any dividends or other distributions paid with respect to the number of whole shares of common stock received by such CER holder in respect of such holder’s CERs and having a record date on or after the closing of the Mosaic Mergers and a payment date prior to the issuance date of such shares of common stock, divided by (ii) the Company share value. The probability-weighted expected return method (“PWERM”) was utilized to estimate the return of capital and liquidation proceeds of the acquired asset portfolio, considering each possible outcome, including the economic and projected performance of each acquired asset, using a probability of 65%-100% return of
capital. The discounted cashflow technique was utilized by the Company to assess the updated value of the acquired portfolio as of the revaluation date. The fair value of dividend distributions to the CER holders was determined using a Monte Carlo simulation model which considers various potential results based on the CER payments, volatility of the Company’s share value and projected dividend distributions.
The final purchase price allocation associated with the closing of the Mosaic Mergers valued the CERs at approximately $25.0 million or $0.83 per CER. As of June 30, 2024, the CERs were valued at zero.
In certain cases, the inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
The table below presents financial instruments carried at fair value on a recurring basis.
Level 1
Level 2
Level 3
Assets:
Money market funds (a)
72,499
80,235
9,145
89,380
PPP loans (b)
230
MBS
6,974
Preferred equity investment (c)
108,423
Total assets
125,021
124,542
322,062
Liabilities:
Total liabilities
6,564
100,238
9,348
165
7,360
111,604
125,131
336,973
7,840
(a) Money market funds are included in cash and cash equivalents on the consolidated balance sheets
(b) PPP loans are included in other assets on the consolidated balance sheets
(c) Preferred equity investment held through consolidated joint ventures are included in assets of consolidated VIEs on the consolidated balance sheets
The table below presents the valuation techniques and significant unobservable inputs used to value Level 3 financial instruments, using third party information without adjustment.
Fair Value
Predominant Valuation Technique (a)
Type
Range
Weighted Average
Income Approach
Discount rate
9.0%
Preferred equity investment
11.0%
115,397
Contingent consideration - Madison One
526
Monte Carlo Simulation Model
Net income volatility | Risk-adjusted discount rate
66.0% | 47.5%
10.0%
115,783
Contingent consideration- Mosaic CER dividends
1,591
Equity volatility | Risk-free rate of return | Discount rate
30.0% | 4.7% | 11.5%
30% | 4.7% | 11.5%
Contingent consideration- Mosaic CER units
6,037
Income approach and PWERM Model
Revaluation discount rate | Discount rate
12.0% | 11.5%
(a) Prices are weighted based on the UPB of the loans and securities included in the range for each class.
Included within Level 3 assets of $124.5 million as of June 30, 2024 and $125.1 million as of December 31, 2023, is $9.1 million and $9.3 million, respectively, of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value. Included within Level 3 liabilities of $3.9 million as of June 30, 2024 is $3.4 million of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value.
34
The table below presents a summary of changes in fair value for Level 3 assets and liabilities.
9,859
9,786
Unrealized gains (losses), net
(86)
680
(13)
Transfer to (from) Level 3
(10,028)
9,773
58,330
60,924
Sales / Principal payments
(11)
(22)
(1,287)
(3,870)
57,032
7,169
7,913
8,094
(195)
(182)
(386)
(363)
7,731
Preferred equity investment (1)
106,548
1,875
113,717
184,525
187,227
1,680
(1,555)
294
(4,246)
(883)
182,959
16,636
28,500
Realized losses (gains), net
(7,628)
Unrealized losses (gains), net
(1,070)
(3,934)
Merger (2)
15,566
(1) Preferred equity investment held through consolidated joint ventures are included in assets of consolidated VIEs on the consolidated balance sheets.
(2) Includes assets acquired and liabilities assumed as a result of the Madison One Acquisition. Refer to Note 5 for further details on assets acquired and liabilities assumed in connection with the Madison One Acquisition.
The Company’s policy is to recognize transfers in and transfers out as of the end of the period of the event or the date of the change in circumstances that caused the transfer. Transfers between Level 2 and Level 3 generally relate to whether there were changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments.
Financial instruments not carried at fair value
The table below presents the carrying value and estimated fair value of financial instruments that are not carried at fair value and are classified as Level 3.
Estimated Fair Value
9,255,383
10,622,137
10,380,893
452,856
129,471
113,715
10,018,912
9,837,710
10,724,974
10,494,608
4,361,392
5,022,057
395,879
317,239
828,902
889,744
717,056
731,104
8,685,866
8,615,198
9,125,103
9,062,219
As of both June 30, 2024 and December 31, 2023, other assets and accounts payable and accrued liabilities are not carried at fair value but generally approximate fair value. Further details are presented in Note 18 – Other Assets and Other Liabilities.
35
The Company performs servicing activities for third parties, which primarily include collecting principal, interest and other payments from borrowers, remitting the corresponding payments to investors and monitoring delinquencies. The Company’s servicing fees are specified by pooling and servicing agreements.
The table below presents information about servicing rights.
SBA servicing rights, at amortized cost
Beginning net carrying amount
31,343
22,040
29,536
19,756
Additions
5,596
2,043
8,273
3,555
Amortization
(1,105)
(921)
(1,960)
(1,756)
Recovery (impairment)
(507)
1,166
(522)
2,773
Ending net carrying amount
35,327
24,328
Multi-family servicing rights, at amortized cost
72,212
67,911
73,301
67,361
882
5,311
2,620
8,392
(2,872)
(2,657)
(5,699)
(5,188)
70,222
70,565
USDA servicing rights, at amortized cost
14,413
14,219
Total servicing rights
94,893
The Company’s servicing rights are carried at amortized cost and evaluated quarterly for impairment. The Company estimates the fair value of these servicing rights by using a combination of internal models and data provided by third-party valuation experts. The assumptions used in the Company’s internal models include forward prepayment rates, forward default rates, discount rates, and servicing expenses.
The Company’s models calculate the present value of expected future cash flows utilizing assumptions that it believes are used by market participants. Forward prepayment rates, forward default rates and discount rates are derived from historical experiences adjusted for prevailing market conditions. Components of the estimated future cash flows include servicing fees, late fees, other ancillary fees and cost of servicing.
The table below presents additional information about servicing rights.
As of June 30, 2024
As of December 31, 2023
1,534,092
1,208,201
5,885,203
5,689,872
USDA
506,131
7,925,426
6,898,073
The table below presents significant assumptions used in the estimated valuation of servicing rights carried at amortized cost.
Range of input values
SBA servicing rights
Forward prepayment rate
1.5
-
21.6
9.1
0.0
4.5
Forward default rate
6.3
7.0
11.6
20.9
12.2
14.4
22.9
14.6
Servicing expense
0.4
Multi-family servicing rights
6.5
5.4
0.9
0.6
6.0
0.8
0.1
USDA servicing rights (1)
2.1
N/A
6.9
0.3
(1) Refer to Note 5 for further details on assets acquired and liabilities assumed in connection with the Madison One Acquisition
Assumptions can change between and at each reporting period as market conditions and projected interest rates change.
The table below presents the possible impact of 10% and 20% adverse changes to key assumptions on servicing rights.
Impact of 10% adverse change
(1,164)
(543)
Impact of 20% adverse change
(2,261)
(1,069)
Default rate
(162)
(165)
(323)
(328)
(1,244)
(1,530)
(2,401)
(2,922)
(2,258)
(2,047)
(4,515)
(4,095)
(466)
(491)
(918)
(965)
(27)
(29)
(2,238)
(2,320)
(4,365)
(4,524)
(2,567)
(2,587)
(5,135)
(5,173)
USDA servicing rights
(804)
(1,543)
(942)
(625)
(1,250)
The table below presents estimated future amortization expense for servicing rights.
10,183
2025
17,730
2026
15,673
2027
13,755
2028
12,074
Thereafter
50,353
In the fourth quarter of 2023, the Board approved a plan to strategically shift the Company’s core focus to LMM commercial real estate lending and government backed small business loans, which contemplates the disposition of assets and liabilities of the Company’s residential mortgage banking segment. Accordingly, the then Residential Mortgage Banking segment met the criteria to be classified as held for sale on the consolidated balance sheets, presented as discontinued operations on the consolidated statements of operations, and excluded from continuing operations for all periods presented. As of June 30, 2024, the Company sold $4.7 billion of residential mortgage servicing rights for net proceeds of $61.8 million as part of the Company’s disposition of its residential mortgage banking segment. The Company expects to complete the disposition of its residential mortgage banking segment in the current year.
The table below presents the assets and liabilities of the Residential Mortgage Banking segment classified as held for sale.
20,438
13,694
5,666
6,314
3,860
2,778
156,264
133,204
Loans eligible for repurchase from Ginnie Mae
89,679
86,872
847
Servicing rights(1)
125,795
188,855
22,192
22,032
229,906
230,965
Liabilities for loans eligible for repurchase from Ginnie Mae
813
1,321
11,867
13,999
(1) Servicing rights are Level 3 assets that had been measured at fair value using the income approach valuation technique. Refer to Note 7- Fair Value Measurements for further details.
The table below presents the operating results of the Residential Mortgage Banking segment presented as discontinued operations.
2,121
1,880
3,962
3,485
(2,755)
(2,313)
(5,285)
(3,839)
Net interest expense
(634)
(433)
(1,323)
(354)
Residential mortgage banking activities
11,353
9,884
20,595
19,053
Net realized gain (loss) on financial instruments
2,938
(7,219)
8,818
2,725
Servicing income, net of amortization and impairment
8,472
9,393
17,888
18,754
Total non-interest income
15,548
28,118
34,210
40,586
(5,818)
(5,295)
(11,502)
(10,707)
Variable expenses on residential mortgage banking activities
(8,122)
(6,574)
(14,208)
(12,059)
(259)
(123)
(412)
(297)
(2,412)
(2,221)
(4,741)
(4,029)
(2,002)
(1,684)
(3,836)
(3,393)
(18,613)
(15,897)
(34,699)
(30,485)
Income (loss) from discontinued operations before provision for income taxes
Income tax (provision) benefit
The table below presents certain characteristics of secured borrowings.
