Banks tend to be risk-averse when making loans. As a result, it can be challenging for smaller businesses to get financing, especially for riskier projects. That has opened the door for other financial companies to provide commercial loans.
One company focused on providing commercial loans, especially those backed by real estate, is Ready Capital (NYSE: RC). Here's a closer look at this real estate investment trust (REIT) focused on commercial real estate financing.
Ready Capital profile
Ready Capital is a commercial mortgage REIT. The real estate finance company originates, acquires, finances, and services small- to medium-balance commercial real estate loans and real estate-related securities.
The company has a multidimensional platform that drives its growth:
- SBC (small-balance commercial) originations: Ready originates loans to investors secured by stabilized or transitional commercial real estate. It's one of eleven Freddie Mac SBC multifamily lenders. Ready allocates 65% of investor equity on SBC originations.
- SBA (Small Business Administration) origination, acquisitions, and servicing: The REIT originates, acquires, and services loans secured by owner-occupied properties. It's one of fourteen SBA non-bank lenders and servicers. Ready allocates about 6% of investors' equity on SBA-related activities.
- Loan acquisitions: Ready acquires non- and re-performing loans from banks. It allocates 23% of investor capital to loan acquisitions.
- Residential mortgage banking: Ready originates and services residential mortgage loans. It invests about 6% of investor equity in residential mortgage banking.
Ready Capital focuses on making smaller commercial loans, lending up to $45 million on multifamily and commercial real estate, including value-add bridge loans and fixed-rate mortgages on stabilized properties. It's an approved Freddie Mac Small Balance Loan lender and an SBA Preferred Lender and provides residential mortgages through its wholly-owned GMFS subsidiary.
The company’s diversified strategy generates several revenue streams. It earns origination fees as it provides loans and makes money servicing loans. It also earns a spread on the portfolio of loans it holds on its balance sheet, which is the difference between where it borrows money and the interest rate on the loans it holds.
Ready Capital focuses on making loans in the following geographies:
- California (18% of its portfolio)
- Texas (14%)
- New York (10%)
- Florida (8%)
- Illinois (5%)
- All others (45%)
It also has the following collateral-backed loans in its portfolio:
- Multifamily properties (24%)
- Retail properties (17%)
- SBA (18%, including lodging (17%), physicians offices (12%), child daycare services (7%), eating places (5%), gasoline services stations 4%, other businesses 55%))
- Office properties (13%)
- Mixed-use properties (13%)
- All other (15%)
Ready Capital held loans of varying credit quality at the end of 2020:
- 17% of its loans are at very low risk of loss. These are new originations or current loans to borrowers with strong credit metrics.
- 58% of its loans are at low risk of loss. These loans are all current with more than six months to maturity. While they're with borrowers having lower credit metrics, the company doesn't expect any losses.
- 12% of its loans are at medium risk of loss. They're current with near-term maturities or in forbearance. Losses are unlikely.
- 9% of its loans are higher risk. These are either delinquent or in maturity default due to potential issues with the sponsor or business plan. The company sees minimal losses possible and has adequately reserved for them in the current period.
- 4% of its loans are at the highest risk. These are in either default or special servicing. It has identified specific losses and adequately reserved against them in the current period.
Ready Capital invests in riskier loans by design. One aspect of its business strategy is to acquire non- and re-performing loans from banks because they offer the potential of earning high returns.
Waterfall Asset Management (WAM), an SEC-registered credit investment advisor formed in 2005, is Ready Capital's external manager. That relationship has benefits and drawbacks. On the downside, Ready Capital pays WAM external management fees. However, the relationship also provides it with opportunities, including the right of first refusal on SBC loans sourced by WAM.
Ready Capital news
Ready Capital ended 2020 with a bang, agreeing to acquire fellow mortgage REIT Anworth Mortgage Asset Corporation in a cash-and-stock deal. Anworth is a specialty finance REIT focused primarily on investing in residential mortgage-backed securities. The transaction grew the combined company's capital base to more than $1 billion and diversified its investment portfolio. It also increased the combined company's scale, which should reduce costs and improve investment returns. Ready Capital closed that deal in early 2021.
That transaction capped a historic year for Ready Capital. The company originated or acquired $1.4 billion of commercial real estate loans. It also originated $214.2 million of SBA loans and $4.2 billion of residential mortgages. That enabled the REIT to generate $101.4 million, or $1.82 per share, of distributable earnings, allowing it to pay $1.30 per share in dividends, implying a 13.1% yield on its average share price.
Ready Capital got off to a strong start in 2021. By the time it reported its 2020 results in early March, the REIT had successfully relaunched its SBC lending operation, originating $625.7 million of loans. Further, it experienced elevated activity in its residential mortgage banking operations, with $758 million of originations by that time.
Ready Capital stock price
Ready Capital's differentiated strategy hasn't paid dividends for its investors in recent years: