Prepared remarks
Greetings. Welcome to Ready Capital's First Quarter 2026 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to Andrew Ahlborn, Chief Financial Officer. Thank you. You may now begin.
Thank you, operator, and good morning to those of you on the call. Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our first quarter 2026 earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital website. I will now turn it over to Chief Executive Officer, Thomas Capasse.
Thank you, Andrew. Good morning, everyone, and thank you for joining today's call. The first quarter of 2026 represents ongoing progress in our balance sheet repositioning strategy initiated in the fourth quarter of 2025. First, year-to-date, we have generated $1.4 billion in cash from loan sales and liquidations. These proceeds have facilitated the paydown of over $1.1 billion in warehouse debt and generated $270 million in net liquidity, which was utilized to retire $184 million of corporate debt. Second, we are continuing to resolve non- and sub-performing positions to reduce earnings drag and facilitate recycling into current market-yielding opportunities. And third, we are transitioning the business model toward a lower leverage, more capital-efficient platform that positions the company for long-term sustainable earnings growth. As we stated in the fourth quarter of 2025, our liquidity plan is projected to span four quarters, and we are confident it is the right approach to reset the company's platform for success in the future.
We began the year with $650 million of corporate debt across four different 2026 maturities. Given the company's current cost of funds and performance of the legacy portfolio, we made the decision to delever the balance sheet with aggressive asset management focused primarily on loan sales. We retired our $117 million, 5.75% senior unsecured bond in February and our $67 million, 6.2% senior unsecured bond in April, leaving $450 million across our fourth quarter 2026 maturities. Year-to-date, we have generated liquidity from two primary sources. First, the sale of 48 loans with total unpaid principal balance of approximately $1 billion across four transactions for a net liquidity of $177 million. These sales consisted of 66% performing and 30% non- and sub-performing loans. Second, portfolio runoff of $550 million provided $93 million in net liquidity. As we look forward, our liquidity plan contemplates an incremental $400 million liquidity from the sale and runoff of $2 billion to $2.5 billion of CRE loans and REO assets through year-end.
Based on current projections, we believe these remaining actions, along with current liquidity, are sufficient to retire our remaining 2026 maturities and satisfy the future cash flow needs of the business. Post completion of our liquidity plan and the payment of our fourth quarter debt maturities, we believe that the remaining legacy CRE portfolio will total approximately $2 billion. We anticipate this will include $800 million to $900 million of sub- and nonperforming loans and REO assets, which we believe have a better net present value via exit from aggressive asset management strategies versus sale at current market discounts. This sub-portfolio of non- and sub-performing assets has a current quarterly earnings drag of approximately $0.06 per share with cash outflows of $9.3 million per quarter. Furthermore, we expect the anticipated long-term benefits of our repositioning plan will be a reset balance sheet to allow for future earnings growth and a more conservative leverage profile anticipated to stabilize around 2.5x.
Upon the expected second quarter completion of the final CRE loan pool sale contemplated in our liquidity plan, we anticipate the material book value pressure that the company has experienced in the past several quarters will be substantially behind us. We also expect several changes to the business model that we will discuss in greater detail in subsequent quarters. First, we intend to focus our investment activity on allocations to CRE sectors where we see best relative value. We expect average investment size to double relative to our historical average of $17 million. Similarly, we expect that our financing strategy will be more opportunistic and less securitization driven. Each change is intended to help scale the business with a more efficient operational footprint and allow us to be flexible in pursuing market opportunities. Second, we intend to simplify our business model through increased integration with our external manager, Waterfall Asset Management, and to refocus on two core businesses, middle market CRE debt investing and SBA 7(a) lending.
During this period of constrained investing, we can generate fee income in lieu of net interest margin by originating for Waterfall, where we have funded $172 million year-to-date, and for third parties, including through our new $1 billion flow arrangement. In the future, as we recycle legacy assets to generate liquidity for CRE investing, we expect that a combination of our right-sized CRE operations in concert with allocation from Waterfall's CRE desk will result in a lower operating expense ratio. And third, we intend to increase capital allocation to our small business lending platform, which we expect to represent 20% of the company's capital going forward. Sequentially, we believe that the high relative ROE of this business will lead the earnings recovery over the period that the legacy CRE portfolio is recycled into new vintage CRE investments. Historically, the small business platform has provided 300 to 500 basis points of core ROE alongside the CRE net interest margin.