Pledged Assets
Carrying Value at
Lenders (1)
Asset Class
Current Maturity (2)
Pricing (3)
Facility Size
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
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
LMM loans
November 2024 - November 2026
SOFR + 3.18%
4,306,000
2,828,152
1,758,071
1,677,885
Matured
45,031
July 2024 - June 2025
7.95%
329,590
596,798
229,236
Total borrowings under repurchase agreements
4,635,590
3,424,950
2,087,661
1,952,152
Total secured borrowings
5,179,854
3,710,913
(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 and repurchase agreements have been converted into USD for purposes of this disclosure.
In the table above, the agreements governing secured borrowings require maintenance of certain financial and debt covenants. As of both June 30, 2024 and December 31, 2023, certain financing counterparties covenants calculations were
amended to exclude the PPPLF from certain covenant calculations. As of both June 30, 2024 and December 31, 2023 the Company was in compliance with all debt and financial covenants.
The table below presents the carrying value of collateral pledged with respect to secured borrowings outstanding.
Pledged Assets Carrying Value
Collateral pledged - borrowings under credit facilities and other financing agreements
24,186
43,365
261,777
169,147
212,512
Collateral pledged - borrowings under repurchase agreements
2,117,106
2,560,725
80,093
20,770
Retained interest in assets of consolidated VIEs
516,705
356,772
579,866
9,349
Real estate acquired in settlement of loans
131,180
160,455
3,108,071
Total collateral pledged on secured borrowings
3,320,583
Note 11. Senior Secured Notes, and Corporate Debt, net
ReadyCap Holdings, LLC (“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.
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.
As of June 30, 2024, the Company was in compliance with all covenants with respect to the Senior Secured Notes and the Term Loan.
The Company issues 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. The Company often is 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 its existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of its 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 contain 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.
As of June 30, 2024, the Company was in compliance with all covenants with respect to Corporate debt.
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, respectively.
The table below presents information about senior secured notes and corporate debt.
Coupon Rate
Maturity Date
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
Corporate debt principal amount(3)
5.50
12/30/2028
110,000
Corporate debt principal amount(4)
6.20
7/30/2026
104,614
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
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
Junior subordinated notes principal amount(9)
4/30/2035
21,250
Total corporate debt, net
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.
760,884
111,250
Total contractual amounts
1,202,134
Unamortized deferred financing costs, discounts, and premiums, net
(17,823)
Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment in the consolidated balance sheets and the portion sold is recorded as guaranteed loan financing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded as interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the accompanying consolidated statements of operations. Guaranteed loan financings are secured by loans of $782.7 million and $845.0 million as of June 30, 2024 and December 31, 2023, respectively.
The table below presents guaranteed loan financing and the related interest rates and maturity dates.
Range of
Interest Rate
Interest Rates
Maturities (Years)
Ending Balance
9.17
1.45-10.50
2024-2048
2023-2048
The table below presents the contractual maturities of guaranteed loan financing.
182
414
1,914
7,778
8,614
763,443
In the normal course of business, the Company enters into certain types of transactions with entities that are considered to be VIEs. The Company’s primary involvement with VIEs has been related to its securitization transactions in which it transfers assets to securitization vehicles, most notably trusts. The Company primarily securitizes its acquired and originated loans, which provides a source of funding and has enabled it to transfer a certain portion of economic risk on loans or related debt securities to third parties. The Company also transfers originated loans to securitization trusts sponsored by third parties, most notably Freddie Mac. Third-party securitizations are securitization entities in which it maintains an economic interest but does not sponsor. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIE activity in which the Company is involved in are consolidated within its financial statements. Refer to Note 3 – Summary of Significant Accounting Policies for a discussion of accounting policies applied to the consolidation of the VIE and transfer of the loans in connection with the securitization.
Consolidated VIEs
The Company consolidates variable interests held in an acquired joint venture investment for which it is the primary beneficiary. The equity held by the remaining owners and their portions of net income (loss) are reflected in stockholders’ equity on the consolidated balance sheets as Non-controlling interests and in the consolidated statements of operations as Net income attributable to noncontrolling interests, respectively. As of June 30, 2024 and December 31, 2023, income and expenses on joint venture investments identified as consolidated VIEs were not material.
The table below presents assets and liabilities of consolidated VIEs.
671
22,778
93,240
108,231
83,486
2,944
4,410,015
5,071,431
(1) Preferred equity investment held through consolidated VIEs are included in Assets of consolidated VIEs on the consolidated balance sheets.
Securitization-related VIEs
Company sponsored securitizations. In a securitization transaction, assets are transferred to a trust, which generally meets the definition of a VIE. The Company’s primary securitization activity is in the form of LMM and SBA loan securitizations, conducted through securitization trusts, which are typically consolidated, as the company is the primary beneficiary.
As a result of the consolidation, the securitization is viewed as a loan financing to enable the creation of the senior security and ultimately, sale to a third-party investor. As such, the senior security is presented in the consolidated balance sheets as securitized debt obligations of consolidated VIEs. The third-party beneficial interest holders in the VIE have no recourse against the Company, with the exception of an obligation to repurchase assets from the VIE in the event that certain representations and warranties in relation to the loans sold to the VIE are breached. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.
The securitization trust receives principal and interest on the underlying loans and distributes those payments to the certificate holders. The assets and other instruments held by the securitization trust are restricted in that they can only be used to fulfill the obligations of the securitization trust. The risks associated with the Company’s involvement with the VIE is limited to the risks and rights as a certificate holder of the securities retained by the Company.
The consolidation of securitization transactions includes the senior securities issued to third parties which are shown as securitized debt obligations of consolidated VIEs in the consolidated balance sheets.
The table below presents additional information on the Company’s securitized debt obligations.
Weighted
Principal
Carrying
Average
Balance
value
ReadyCap Lending Small Business Trust 2019-2
25,512
8.0
32,175
7.6
ReadyCap Lending Small Business Trust 2023-3
114,485
112,549
8.6
121,527
119,308
Sutherland Commercial Mortgage Trust 2017-SBC6
277
5.0
1,550
1,532
Sutherland Commercial Mortgage Trust 2019-SBC8
97,659
96,256
2.9
105,281
103,733
Sutherland Commercial Mortgage Trust 2021-SBC10
69,979
68,902
81,214
79,952
ReadyCap Commercial Mortgage Trust 2015-2
1,758
1,688
5.1
1,902
1,753
ReadyCap Commercial Mortgage Trust 2016-3
8,901
8,670
9,038
8,723
5.2
ReadyCap Commercial Mortgage Trust 2018-4
52,078
50,569
53,052
51,309
ReadyCap Commercial Mortgage Trust 2019-5
84,579
80,128
4.9
88,520
83,529
ReadyCap Commercial Mortgage Trust 2019-6
192,110
188,680
199,379
195,496
ReadyCap Commercial Mortgage Trust 2022-7
194,429
188,188
4.2
195,866
188,995
Ready Capital Mortgage Financing 2021-FL5
113,339
7.4
273,681
273,623
Ready Capital Mortgage Financing 2021-FL6
242,920
417,782
416,467
Ready Capital Mortgage Financing 2021-FL7
552,629
552,131
586,117
583,771
Ready Capital Mortgage Financing 2022-FL8
789,968
788,547
808,671
805,220
Ready Capital Mortgage Financing 2022-FL9
453,978
451,260
511,622
505,917
8.1
Ready Capital Mortgage Financing 2022-FL10
577,204
572,469
8.2
654,116
646,141
7.8
Ready Capital Mortgage Financing 2023-FL11
429,849
427,051
473,481
468,307
Ready Capital Mortgage Financing 2023-FL12
440,609
437,381
507,646
500,882
4,442,263
4,406,517
7.2
5,122,620
5,066,833
The table above excludes non-company sponsored securitized debt obligations of $0.7 million and $1.6 million that are included in the consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively.
Repayment of securitized debt will be dependent upon the cash flows generated by the loans in the securitization trust that collateralize such debt. The actual cash flows from the securitized loans are comprised of coupon interest, scheduled principal payments, prepayments and liquidations of the underlying loans. The actual term of the securitized debt may differ significantly from the Company’s estimate given that actual interest collections, mortgage prepayments and/or losses on liquidation of mortgages may differ significantly from those expected.
Third-party sponsored securitizations. For most third-party sponsored securitizations, the Company determined that it is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the economic performance of these entities. Specifically, the Company does not manage these entities or otherwise solely hold decision making powers that are significant, which include special servicing decisions. As a result of this assessment, the Company does not consolidate any of the underlying assets and liabilities of these trusts and only accounts for its specific interests in them.
Unconsolidated VIEs
The Company does not consolidate variable interests held in an acquired joint venture investment accounted for as an equity method investment as it does not have the power to direct the activities that most significantly impact their economic performance and therefore, the Company only accounts for its specific interest in them.
The table below reflects variable interests in identified VIEs for which the Company is not the primary beneficiary.
Carrying Amount
Maximum Exposure to Loss (1)
MBS (2)
27,364
26,301
Total assets in unconsolidated VIEs
161,966
159,622
(1) Maximum exposure to loss is limited to the greater of the fair value or carrying value of the assets as of the consolidated balance sheet date.
(2) Retained interest in other third party sponsored securitizations.
Interest income and expense 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 interest income and expense.