I would also like to provide an update on two additional items. First, the Ritz property remains our largest single equity allocation, representing 18% of quarter-end stockholders' equity. On the condominiums, we have sold 43 units and have an additional four units under contract, which would bring our total sellout to 36% of the 132 total units. The average selling price of the 32 condos sold year-to-date was $745 per square foot compared to $900 per square foot for all condos sold. This is a deliberate pricing strategy designed to drive momentum towards the full sellout at higher average prices. The hotel's occupancy increased 5% year-over-year to 46%, marking steady progress towards our 60% target. This increased occupancy, along with a 1% increase in ADR to $482, resulted in a 13% increase in RevPAR to $221. Separately, lower SBA 7(a) originations in the first quarter reflected the prioritization of capital to debt repayment, limiting new SBA deployment to existing warehouse capacity.
We anticipate that will change with the pending launch of our $158 million SBA 7(a) securitization. We expect second quarter securitization to generate capacity for $500 million of incremental go-forward volume, resulting in the second half of the year climbing towards historical production levels, which were $1.1 billion in 2024. We continue to take deliberate steps to enhance liquidity and strengthen the platform. Specifically, we have generated 67% of our target liquidity and begun to streamline business lines to reduce operating costs in conjunction with greater integration with our external manager, Waterfall. There's certainly more work ahead, but we are encouraged by the progress made to date and remain focused on disciplined execution. With that said, I'll now turn it over to Andrew for a detailed review of the quarterly results.
First quarter earnings and balance sheet reflect the continued effects of the repositioning plan outlined in Tom's remarks. For the quarter, we reported a GAAP loss from continuing operations of $1.25 per common share. Distributable earnings were a loss of $1 per common share and $0.33 per common share, excluding realized losses on asset sales. At quarter end, book value per share was $7.43 versus $8.79 at year-end. The change was primarily due to a $0.42 per share loss on loan sales settled in the quarter, a $0.47 per share loss on additional CECL reserves and valuation allowances and a $0.36 per share loss from operations. The net loss from normal operations was impacted by the following revenue and expense items. On the revenue side, recurring revenue was $16.2 million compared to $41.5 million in the prior quarter. The change was driven by a $28.5 million reduction in net interest income, offset by a $3 million increase in other income.
The decline in interest income was primarily impacted by the following items: First, the liquidation of approximately $1.8 billion of loans across the last two quarters resulted in a $16.5 million quarter-over-quarter reduction in net interest income. Second, a $5.4 million reduction in cash receipts on loans currently on nonaccrual, the majority of which was driven by two loans totaling $230 million that are scheduled for second quarter liquidations. And third, the timing delay between liquidation of assets and the proceeding paydown of corporate debt. We expect net interest income to be negative as we move through this transition period with improvement coming from the continued reduction in nonaccrual loans and REO, the reduction of both asset level and corporate debt financing and the recycling of capital back into market yields. Over this period, we expect a greater percentage of revenue to come from gain on sale and fee revenue.
On the expense side, operating expenses increased $7.8 million quarter-over-quarter to $67.7 million. The change was primarily due to a $6.7 million increase in nonrecurring advance payments made to servicers upon the collapse of our remaining CLOs and a $3.9 million decrease in the tax benefit. Regarding Ready Capital's liquidity and capitalization, we remained active in repositioning our liabilities. First quarter activities included collapsing three CLOs totaling $900 million of collateral, the addition of a new $500 million CRE warehouse facility and the renewal of an additional two facilities. Current total leverage is 3x, and we ended the quarter with $200 million of liquidity and $730 million of unencumbered assets. With that, we will open the line for questions.
Questions and answers
And our first question is from the line of Jade Rahmani with KBW.
Where do you expect balance sheet total assets to end after you're done with the planned asset sales? What size balance sheet do you expect Ready Capital to have?
Andrew, do you want to touch on the pro forma?
Yes. And the total assets, as Tom said in his remarks, we expect another $2 billion to $2.5 billion reduction in the loan portfolio. So based on current total assets of roughly $6.3 billion, we'd expect that number to come down closer to $4 billion.
Okay. Do you have a range of pro forma book value per share you expect the $2 billion to $2.5 billion further reduction to result in?
We're not providing guidance at this time. Yes, go ahead, Andrew.
Yes. What I would say is the change in book value between the first quarter and where we end up in the second quarter base is going to be highly dependent on how much of that $2.5 billion we end up selling to cover the remaining liquidity needs to get through the 2026 maturities. So there's a little bit of variability based on the execution of those upcoming trades.
The remaining $800 million to $900 million of subperforming loans, that's not including any of the REO?
That includes...
That includes the REO portfolio.
That includes the Portland REO?
That's correct.