146,418
165,788
294,691
326,219
11,693
12,164
23,959
25,192
25,963
22,337
56,131
34,503
31,945
15,335
63,235
30,256
PPP (1)
127
3,435
428
6,442
8,218
7,857
16,003
16,232
Total loans, net (2)
224,364
226,916
454,447
438,844
264
701
1,436
4,400
538
756
Total loans, held for sale (2)
5,326
725
5,544
1,467
Investments held to maturity (1)
Preferred equity investment (2)
3,439
2,193
4,361
976
1,158
1,932
2,280
Total interest income
(51,500)
(47,282)
(99,138)
(92,502)
PPPLF borrowings (3)
(24)
(124)
(52)
(288)
Securitized debt obligations of consolidated VIEs
(94,476)
(99,558)
(194,728)
(190,159)
(17,782)
(4,693)
(36,290)
(9,565)
Senior secured notes
(6,368)
(4,397)
(10,749)
(8,778)
Convertible note
(2,188)
(4,376)
Corporate debt
(13,017)
(11,979)
(26,015)
(23,421)
Total interest expense
Net interest income before provision for loan losses
(1) Included in other assets on the consolidated balance sheets.
(2) Includes interest income on assets in consolidated VIEs.
(3) Included in other liabilities on the consolidated balance sheets.
The Company is exposed to changing interest rates and market conditions, which affect cash flows associated with borrowings. The Company uses derivative instruments to manage interest rate risk and conditions in the commercial mortgage market and, as such, views them as economic hedges. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for making payments based on a fixed interest rate over the life of the swap contract.
For derivative instruments where the Company has not elected hedge accounting, fair value adjustments are recorded in earnings. The fair value adjustments for interest rate swaps, along with the related interest income, interest expense and gains (losses) on termination of such instruments, are reported as a net realized gain on financial instruments in the consolidated statements of operations.
As described in Note 3, for qualifying cash flow hedges, the change in the fair value of derivatives is recorded in OCI and not recognized in the consolidated statements of operations. Derivative movements impacting earnings are recognized on a consistent basis with the classification of the hedged item, primarily interest expense. The ineffective portions of the cash flow hedges are immediately recognized in earnings.
The table below presents average notional derivative amounts, as this is the most relevant measure of volume, and derivative assets and liabilities by type. Refer to Note 22 for further details on derivative assets and liabilities by product type.
Notional
Derivative
Primary Underlying Risk
Asset
Liability
Interest Rate Swaps - not designated as hedges
Interest rate risk
26,300
4,380
183,081
12,349
Interest Rate Swaps - designated as hedges
546,620
51,390
(2,038)
416,139
24,463
FX forwards
Foreign exchange rate risk
62,166
343
39,447
(212)
635,086
56,113
(2,638)
638,667
36,812
The table below presents gains and losses on derivatives.
Net Realized
Net Unrealized
Gain (Loss)
Interest rate swaps
3,566
(1,803)
912
4,478
9,682
3,853
745
(1,364)
10,427
2,489
7,958
5,083
8,870
13,368
(4,606)
(1,826)
14,113
(6,432)
In the table above:
The table below summarizes the gains and losses on derivatives which have qualified for hedge accounting.
Derivatives - effective portion reclassified from AOCI to income
Derivatives - effective portion recorded in OCI
Total change in OCI for period
(278)
(1,718)
(294)
2,199
(561)
4,244
(592)
(1,904)
The table below presents details on the real estate owned, held for sale portfolio.
Acquired Portfolio:
Mixed use
9,658
8,535
35,589
73,745
5,035
14,010
Residential
11,977
23,064
6,630
6,901
Land
74,478
86,375
Total Acquired REO (1)
143,367
212,630
Other REO Held for Sale:
10,683
5,983
4,247
27,892
28,139
1,694
1,950
Total Other REO
44,516
Total real estate owned, held for sale
In the table above, Other REO excludes $3.4 million and $1.9 million as of June 30, 2024 and December 31, 2023, respectively, of real estate owned, held for sale within consolidated VIEs.
Subsequent to the determination of the preliminary purchase price allocation, based on updated valuations obtained, the Company recorded a measurement period adjustment of $23.7 million to decrease the value of real estate owned, held for sale in connection with the Broadmark Merger. Refer to Note 5 for further details on assets acquired and liabilities assumed in connection with the Broadmark Merger.
Management Agreement
The Company has entered into a management agreement with its Manager (the “Management Agreement”), which describes the services to be provided to the Company by its Manager and compensation for such services. The Company’s Manager is responsible for managing the Company’s day-to-day operations, subject to the direction and oversight of the Board.
Management fee. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee calculated and payable quarterly in arrears equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement) up to $500 million and 1.00% per annum of stockholders’ equity in excess of $500 million.
The table below presents the management fee payable to the Manager.
Management fee - total
6.2 million
5.8 million
12.8 million
10.9 million
Management fee - amount unpaid
Incentive distribution. The Manager is entitled to an incentive distribution in an amount equal to the product of (i) 15% and (ii) the excess of (a) core earnings as defined in the partnership agreement (IFCE) on a rolling four-quarter basis over (b) an amount equal to 8.00% per annum multiplied by the weighted average of the issue price per share of the common stock or OP units multiplied by the weighted average number of shares of common stock outstanding, provided that IFCE over the prior twelve calendar quarters is greater than zero. 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.
The table below presents the Incentive fee payable to the Manager.
Incentive fee distribution - total
0.1 million
1.8 million
Incentive fee distribution - amount unpaid
The Management Agreement may be terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors or the holders of a majority of the outstanding common stock (excluding shares held by employees and affiliates of the Manager), based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term. Additionally, upon such a termination by the Company without cause (or upon termination by the Manager due to the Company’s material breach), the management agreement provides that the Company will pay the Manager a termination fee equal to three times the average annual base management fee earned by the Manager during the prior 24 month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, except upon an internalization. Additionally, if the management agreement is terminated under circumstances in which the Company is obligated to make a termination payment to the Manager, the operating partnership shall repurchase,
concurrently with such termination, the Class A special unit for an amount equal to three times the average annual amount of the incentive distribution paid or payable in respect of the Class A special unit during the 24 month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination.
The current term of the Management Agreement will expire on October 31, 2024 and is automatically renewed for successive one-year terms on each anniversary thereafter; provided, however, that either the Company, under the certain limited circumstances described above that would require the Company and the operating partnership to make the payments described above, or the Manager may terminate the Management Agreement annually upon 180 days prior notice.
Expense reimbursement. In addition to the management fees and incentive distribution described above, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company and for certain services provided by the Manager to the Company. Expenses incurred by the Manager and reimbursed by the Company are typically included in salaries and benefits or general and administrative expense in the consolidated statements of operations.
The table below presents reimbursable expenses payable to the Manager.
Reimbursable expenses payable to Manager - total
3.3 million
2.8 million
6.1 million
5.7 million
Reimbursable expenses payable to Manager - amount unpaid
3.0 million
Co-Investment with Manager
On July 15, 2022, the Company closed on a $125.0 million commitment to invest into a parallel vehicle, Waterfall Atlas Anchor Feeder, LLC (the “Fund”), a fund managed by the Manager, in exchange for interests in the Fund. In exchange for the Company’s commitment, the Company is entitled to 15% of any carried interest distributions received by the general partner of the Fund such that over the life of the Fund, the Company receives an internal rate of return of 1.5% over the internal rate of return of the Fund. The Fund focuses on commercial real estate equity through the acquisition of distressed and value-add real estate across property types with local operating partners. As of June 30, 2024, the Company has contributed $61.2 million of cash into the Fund for a remaining commitment of $63.8 million.
The table below presents the composition of other assets and other liabilities.
49,091
38,530
Deferred loan exit fees
30,175
32,271
Accrued interest
65,498
64,504
35,759
20,780
28,704
17,749
Receivable from third party
32,895
36,519
9,994
9,544
Deferred tax asset
21,085
Tax receivable
61,526
3,069
Right-of-use lease asset
3,957
2,539
PPP receivables
23,735
34,597
3,446
Purchased future receivables, net
2,093
9,483
11,455
27,144
Accounts payable and other accrued liabilities:
Accrued salaries, wages and commissions
20,028
33,961
Accrued interest payable
38,545
35,373
Servicing principal and interest payable
10,360
6,249
Deferred tax liability
32,977
7,580
Payable to related parties
12,854
7,038
PPP liabilities
24,830
36,182
Accrued professional fees
3,235
5,354
Lease payable
9,384
8,205
44,973
35,168
Total accounts payable and other accrued liabilities
In the table above, investments held to maturity was $3.4 million as of both June 30, 2024 and December 31, 2023. As of both June 30, 2024 and December 31, 2023 substantially all of the investments held to maturity consisted of multi-family preferred equities with maturities of one through five years and a weighted average interest rate of 10.0%. The provision for credit losses on held to maturity securities was not material for the three and six months ended June 30, 2024 or June 30, 2023.
The table below presents the carrying value of goodwill by reportable segment.
LMM Commercial Real Estate
27,324
Small Business Lending
21,767
11,206
The table below presents information on intangible assets.
Gross Carrying Amount
Accumulated Amortization
Net Carrying Value
Amortized intangible assets:
Internally developed software
14,107
5,161
8,946
Customer relationships
6,799
1,043
5,756
Broker network
9,300
1,284
8,016
3,182
696
2,486
Unamortized intangible assets:
Trade name
2,500
SBA license
1,000
Total intangible assets
36,888
8,184
11,840
3,884
7,956
6,800
865
5,935
2,080
1,722
358
24,220
6,471
The amortization expense related to intangible assets was $0.9 million and $1.7 million for the three and six months ended June 30, 2024 and $0.4 million and $0.8 million for the three and six months ended June 30, 2023, respectively. Such amounts are recorded as other operating expenses in the consolidated statements of operations.
The table below presents amortization expense related to finite-lived intangible assets for the subsequent five years.
2,168
4,204
3,554
3,434
2,407
9,437
25,204
48
The table below presents the composition of other income and operating expenses.