Okay. And then just lastly, in other assets of $466 million, do you have the balance of deferred tax assets and tax receivables? Because my worry is that there's write-down risk for those assets as the recoverability in earnings is reduced driven by ongoing operating losses and the lack of earnings to materialize those deferred tax assets.
Yes. The current deferred tax asset on the balance sheet is a little over $200 million. It's $201.6 million. And the tax receivable is $16.7 million. What I would say is there is a heavy focus on growing the SBA business. And as Tom mentioned, it's really been limited by the existing warehouse capacity; as that opens up, I would expect that business to return towards profitability more similar to where we were running in 2024. So we do think that deferred tax asset has value. But certainly, we are aware of the magnitude.
Yes. I mean just to add to Andrew's remarks, there's a clear path forward for recovery in earnings sequentially over a relatively short period of time, led by the SBA small business, which has historically generated around 300 to 500 basis points of ROE. Secondly, there will be OpEx reductions consistent with the simplification of the business model. And thirdly, the remaining nonperforming assets post the final tranche of the loan sales are a relatively small pool of assets including the Ritz, which is experiencing positive financial momentum. The underlying duration of those assets is probably about 1.5 years.
The next question is from the line of Christopher Nolan with Ladenburg Thalmann.
I want to preface just saying that you're skiing down some very difficult terrain, and I got to give you kudos for navigating this so far. The nonperformers for the overall portfolio increased materially quarter-over-quarter. Why — can you give some color as to why the core CRE portfolio deteriorated?
Yes, I'll let Dom get into some of the details, but I will say that to some extent traditional metrics like 60-plus day delinquencies are becoming less relevant as a sole metric on loan quality because when we look to sell assets, if a loan is subperforming with a relatively low single-digit debt yield, we will purposely execute asset management strategies, which improve the secondary market price of that sale—for example, not providing additional modifications. So that creates a roll rate that amplifies the additional impact of the denominator effect, which is the sale of performing loans. Dom, maybe just touch on that as well.
Yes, sure. Just to stress what Tom was referencing, I think the designation with core and noncore as we work through this liquidity strategy is likely to become less relevant. But just to give you some summary information: if you look at Q4 quarter-end compared to Q1 quarter-end, we're up about eight percentage points. As we identify assets for sale to generate liquidity, some of those assets will be, and have been, performing assets. So keep that in mind. I'd say the breakout of that increase is roughly one-third credit migration, with a few assets moving to a workout stage, but the majority is predominantly a denominator effect as we sell through some of the performing loans.
Okay. And then I guess, Andrew, what does all of the changing or deteriorating credit metrics and everything else mean for the reserve allowance going forward? And where do you see leverage ratios once this transition is over?
Yes. We had an additional provision of a little under $71 million in the quarter. As we sell through this remaining portfolio, as Tom mentioned, the amount of loans on the book, and particularly loans that are non- and sub-performing, is going to be fairly limited—somewhere between $300 million and $400 million and only across 30 or so line items. So we have pretty good line of sight into how those assets are going to perform. You may see marginal increases in reserving around those, but I think the biggest remaining effect in the book is the execution of the sales on the $2 billion to $2.5 billion portfolio. And then leverage, we expect to stabilize around 2.5x.
Great. And Tom, you mentioned less securitization. Does that mean less 7(a) securitization?
No, I think SBA securitizations are very liquid and there's a lot of demand in the ABS market. That comment was more a reference to CRE securitization, CLOs focused on a single sector, in this case historically multifamily. What's important to understand is that the third leg of the reboot of the earnings will come from recycling the remaining finite number of REO and NPL assets that currently have a negative drag of about two points on ROE. We are integrating our operations and origination team with the external manager, who has very large investment capacity across a broad array of CRE sectors, so we'll look for best relative value and become more sector agnostic. Many of those transactions are funded with nonrecourse bank debt that matches the maturity of the underlying loans, which in turn are probably at most three-year exposures. If you look at the external manager's trailing five-year track record, those investments are currently running in the low to upper teens, probably around 14%. Once you free up equity from an NPL resolution, which we have finite plans for across a small number of line items, that's immediately accretive because we can get an allocation from the external manager that is immediately accretive. That's how we view the positioning toward a more conservative liability management approach on an unsecured basis.
At this time, I'll turn the floor back to management for closing comments.
We appreciate everybody's time and focus on this call, and we look forward to the second quarter earnings call where we will continue to execute and complete our liquidity plan.
Thank you. Ladies and gentlemen, you may now disconnect your lines at this time. We thank you for your participation, and have a wonderful day.