Other income:
Origination income
2,473
6,316
5,130
10,928
Change in repair and denial reserve
(959)
527
(2,166)
328
ERC consulting income
95
8,481
2,586
18,156
4,988
3,308
16,873
9,612
Total other income
Other operating expenses:
Origination costs
1,415
1,744
3,229
3,399
Technology expense
2,232
1,578
4,825
3,090
Impairment on real estate
9,130
Rent and property tax expense
1,372
3,690
2,111
Recruiting, training and travel expense
525
722
1,232
1,353
Marketing expense
350
220
749
532
Bad debt expense - ERC
1,808
3,621
4,970
4,250
8,541
8,263
Total other operating expenses
21,802
9,557
51,989
22,166
Common stock dividends
The table below presents dividends declared by the Board on common stock during the last twelve months.
Declaration Date
Record Date
Payment Date
Dividend per Share
May 15, 2023
May 30, 2023
June 15, 2023
0.26
July 31, 2023
0.14
September 15, 2023
September 29, 2023
October 31, 2023
0.36
December 14, 2023
December 29, 2023
January 31, 2024
March 15, 2024
March 28, 2024
April 30, 2024
June 14, 2024
June 28, 2024
July 31, 2024
Stock incentive plans
The Company currently maintains the 2013 Equity Incentive Plan and the 2023 Equity Incentive Plan which authorize the Compensation Committee of the Board to approve grants of equity-based awards to the Company’s officers and directors, and employees of the Manager and its affiliates. The 2013 Equity Incentive Plan provided for grants of equity-based awards up to an aggregate of 5% of the shares of the Company’s common stock issued and outstanding from time to time on a fully diluted basis. On August 22, 2023, the Company’s stockholders approved the 2023 Equity Incentive Plan which replaces the 2013 Equity Incentive Plan and provides for grants of equity-based awards up to 5.5 million shares of the Company’s common stock. As of August 22, 2023, no further awards will be granted under the 2013 Equity Incentive Plan, and the 2013 Equity Incentive Plan remains in effect only for so long as awards granted thereunder remain outstanding. The Company currently settles stock-based incentive awards with newly issued shares. The fair value of the RSUs and RSAs granted, which is determined based upon the stock price on the grant date, is recorded as compensation expense on a straight-line basis over the vesting periods for the awards, with an offsetting increase in stockholders’ equity.
In 2024, 2023, and 2022, the Company granted 615,022, 413,852, and 327,692, respectively, of time-based RSAs under the 2013 Equity Incentive Plan and the 2023 Equity Incentive Plan to certain key employees. These awards generally vest ratably in equal annual installments over a three-year period based solely on continued employment or service. The Company further granted in these years 126,930, 75,639, and 45,162, respectively, of time-based RSAs and RSUs to directors of the Company, which vest ratably in equal installments quarterly over a one-year period. Directors may elect to receive RSAs or RSUs that have a deferred settlement date of their choosing. Dividends are paid on all above-mentioned time-based awards, vested and non-vested.
Additionally, as part of the Broadmark Merger, the Company assumed the Broadmark RSU Awards outstanding immediately prior to the Effective Time and converted them into 736,666 Company RSUs after applying the Exchange Ratio, of which 1,230 Company RSUs remain outstanding. The Broadmark RSU Awards have the same terms and conditions as were applicable to them immediately prior to the Effective Time and, accordingly, are not dividend eligible.
The table below summarizes RSU and RSA activity, excluding performance-based equity awards. See below for further details on performance-based equity awards.
Restricted Stock Units/Awards
Number of shares
Grant date fair value
Weighted-average grant date fair value (per share)
Outstanding, December 31, 2023
747,808
9,888
13.22
Granted
768,407
6,993
9.10
Vested
(325,918)
(4,110)
12.61
Forfeited
(58,937)
(609)
10.33
Outstanding, March 31, 2024
1,131,360
12,162
10.75
2,760
9.06
(60,154)
9.84
(65,872)
(699)
10.61
Outstanding, June 30, 2024
1,008,094
10,896
10.81
The Company recognized $1.9 million and $3.8 million for the three and six months ended June 30, 2024, respectively, and $2.0 million and $3.9 million for the three and six months ended June 30, 2023, respectively, of non-cash compensation expense related to its stock-based incentive plan in the consolidated statements of operations. As of June 30, 2024 and December 31, 2023, approximately $10.9 million and $9.9 million, respectively, of non-cash compensation expense related to unvested awards had not yet been charged to net income. These costs are expected to be amortized into compensation expense ratably over the course of the remaining vesting periods.
Performance-based equity awards under the 2023 Equity Incentive Plan
2024 performance-based RSUs. In February 2024, the Company granted, to certain key employees, 132,450 performance-based RSUs at a grant date fair value of $9.06 per performance-based RSU. Subject to the pre-established metrics achieved during the performance period, the actual number of shares that the key employees receive at the end of the performance period remains at risk and subject to forfeiture. The fair value of the performance-based RSUs is recorded as compensation expense over the performance period and will cliff vest at the end of the performance period, with an offsetting increase in stockholders’ equity.
Performance-based equity awards under the 2013 Equity Incentive Plan
2023 performance-based RSUs. In June 2023, the Company granted, to certain key employees, 222,552 performance-based RSUs at a grant date fair value of $10.11 per performance-based RSU, which may be earned based on the achievement of performance goals by the end of 2024 in relation to the Broadmark Merger. The awards are allocated 30% to awards that may be earned based on cost savings in 2024 as a percentage of the pre-merger Broadmark expense run rate, 15% to awards that may be earned based on the volume of Broadmark product originated from the time of the merger through the end of 2024, 30% to awards that may be earned based on the generation of incremental liquidity from asset level financing, portfolio run-off, sales or corporate re-levering through the end of 2024, and 25% to awards that may be earned based on distributable return on equity (“ROE”) for 2024. Subject to the level of achievement of these goals during the performance period, the actual number of shares that the key employees receive may range from 0% to 200% of the target award. The fair value of the performance-based RSUs granted is recorded as compensation expense over the performance period and will vest 2/3rds on December 31, 2024, and 1/3rd on December 31, 2025, with an offsetting increase in stockholders’ equity. Any awards earned on December 31, 2024 based on achievement of the applicable performance metrics but vesting on December 31, 2025 will convert into RSAs that are eligible to vest on December 31, 2025 based on the key employee’s continued employment or service through that date.
In February 2023, the Company granted, to certain key employees, 92,451 performance-based RSUs at a grant date fair value of $12.98 per performance-based RSU. The performance-based RSUs are allocated 50% to awards that may be earned based on achievement of performance goals related to distributable ROE for the three-year forward-looking period ending December 31, 2025 and 50% to awards that may be earned based on achievement of performance goals related to relative TSR for such three-year forward-looking performance period relative to the performance of a designated peer group. Subject to the distributable ROE metric and relative TSR achieved during the performance period, the actual number of shares that the key employees receive at the end of the performance period may range from 0% to 200% of the target award. The fair value of the performance-based RSUs is recorded as compensation expense over the performance period and will cliff vest at the end of the three-year performance period, with an offsetting increase in stockholders’ equity.
2022 performance-based RSUs. In February 2022, the Company granted, to certain key employees, 84,566 performance-based RSUs at a grant date fair value of $14.19 per performance-based RSU. During April 2024, 8,809 performance-based RSUs were forfeited. The performance-based RSUs are allocated 50% to awards that may be earned based on achievement of performance goals related to distributable ROE for the three-year forward-looking period ending December 31, 2024
50
and 50% to awards that may be earned based on achievement of performance goals related to relative TSR for such three-year forward-looking performance period relative to the performance of a designated peer group. Subject to the distributable ROE metric and relative TSR achieved during the vesting period, the actual number of shares that the key employees receive at the end of the performance period may range from 0% to 200% of the target award. The fair value of the performance-based RSUs is recorded as compensation expense over the performance period and will cliff vest at the end of a three-year performance period, with an offsetting increase in stockholders’ equity.
2021 performance-based RSUs. In February 2021, the Company granted, to certain key employees, 61,895 performance-based RSUs at a grant date fair value of $12.82 per performance-based RSU. During October 2021, 18,568 performance-based RSUs were forfeited. The performance-based RSUs are allocated 50% to awards that may be earned based on achievement of performance goals related to absolute TSR for the three-year forward-looking period ending December 31, 2023 and 50% to awards that may be earned based on achievement of performance goals related to TSR for such three-year forward-looking performance period relative to the performance of a designated peer group. Subject to the absolute and relative TSR achieved during the performance period, the actual number of shares that the key employees receive at the end of the performance period may range from 0% to 300% of the target award. Following the conclusion of the performance period on December 31, 2023, the Board determined that the relative TSR target goal was achieved and the absolute TSR goal was not achieved. As such, on January 9, 2024 the Board approved the settlement of 29,215 performance-based RSUs. The fair value of the performance-based RSUs granted was recorded as compensation expense over the performance period with an offsetting increase in stockholders’ equity.
Preferred Stock
In the event of a liquidation or dissolution of the Company, any outstanding preferred stock ranks senior to the outstanding common stock with respect to payment of dividends and the distribution of assets.
The Company classifies Series C Cumulative Convertible Preferred Stock, or Series C Preferred Stock, on the balance sheets using the guidance in ASC 480‑10‑S99. The Series C Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the preferred stock for cash only if certain events occur, such as a change in control. As of June 30, 2024, the conversion rate was 1.5285 shares of common stock per $25 principal amount of the Series C Preferred Stock, which is equivalent to a conversion price of approximately $16.36 per share of common stock. As redemption under these circumstances is not solely within the Company’s control, the Series C Preferred Stock has been classified as temporary equity. The Company has analyzed whether the conversion features should be bifurcated under the guidance in ASC 815 and has determined that bifurcation is not necessary.
The table below presents details on preferred equity by series.
Preferential Cash Dividends
Carrying Value (in thousands)
Series
Shares Issued and Outstanding (in thousands)
Par Value
Liquidation Preference
Rate per Annum
Annual Dividend (per share)
C
335
0.0001
25.00
6.25%
1.56
E
4,600
6.50%
1.63
In the table above,
Public and Private Warrants
As part of the Broadmark Merger, the Company assumed public and private placement warrants that represented the right to purchase shares of Broadmark Common Stock. As of June 30, 2024, there were 41.7 million public warrants outstanding, each representing the right to purchase 0.1180825 shares of our common stock, and 5.2 million private placement warrants outstanding, each representing the right to purchase 0.47233 shares of common stock. In the aggregate, the Company has outstanding warrants to purchase approximately 7.4 million shares of common stock at a price of $24.34 per whole share. Settlement of outstanding warrants will be in shares of common stock, unless the Company elects (solely in the Company’s discretion) to settle warrants the Company has called for redemption in cash, and subject to customary adjustment in the event of business combinations and certain tender offers. Unless earlier redeemed, the public warrants will expire on November 19, 2024.
The liability for the private placement warrants was less than $0.1 million as of June 30, 2024 and is included in accounts payable and other accrued liabilities in the consolidated balance sheets.
Equity ATM Program
On July 9, 2021, the Company entered into an Equity Distribution Agreement, as amended on March 8, 2022 (the “Equity Distribution Agreement”), with JMP Securities LLC (the “Sales Agent”), pursuant to which the Company may sell, from time to time, shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $150 million, through the Sales Agent either as agent or principal (the “Equity ATM Program”). The Company made no such sales through the Equity ATM Program during the three or six months ended June 30, 2024 or June 30, 2023. As of June 30, 2024, shares representing approximately $78.4 million remain available for sale under the Equity ATM Program.
The table below provides information on the basic and diluted EPS computations, including the number of shares of common stock used for purposes of these computations.
(in thousands, except for share and per share amounts)
Basic Earnings
Less: Income attributable to non-controlling interest
Less: Income attributable to participating shares
2,301
2,373
4,636
4,744
Basic earnings - continuing operations
(35,548)
237,669
(113,582)
271,972
Basic earnings - discontinued operations
Diluted Earnings
Add: Expenses attributable to dilutive instruments
131
2,319
4,638
Diluted earnings - continuing operations
(35,417)
239,988
(113,320)
276,610
Diluted earnings - discontinued operations
Number of Shares
Basic — Average shares outstanding
Effect of dilutive securities — Unvested participating shares
1,210,234
9,932,712
1,170,253
9,876,386
Diluted — Average shares outstanding
EPS Attributable to RC Common Stockholders:
Basic - continuing operations
Basic - discontinued operations
Basic - total
Diluted - continuing operations
Diluted - discontinued operations
Diluted - total
In the table above, participating unvested RSUs were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.
Certain investors own OP units in the operating partnership. An OP unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the operating partnership. OP unit holders have the right to redeem their OP units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company’s option, calculated as follows: one share of the Company’s common stock, or cash equal to the fair value of a share of the Company’s common stock at the time of redemption, for each OP unit. When an OP unit holder redeems an OP unit, non-controlling interests in the operating partnership is reduced and the Company’s equity is increased. As of June 30, 2024 and December 31, 2023, the non-controlling interest OP unit holders owned 1,225,582 and 1,330,582 OP units, respectively.
In order to better define its contractual rights and to secure rights that will help the Company mitigate its counterparty risk, the Company may enter into an International Swaps and Derivatives Association (“ISDA”) Master Agreement with multiple derivative counterparties. An ISDA Master Agreement, published by ISDA, is a bilateral trading agreement between two parties that allow both parties to enter into over-the-counter (“OTC”), derivative contracts. The ISDA Master Agreement contains a Schedule to the Master Agreement and a Credit Support Annex, which governs the maintenance, reporting, collateral management and default process (netting provisions in the event of a default and/or a termination event). Under an ISDA Master Agreement, the Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default, including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Company’s stockholders’ equity declines by a stated percentage or the Company fails to meet the terms of its ISDA Master Agreements, which would cause the Company to accelerate payment of any net liability owed to the counterparty. As of June 30, 2024 and December 31, 2023, the Company was in good standing on all of its ISDA Master Agreements or similar arrangements with its counterparties.
For derivatives traded under an ISDA Master Agreement, the collateral requirements are listed under the Credit Support Annex, which is the sum of the mark to market for each derivative contract, the independent amount due to the derivative counterparty and any thresholds, if any. Collateral may be in the form of cash or any eligible securities, as defined in the respective ISDA agreements. Cash collateral pledged to and by the Company with the counterparty, if any, is reported separately in the consolidated balance sheets as restricted cash. All margin call amounts must be made before the notification time and must exceed a minimum transfer amount threshold before a transfer is required. All margin calls must be responded to and completed by the close of business on the same day of the margin call, unless otherwise specified. Any margin calls after the notification time must be completed by the next business day. Typically, the Company and its counterparties are not permitted to sell, rehypothecate or use the collateral posted. To the extent amounts due to the Company from its counterparties are not fully collateralized, the Company bears exposure and the risk of loss from a defaulting counterparty. The Company attempts to mitigate counterparty risk by establishing ISDA agreements with only high-grade counterparties that have the financial health to honor their obligations and diversification by entering into agreements with multiple counterparties.
The Company discloses the impact of offsetting of assets and liabilities represented in the consolidated balance sheets to enable users of the consolidated financial statements to evaluate the effect or potential effect of netting arrangements on its financial position for recognized assets and liabilities. These recognized assets and liabilities are financial instruments and derivative instruments that are either subject to enforceable master netting arrangements or ISDA Master Agreements or meet the following right of setoff criteria: (a) the amounts owed by the Company to another party are determinable, (b) the Company has the right to set off the amounts owed with the amounts owed by the counterparty, (c) the Company intends to offset, and (d) the Company’s right of offset is enforceable at law. As of June 30, 2024 and December 31, 2023, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the consolidated balances sheets.
The table below presents the gross fair value of derivative contracts by product type, Paycheck Protection Program Liquidity Facility borrowings and secured borrowings, the amount of netting reflected in the consolidated balance sheets,
as well as the amount not offset in the consolidated balance sheets as they do not meet the enforceable credit support criteria for netting under U.S. GAAP.
Gross amounts not offset in the Consolidated Balance Sheets(1)
Gross amounts of Assets / Liabilities
Gross amounts offset
Balance in Consolidated Balance Sheets
Financial Instruments
Cash Collateral Received / Paid
Net Amount
55,770
41,731
14,039
2,038
PPPLF
1,095
2,339,437
2,335,704
3,733
34,408
36,036
34,596
1,440
2,138,323
2,136,671
1,652
In the normal course of business, the Company enters into transactions that expose us to various types of risk, both on and off-balance sheet. Such risks are associated with financial instruments and markets in which the Company invests. These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, off-balance sheet risk and prepayment risk.
Market Risk — Market risk is the potential adverse changes in the values of the financial instrument due to unfavorable changes in the level or volatility of interest rates, foreign currency exchange rates, or market values of the underlying financial instruments. The Company attempts to mitigate its exposure to market risk by entering into offsetting transactions, which may include purchase or sale of interest-bearing securities and equity securities.
Credit Risk — The Company is subject to credit risk in connection with its investments in LMM loans and LMM MBS and other target assets it may acquire in the future. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. The Company believes that loan credit quality is primarily determined by the borrowers' credit profiles and loan characteristics and seeks to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value−driven approach to underwriting and diligence, consistent with its historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. The Company further mitigates its risk of potential losses while managing and servicing loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur, which may adversely impact operating results.
The Company is also subject to credit risk with respect to the counterparties to derivative contracts. If a counterparty fails to perform its obligation under a derivative contract due to financial difficulties, the Company may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If the Company is owed this fair market value in the termination of the derivative transaction and its claim is unsecured, it will be treated as a general creditor of such counterparty and will not have any claim with respect to the underlying security. The Company may obtain only a limited recovery or may obtain no recovery in such circumstances. In addition, the business failure of a counterparty with whom it enters a hedging transaction will most likely result in its default, which may result in the loss
of potential future value and the loss of our hedge and force the Company to cover its commitments, if any, at the then current market price.
Counterparty credit risk is the risk that counterparties may fail to fulfill their obligations, including their inability to post additional collateral in circumstances where their pledged collateral value becomes inadequate. The Company attempts to manage its exposure to counterparty risk through diversification, use of financial instruments and monitoring the creditworthiness of counterparties.
The Company finances the acquisition of a significant portion of its loans and investments with repurchase agreements and borrowings under credit facilities and other financing agreements. In connection with these financing arrangements, the Company pledges its loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e., the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the repurchase agreement financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.
The Company is exposed to changing interest rates and market conditions, which affects cash flows associated with borrowings. The Company enters into derivative instruments, such as interest rate swaps, to mitigate these risks. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for making payments based on a fixed interest rate over the life of the swap contract.
Certain subsidiaries have entered into OTC interest rate swap agreements to hedge risks associated with movements in interest rates. Because certain interest rate swaps were not cleared through a central counterparty, the Company remains exposed to the counterparty’s ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an OTC swap counterparty cannot perform under the terms of an interest rate swap, the Company’s subsidiary would not receive payments due under that agreement, the Company may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While the Company would seek to terminate the relevant OTC swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that the Company would be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, the Company could be forced to cover its unhedged liabilities at the then current market price. The Company may also be at risk for any pledged collateral to secure its obligations under the OTC interest rate swap if the counterparty becomes insolvent or files for bankruptcy. Therefore, upon a default by an interest rate swap agreement counterparty, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.
Liquidity Risk — Liquidity risk arises from investments and the general financing of the Company’s investing activities. It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at reasonable prices, in addition to potential increases in collateral requirements during times of heightened market volatility. If the Company was forced to dispose of an illiquid investment at an inopportune time, it might be forced to do so at a substantial discount to the market value, resulting in a realized loss. The Company attempts to mitigate its liquidity risk by regularly monitoring the liquidity of its investments in LMM loans, MBS and other financial instruments. Factors such as expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding, are considered in analyzing liquidity risk. To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which the Company invests, it attempts to minimize its reliance on short-term financing arrangements. While the Company may finance certain investments in security positions using traditional margin arrangements and reverse repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer term financing vehicles may be utilized to provide it with sources of long-term financing.
Off-Balance Sheet Risk —The Company has undrawn commitments on outstanding loans. Refer to Note 24 for further information.
Interest Rate Risk — Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control.
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The Company’s operating results will depend, in part, on differences between the income from its investments and financing costs. Generally, debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, subject to a floor, as determined by the particular financing arrangement. In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between the Company’s interest-earning assets and interest-bearing liabilities.
Additionally, non-performing LMM loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically disposing of them. Because non-performing LMM loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates.
Prepayment Risk — As the Company receives prepayments of principal on its assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest income earned on the assets.
Litigation
The Company may be subject to litigation and administrative proceedings arising in the ordinary course of business and as such, has entered into agreements which provide for indemnifications against losses, costs, claims, and liabilities arising from the performance of individual obligations under such agreements. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments related to these indemnification obligations have not been material to the Company. Management is not aware of any other contingencies that would require accrual or disclosure in the consolidated financial statements.
Unfunded Loan Commitments
The table below presents unfunded loan commitments.
520,855
745,782
116,544
19,327
279
436
The Company is a REIT pursuant to Internal Revenue Code Section 856. Qualification as a REIT depends on the Company’s ability to meet various requirements imposed by the Internal Revenue Code, which relate to its organizational structure, diversity of stock ownership and certain requirements with regard to the nature of its assets and the sources of its income. As a REIT, the Company generally must distribute annually dividends equal to at least 90% of its net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to earnings that are distributed. To the extent the Company satisfies this distribution requirement but distributes less than 100% of its net taxable income, it will be subject to U.S. federal income tax on its undistributed taxable income. In addition, the Company will be subject to a 4% nondeductible excise tax if the actual amount paid to stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. Even if the Company qualifies as a REIT, it may be subject to certain U.S. federal income and excise taxes and state and local taxes on its income and assets. If the Company fails to maintain its qualification as a REIT for any taxable year, it may be subject to material penalties as well as federal, state and local income tax on its taxable income at regular corporate rates and it would not be able to qualify as a REIT for the subsequent four taxable years. As of June 30, 2024 and December 31, 2023, the Company was in compliance with all REIT requirements.
Certain subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit the Company to participate in certain activities that would not be qualifying income if earned directly by the parent REIT, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Internal Revenue Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue
Code. To the extent these criteria are met, the Company will continue to maintain our qualification as a REIT. The Company’s TRSs engage in various real estate - related operations, including originating and securitizing commercial mortgage loans, and investments in real property. Such TRSs are not consolidated for federal income tax purposes but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred income taxes is established for the portion of earnings recognized by the Company with respect to its interest in TRSs.
The Company recognizes deferred tax assets and liabilities for the future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases. The Company evaluates its deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future taxable income.
The provisions of ASC 740 require that carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2023, the Company recorded net deferred tax assets of $21.1 million as a result of the acquisition of Broadmark taxable REIT subsidiary. A full valuation allowance was recorded against these deferred tax assets at year-end as it was more likely than not that these assets would not be realized. In the first quarter of 2024, the Company completed a reorganization which will allow the Company to recover the deferred tax assets recorded, and as such, the valuation allowance was released in the first quarter. There was no such valuation allowance activity during the three months ended June 30, 2024.
The Company’s framework for assessing the recoverability of deferred tax assets requires it to weigh all available evidence, including the sustainability of recent profitability required to realize the deferred tax assets, the cumulative net income in its consolidated statements of operations in recent years, the future reversals of existing taxable temporary differences, and the carryforward periods for any carryforwards of net operating losses.
The Company reports its results of operations through the following two business segments: i) LMM Commercial Real Estate (formerly our SBC Lending and Acquisitions segment) and ii) Small Business Lending. The Company’s organizational structure is based on a number of factors that the Chief Operating Decision Maker (“CODM”), the Chief Executive Officer, uses to evaluate, view, and run its business operations, which includes customer base and nature of loan program types. The segments are based on this organizational structure and the information reviewed by the CODM and management to evaluate segment results.
The Company originates LMM loans across the full life-cycle of an LMM property including construction, bridge, stabilized and agency channels. As part of this segment, the Company originates and services multi-family loan products under the Freddie Mac SBL program. LMM originations include construction and permanent financing activities for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds. This segment also reflects the impact of LMM securitization activities. The Company acquires performing and non-performing LMM loans and intends to continue to acquire these loans as part of the Company’s business strategy.
The Company acquires, originates and services loans guaranteed by the SBA under the SBA Section 7(a) Program and government guaranteed loans focused on the USDA. This segment also reflects the impact of SBA securitization activities.
Corporate- Other
Corporate - Other consists primarily of unallocated activities including interest expense relating to senior secured notes, allocated employee compensation from the Manager, management and incentive fees paid to the Manager and other general corporate overhead expenses.
Results of business segments and all other. The tables below present reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other.
Small
LMM Commercial
Business
Corporate-
Real Estate
Lending
Consolidated
202,047
32,072
(158,344)
(24,823)
Net interest income before recovery of loan losses
43,703
7,249
Recovery of loan losses
14,414
4,457
Net interest income after recovery of loan losses
58,117
11,706
(10,089)
17,339
(1,497)
Servicing income, net
1,255
2,016
Loss on bargain purchase
4,796
376
1,425
Total non-interest income (loss)
(85,383)
19,871
(16,881)
(7,142)
(8,328)
(2,329)
(300)
(2,700)
(874)
(2,930)
(2,229)
(10,896)
(12,054)
(5,918)
(3,830)
(31,266)
(17,292)
(18,878)
(58,532)
14,285
(35,759)
9,527,088
1,367,463
455,888
11,350,439
402,810
63,663
(317,229)
(49,743)
85,581
13,920
45,169
246
130,750
14,166
(4,334)
30,452
1,489
1,786
2,553
4,476
17,523
3,475
(208,329)
40,189
(14,618)
(17,620)
(3,975)
(550)
(4,950)
(2,515)
(6,145)
(4,438)
(23,443)
(33,588)
(11,271)
(7,130)
(74,714)
(35,399)
(35,581)
(152,293)
18,956
(52,462)
58
212,233
18,771
(160,503)
(9,718)
51,730
9,053
(17,415)
(2,012)
Net interest income after provision for loan losses
34,315
7,041
15,356
8,522
(677)
(734)
3,149
Gain on bargain purchase
8,167
10,185
280
24,769
21,122
230,174
(8,724)
(11,614)
(2,076)
(250)
(2,250)
(1,135)
(2,782)
(1,616)
(10,746)
(148)
(3,598)
(4,687)
(1,272)
(24,453)
(19,231)
(27,011)
Income before provision for income taxes
34,631
8,932
203,163
10,969,193
739,391
220,484
11,929,068
410,272
36,700
(309,997)
(19,092)
100,275
17,608
(9,286)
(3,407)
90,989
14,201
20,181
15,272
(6,788)
(258)
2,983
6,698
17,260
21,153
611
34,325
42,865
230,505
(14,930)
(22,889)
(4,322)
(482)
(4,344)
(2,116)
(4,407)
(4,553)
(18,804)
(245)
(10,331)
(8,781)
(3,054)
(46,663)
(36,322)
(43,764)
78,651
20,744
186,741
On July 1, 2024, the Company acquired Funding Circle USA, Inc., which operates an online lending platform to originate and service small business loans, for approximately $41.2 million in cash.
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:
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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:
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:
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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.
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.
($ in thousands, except share data)
Net Income (loss) from continuing operations
Distributable earnings
16,631
51,283
70,607
89,432
Distributable earnings per common share - basic
0.37
0.67
Distributable earnings per common share - diluted
0.35
0.65
Dividends declared per common share
Dividend yield (1)
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
8.8
Book value per common share
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
64
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).
Loan originations:
256,485
511,603
516,161
922,119
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
$ Change
% Change
87,754
63.3
(92)
(0.3)
(575,281)
(14.3)
450,912
552.6
2,738
10.0
1,281
1.0
11,978
498.3
16,931
16.5
(65,066)
(25.7)
79,238
26.4
(646,575)
(9.4)
Assets held for sale
(30,702)
(6.8)
(666,884)
(5.4)
209,894
(661,212)
(13.0)
71,913
20.8
2,363
(7.4)
(3,702)
(48.5)
2,426
1,144.3
(1,170)
(2.2)
26,588
42.2
(1,646)
(45.2)
(2,715)
(1.3)
Liabilities held for sale
(892)
(420,348)
(4.3)
Preferred stock Series C, liquidation preference $25.00 per share
Commitments & contingencies
Preferred stock Series E, liquidation preference $25.00 per share
(34,305)
(1.5)
(216,732)
(174.2)
3,980
22.3
(247,057)
(9.7)
521
0.5
(246,536)
(9.3)
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.
8,268,951
1,222,169
9,491,120
698,122
769,403
84,441
191,294
2,122,954
4,269,180
138,061
405,371
11,669
Statement of Operations Analysis and Metrics
LMM commercial real estate
(10,186)
(7,462)
Small business lending
13,301
26,963
3,115
19,501
2,159
(7,232)
(15,105)
(30,651)
(12,946)
(37,883)
(9,831)
(18,382)
31,829
54,455
6,469
3,653
Total recovery of (provision for) loan losses
38,298
58,108
28,467
39,726
Non-interest income (loss)
(110,152)
(242,654)
(1,251)
(2,676)
Corporate - other
(247,055)
(247,386)
(358,458)
(492,716)
(6,813)
(28,051)
1,939
923
8,133
8,183
3,259
(18,945)
Net income (loss) before provision for income taxes
(93,163)
(230,944)
5,353
(1,788)
(238,922)
(239,203)
Total net income (loss) before provision for income taxes
(326,732)
(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.
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
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
2,831
Creation of MSRs - Red Stone
503
4,751
(4,248)
1,958
7,609
(5,651)
Realized gain on derivatives
10,430
(5,952)
14,116
(5,246)
Realized loss on MBS
(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
(16,628)
(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
875
(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)
(173)
216
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:
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.
Net Income (loss)
(287,574)
(398,719)
Reconciling items:
Unrealized (gain) loss on MSR - discontinued operations
7,219
(8,818)
16,037
(2,725)
9,944
Unrealized gain on joint ventures
(626)
(661)
Increase (decrease) in CECL reserve
(24,574)
19,410
(43,984)
(56,755)
12,089
(68,844)
Increase in valuation allowance
80,987
Non-recurring REO impairment
8,474
23,986
Non-cash compensation
1,891
2,062
(171)
(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
248,200
Realized losses on sale of investments
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
(14,399)
90,860
1,428
Realized losses on sale of investments, net of tax
(20,253)
(34,652)
(18,825)
Less: Distributable earnings attributable to non-controlling interests
2,206
2,035
171
3,312
3,873
(72)
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
(0.17)
0.49
(0.18)
(0.29)
(0.30)
(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.
(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.
(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.
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
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
1,889,494
Q1 2024
1,998,132
1,956,153
Q2 2024
2,058,766
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.
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”).
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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.
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.
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)
October 2011
143.4
Sutherland Commercial Mortgage Trust 2015-4 (SBC4)
August 2015
125.4
Sutherland Commercial Mortgage Trust 2018 (SBC7)
November 2018
217.0
ReadyCap Lending Small Business Trust 2015-1 (RCLT 2015-1)
Acquired SBA 7(a) loans
June 2015
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)
July 2023
132.0
Real Estate Mortgage Investment Conduits (REMICs)
ReadyCap Commercial Mortgage Trust 2014-1 (RCMT 2014-1)
LMM Originated conventional
September 2014
181.7
ReadyCap Commercial Mortgage Trust 2015-2 (RCMT 2015-2)
November 2015
218.8
ReadyCap Commercial Mortgage Trust 2016-3 (RCMT 2016-3)
November 2016
162.1
ReadyCap Commercial Mortgage Trust 2018-4 (RCMT 2018-4)
March 2018
165.0
Ready Capital Mortgage Trust 2019-5 (RCMT 2019-5)
January 2019
355.8
Ready Capital Mortgage Trust 2019-6 (RCMT 2019-6)
November 2019
430.7
Ready Capital Mortgage Trust 2022-7 (RCMT 2022-7)
April 2022
276.8
Waterfall Victoria Mortgage Trust 2011-2 (SBC2)
March 2011
97.6
Sutherland Commercial Mortgage Trust 2018 (SBC6)
August 2017
154.9
Sutherland Commercial Mortgage Trust 2019 (SBC8)
June 2019
306.5
Sutherland Commercial Mortgage Trust 2020 (SBC9)
June 2020
203.6
Sutherland Commercial Mortgage Trust 2021 (SBC10)
May 2021
232.6
Collateralized Loan Obligations (CLOs)
Ready Capital Mortgage Financing 2017– FL1
LMM Originated bridge
198.8
Ready Capital Mortgage Financing 2018 – FL2
June 2018
217.1
Ready Capital Mortgage Financing 2019 – FL3
April 2019
320.2
Ready Capital Mortgage Financing 2020 – FL4
405.3
Ready Capital Mortgage Financing 2021 – FL5
March 2021
628.9
Ready Capital Mortgage Financing 2021 – FL6
August 2021
652.5
Ready Capital Mortgage Financing 2021 – FL7
November 2021
927.2
Ready Capital Mortgage Financing 2022 – FL8
March 2022
1,135.0
Ready Capital Mortgage Financing 2022 – FL9
June 2022
754.2
Ready Capital Mortgage Financing 2022 – FL10
October 2022
860.1
Ready Capital Mortgage Financing 2023 – FL11
February 2023
586.0
Ready Capital Mortgage Financing 2023 – FL12
June 2023
648.6
Trusts (Non-firm sponsored)
Freddie Mac Small Balance Mortgage Trust 2016-SB11
Originated agency multi-family
January 2016
110.0
Freddie Mac Small Balance Mortgage Trust 2016-SB18
July 2016
118.0
Freddie Mac Small Balance Mortgage Trust 2017-SB33
June 2017
197.9
Freddie Mac Small Balance Mortgage Trust 2018-SB45
January 2018
362.0
Freddie Mac Small Balance Mortgage Trust 2018-SB52
September 2018
505.0
Freddie Mac Small Balance Mortgage Trust 2018-SB56
December 2018
507.3
Key Commercial Mortgage Trust 2020-S3(1)
September 2020
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.
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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we enter into transactions in various financial instruments that expose us to various types of risk, both on and off-balance sheet, which are associated with such financial instruments and markets for which we invest. These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, off-balance sheet risk and prepayment risk. Many of these risks have been augmented due to the continuing economic disruptions caused by inflationary pressures, rising energy costs, heightened geopolitical tensions, and the impact of pandemics and epidemics which remain uncertain and difficult to predict. We continue to monitor the impact and effect of these risks in our operations.
Market risk. Market risk is the potential adverse changes in the values of the financial instrument due to unfavorable changes in the level or volatility of interest rates, foreign currency exchange rates, or market values of the underlying financial instruments. We attempt to mitigate our exposure to market risk by entering into offsetting transactions, which may include purchase or sale of interest-bearing securities and equity securities.
Credit risk. We are subject to credit risk in connection with our investments in LMM loans and LMM ABS and other target assets we may acquire in the future. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that loan credit quality is primarily determined by the borrowers’ credit profiles and loan characteristics. We seek to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value-driven approach to underwriting and diligence, consistent with our historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. We further mitigate our risk of potential losses while managing and servicing our loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur which could adversely impact operating results.
Interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, subject to a floor, as determined by the particular financing arrangement. The general impact of changing interest rates is discussed above under “— Factors Impacting Operating Results — Changes in Market Interest Rates.” In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest-earning assets and interest-bearing liabilities.
The table below projects the impact on our interest income and expense for the twelve-month period following June 30, 2024, assuming an immediate increase or decrease of 25, 50, 75, and 100 basis points in interest rates.
12-month pretax net interest income sensitivity profiles
Instantaneous change in rates
25 basis point increase
50 basis point increase
75 basis point increase
100 basis point increase
25 basis point decrease
50 basis point decrease
75 basis point decrease
100 basis point decrease
17,828
35,661
53,494
71,328
(17,747)
(35,443)
(53,092)
(70,651)
Interest rate swap hedges
1,432
2,865
4,297
5,729
(1,432)
(2,865)
(4,297)
(5,729)
19,260
38,526
57,791
77,057
(19,179)
(38,308)
(57,389)
(76,380)
(4,949)
(9,899)
(14,848)
(19,797)
4,949
9,899
14,848
19,797
Securitized debt obligations
(9,353)
(18,706)
(28,060)
(37,413)
9,353
18,706
28,060
37,413
Senior secured notes and corporate debt
(556)
(834)
(1,113)
278
556
834
1,113
(14,580)
(29,161)
(43,742)
(58,323)
14,580
29,161
43,742
58,323
Total Net Impact to Net Interest Income (Expense)
4,680
9,365
14,049
18,734
(4,599)
(9,147)
(13,647)
(18,057)
Such hypothetical impact of interest rates on our variable rate debt does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, we may take actions to further mitigate our exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in our financial structure.
Liquidity risk. Liquidity risk arises in our investments and the general financing of our investing activities. It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at a reasonable price, in addition to potential increases in collateral requirements during times of heightened market volatility. If we were forced to dispose of an illiquid investment at an inopportune time, we might be forced to do so at a substantial discount to the market value, resulting in a realized loss. We attempt to mitigate our liquidity risk by regularly monitoring the liquidity of our investments in LMM loans, ABS and other financial instruments. Factors such as our expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding, are considered in analyzing liquidity risk. To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which we invest, we attempt to minimize our reliance on short-term financing arrangements. While we may finance certain investments in security positions using traditional margin arrangements and reverse repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer-term financing vehicles may be utilized to provide us with sources of long-term financing.
Prepayment risk. Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest income earned on the assets.
78
LMM loan and ABS extension risk. Our Manager computes the projected weighted-average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the mortgages or extend. If prepayment rates decrease in a rising interest rate environment or extension options are exercised, the life of the fixed-rate assets could extend beyond the term of the secured debt agreements. This could have a negative impact on our results of operations. In some situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Real estate risk. The market values of commercial assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, construction cost, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.
Fair value risk. The estimated fair value of our investments fluctuates primarily due to changes in interest rates. Generally, in a rising interest rate environment, the estimated fair value of the fixed-rate investments would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed-rate investments would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our assets recorded and/or disclosed may be adversely impacted. Our economic exposure is generally limited to our net investment position as we seek to fund fixed rate investments with fixed rate financing or variable rate financing hedged with interest rate swaps.
Counterparty risk. We finance the acquisition of a significant portion of our commercial mortgage loans, MBS and other assets with our repurchase agreements, credit facilities, and other financing agreements. In connection with these financing arrangements, we pledge our mortgage loans and securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e. the haircut) such that the borrowings will be over-collateralized. As a result, we are exposed to the counterparty if, during the term of the financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.
We are exposed to changing interest rates and market conditions, which affects cash flows associated with borrowings. We enter into derivative instruments, such as interest rate swaps, to mitigate these risks. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for us making payments based on a fixed interest rate over the life of the swap contract.
Certain of our subsidiaries have entered into over-the-counter (“OTC”) interest rate swap agreements to hedge risks associated with movements in interest rates. Because certain interest rate swaps were not cleared through a central counterparty, we remain exposed to the counterparty's ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an OTC swap counterparty cannot perform under the terms of an interest rate swap, our subsidiary would not receive payments due under that agreement, we may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While we would seek to terminate the relevant OTC swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that we would be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, we could be forced to cover our unhedged liabilities at the then current market price. We may also be at risk for any collateral we have pledged to secure our obligations under the OTC interest rate swap if the counterparty becomes insolvent or files for bankruptcy. Therefore, upon a default by an interest rate swap agreement counterparty, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.
The table below presents information with respect to any counterparty for repurchase agreements for which our Company had greater than 5% of stockholders’ equity at risk in the aggregate.
CounterpartyRating
Amount of Risk
Weighted Average Months to Maturity for Agreement
Percentage of Stockholders’ Equity
JPMorgan Chase Bank, N.A.
A+/Aa2
$ 577,031
25.2%
Morgan Stanley Bank, N.A.
A+/Aa3
$ 125,979
5.5%
Credit Suisse AG
$ 146,754
6.4%
79
Capital market risk. We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under repurchase obligations or other financing arrangements. As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing, and terms of capital we raise.
Off-balance sheet risk. Off-balance sheet risk refers to situations where the maximum potential loss resulting from changes in the level or volatility of interest rates, foreign currency exchange rates or market values of the underlying financial instruments may result in changes in the value of a particular financial instrument in excess of the reported amounts of such assets and liabilities currently reflected in the accompanying consolidated balance sheets.
Inflation risk. Most of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. Changes in interest rates may, but do not necessarily, correlate with inflation rates and/or changes in inflation rates. Refer to “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk” in this Form 10-Q for a discussion on interest rate sensitivity.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act, reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of June 30, 2024. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business.
On June 6, 2024, a purported former stockholder of Broadmark filed a class action lawsuit, captioned Eibling v. Pyatt, et al., Case No. C-24-CV-24-000818, in the Circuit Court for Baltimore City, Maryland (the “Action”). The Action names as defendants Broadmark’s former board of directors and alleges they breached their fiduciary duties in connection with the Broadmark Merger by failing to properly consider acquisition proposals that were purportedly superior to the Broadmark Merger, by relying on purportedly false and misleading valuation analyses, and by authorizing the issuance of a purportedly false and misleading proxy statement. The Action also asserts claims against Broadmark’s financial advisor for aiding and abetting these alleged breaches of fiduciary duty. The Action seeks damages in the form of compensatory damages, quasi-appraisal damages, rescissory damages, and disgorgement of any merger-related benefits. The Action also seeks reimbursement for litigation expenses and attorneys’ and experts’ fees. Although the Company is not a defendant in the Action, it is subject to contractual indemnification obligations (conditioned on the satisfaction of various contractual requirements) in connection therewith, including with respect to the defendants’ service as Broadmark directors and provision of services to Broadmark, as applicable. The defendants intend to vigorously defend against the Action.
Item 1A. Risk Factors
There have been no material changes from risk factors previously disclosed in the Company’s Form 10-K under Part I, Item 1A. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Program
On March 6, 2018, our Board approved a share repurchase program authorizing, but not obligating, the repurchase of our common stock, and on September 29, 2022, our Board approved an increase to the size of the share repurchase program bringing the total authorized repurchases thereunder to $50.0 million. To facilitate further repurchases, on June 1, 2023, our Board approved a new share repurchase program, replacing the previous program, authorizing, but not obligating, the repurchase of up to $100.0 million of our common stock. Repurchases under the stock repurchase programs may be made at management’s discretion from time to time on the open market, in privately negotiated transactions or otherwise, in each case subject to compliance with all Securities and Exchange Commission rules and other legal requirements and may be made in part under one or more Rule 10b5-1 plans, which permit stock repurchases at times when we might otherwise be precluded from doing so. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, legal requirements and other factors.
The table below presents purchases of our common stock during the quarter.
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs
Maximum Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Program
April
1,578,263
8.57
1,573,644
49,483,756
May
774,952
8.70
768,118
42,802,320
June
2,353,215
(1)
8.61
(2)
2,341,762
(1) Total shares purchased includes shares of common stock owned by certain of our employees which have been surrendered by them to satisfy their tax and other compensation related withholdings associated with the vesting of restricted stock units and other equity awards.
(2) The price paid per share is based on the price of our common stock as of the date of the withholding.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None of our officers and directors entered into, modified or terminated any “Rule 10b5-1 trading arrangements” or “non-Rule 10b5-1 trading arrangements” (each as defined in Item 408(c) of Regulation S-K) during the quarter ended June 30, 2024.
Item 6. Exhibits
Exhibitnumber
Exhibit description
3.1
*
Articles of Amendment and Restatement of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
Articles Supplementary of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
3.3
Articles of Amendment and Restatement of Sutherland Asset Management Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed November 4, 2016).
Articles of Amendment of Ready Capital Corporation (incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on September 26, 2018).
Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of 6.25% Series C Cumulative Convertible Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.7 to the Registrant's Registration Statement on Form 8-A filed on March 19, 2021).
3.6
Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of 6.50% Series E Cumulative Redeemable Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on June 10, 2021).
Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of Class B-1 Common Stock, $0.0001 par value per share, Class B-2 Common Stock, $0.0001 par value per share, Class B-3 Common Stock, $0.0001 par value per share, and Class B-4 Common Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.8 to the Registration Statement on Form S-3 filed with the SEC on March 21, 2022).
3.8
Amended and Restated Bylaws of Ready Capital Corporation (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on September 26, 2018).
3.9
Certificate of Notice, dated May 11, 2022, relating to the automatic conversion of the Class B-1 Common Stock, $0.0001 par value per share, Class B-2 Common Stock, $0.0001 par value per share, Class B-3 Common Stock, $0.0001 par value per share, and Class B-4 Common Stock, $0.0001 par value per share, into Common Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on May 10, 2022).
3.10
Articles Supplementary to the Articles of Amendment of Ready Capital Corporation reclassifying and designating the Class B-1 Common Stock, $0.0001 par value per share, Class B-2 Common Stock, $0.0001 par value per share, Class B-3 Common Stock, $0.0001 par value per share, and Class B-4 Common Stock, $0.0001 par value per share, as Common Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on May 10, 2022).
Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC and ReadyCap Commercial, LLC, each as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed February 13, 2017).
First Supplemental Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC, ReadyCap Commercial, LLC, each as guarantors and U.S. Bank National Association, as trustee and as collateral agent, including the form of 7.5% Senior Secured Notes due 2022 and the related guarantees (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed February 13, 2017).
Indenture, dated as of August 9, 2017, by and between Sutherland Asset Management Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed August 9, 2017).
Second Supplemental Indenture, dated as of April 27, 2018, by and between Sutherland Asset Management Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed April 27, 2018).
Third Supplemental Indenture, dated as of February 26, 2019, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.7 of the Registrant's Annual Report on Form 10-K filed March 13, 2019).
Amendment No. 1, dated as of February 26, 2019, to the First Supplemental Indenture, dated as of August 9, 2017, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.8 of the Registrant's Annual Report on Form 10-K filed March 13, 2019).
Amendment No. 1, dated as of February 26, 2019, to the Second Supplemental Indenture, dated as of April 27, 2018, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.9 of the Registrant's Annual Report on Form 10-K filed March 13, 2019).
Fourth Supplemental Indenture, dated as of July 22, 2019, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed July 22, 2019).
Fifth Supplemental Indenture, dated as of February 10, 2021, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed February 10, 2021).
4.10
Sixth Supplemental Indenture, dated as of December 21, 2021, by and between Ready Capital Corporation and U.S. Bank National Association, a Sixth Supplemental Indenture, dated as of December 21, 2021, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed December 21, 2021) as trustee (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed December 21, 2021).
4.11
Seventh Supplemental Indenture, dated as of April 18, 2022, by and between Ready Capital Corporation and U.S. Bank Trust Company, National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed April 18, 2022).
4.12
Eighth Supplemental Indenture, dated as of July 25, 2022, by and between Ready Capital Corporation and U.S. Bank Trust Company, National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed on July 25, 2022).
4.13
Specimen Common Stock Certificate of Ready Capital Corporation (incorporated by reference to Exhibit 4.1 to the Registrant’s Form S-4 filed on December 13, 2018).
4.14
Specimen Preferred Stock Certificate representing the shares of 6.25% Series C Cumulative Convertible Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.13 of the Registrant’s Registration Statement on Form 8-A filed on March 19, 2021).
4.15
Specimen Preferred Stock Certificate representing the shares of 6.50% Series E Cumulative Redeemable Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on June 10, 2021).
84
4.16
Specimen Warrant Certificate (incorporated by reference to Exhibit 4.2 to Broadmark Realty Capital Inc.’s Form 8-A12B filed with the SEC on November 14, 2019).
4.17
Warrant Agreement, dated as of May 14, 2018, between Trinity Merger Corp. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.3 to Broadmark Realty Capital Inc.’s Form 8-A12B filed with the SEC on November 14, 2019).
4.18
Amendment to Warrant Agreement, dated November 14, 2019, by and among Broadmark Realty Capital Inc., Continental Stock Transfer & Trust Co., and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 4.4 to Broadmark Realty Capital Inc.’s Form 8-K filed with the SEC on November 20, 2019).
4.19
Second Amendment to Warrant Agreement, dated November 14, 2019, by and among Broadmark Realty Capital Inc., Continental Stock Transfer & Trust Co., and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 4.5 to Broadmark Realty Capital Inc.’s Form 8-K filed with the SEC on November 20, 2019).
4.20
Third Amendment of Warrant Agreement, dated May 31, 2023, by and among Ready Capital Corporation, RCC Merger Sub, LLC, Computershare Inc. and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.21 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2023).
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
**
Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Scheme Document
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF
Inline XBRL Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Linkbase Document
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded with the Inline XBRL document)
* Previously filed.
** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
85
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Ready Capital Corporation
Date: August 9, 2024
By:
/s/ Thomas E. Capasse
Thomas E. Capasse
Chairman of the Board, Chief Executive Officer and Chief Investment Officer
(Principal Executive Officer)
/s/ Andrew Ahlborn
Andrew Ahlborn
Chief Financial Officer
(Principal Accounting and Financial Officer)