Greetings and Welcome to the Ready Capital third quarter 2026 earnings call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Andrew Ahlborn, Chief Financial Officer. Thank you. You may 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 more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss certain 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 third 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 Tom Capasse.
Thank you, Andrew. Good morning, everyone, and thank you for joining today's call. In the third quarter, we substantially completed the balance sheet repositioning and liquidity plan we laid out in the fourth quarter of 2025. After the final November payment we expect to make at maturity, we will have repaid $649 million of corporate debt. Along the way, we reduced secured asset level financing by $1.7 billion and resolved through runoff or sale $2.7 billion of legacy CRE loans, predominantly from the 2021 and 2022 vintages. While the plan was achieved within the parameters we set, it came with a cost. Generating $2.3 billion of liquidity reduced book value per share year- to- date by $2.35-$6.44 at September 30, and required us to reduce the dividend to $0.01 per share to preserve liquidity.
Looking forward, our focus will shift from the liquidity plan to continued resolution of the remaining legacy CRE loan book and rebuilding earnings. Our near-term target is to bring distributable earnings and cash flow from operations closer to break-even. Quarter-over-quarter, distributable earnings excluding realized losses improved $0.03 per share to a loss of $0.21 per share. To close the gap, we are prioritizing four action items. First, growing revenue in our capital light businesses led by our SBA 7(a) platform. The June securitization created funding capacity for $500 million of originations, which we believe will allow us to ramp toward our immediate annual target of $1 billion with a long-term target of $1.5 billion. In the third quarter, originations rose 33% to $109 million, and gain on sale revenue grew 56% to $6.1 million.
We expect the incremental revenue from increasing volume to our immediate target level will be approximately $8 million per quarter. Our current 7(a) pipeline is $150 million. A natural complement to our secured 7(a) is unsecured conventional working capital lending, smaller balance, shorter duration loans that we originate and sell on a servicing retained basis, requiring little balance sheet capital. Our fintech iBusiness Funding has originated this product for 10 years, and there is strong demand from private credit investors. Gain on sale income plus origination fees from this product rose 23% to $3.2 million quarter-over-quarter on $61 million of originations. We believe we can scale this production approximately 2X in the new year, which would add $3 million in incremental quarterly revenue. Together, we expect these businesses to be our greatest growth opportunity in 2027. Second, improving the earnings contribution on our legacy CRE portfolio.
With our 2026 repositioning plan executed, our asset management team is pivoting from selling loans at discounts to generate liquidity to stabilizing non-performing loans and REO. In sum, our asset managers are able to employ more flexible asset management strategies to improve NOI and value at exit. As assets stabilize, they generally move from a carrying cost to a source of income or resolution, which reduces the earnings drag from non-performing assets. Third, we continued to make progress at the Ritz-Carlton, Portland. Hotel NOI net of replacement reserves improved quarter-over-quarter to $1.6 million, driven by increased occupancy and strong high season performance. Trailing 12-month RevPAR improved 35% year-over-year to $271. Condominium sales were slower in the quarter with 52 units or 39% of the building sold. We have an additional two units under contract. Fourth, divesting non-core businesses and reducing operating expenses.
We expect to announce specific non-core business divestitures in succeeding quarters, and with respect to operating expenses, anticipate reducing spending in non-revenue-producing businesses and right-sizing staff to match a smaller balance sheet. We believe we can materially reduce our operating expenses without impacting operations or revenue-producing objectives. Collectively, we expect these four actions will bring distributable earnings, excluding realized losses, closer to break-even, with future earnings growth beyond these levels determined by the turnover of the legacy CRE loan portfolio, which I will now discuss. The CRE loan portfolio is now $1.95 billion and is segmented into three parts based on asset management strategy. First, performing loans, which comprise 98 positions with a carrying value of $1.1 billion, a weighted average LTV of 83%, and a weighted average coupon of 7.9%. The levered yield of this portfolio is 11.5%. This group is 83% multifamily.
Within it, we expect that 29 loans totaling $391 million will pay off at par in 2027, generating approximately $97 million of net liquidity. Second, we expect 14 assets with a carrying value of $318 million to be resolved by the end of 2027, generating approximately $109 million of net liquidity. This portfolio generated a $500,000 of net income in the third quarter, and we believe that full reinvestment of the equity at market yield would generate improvement of $3 million in net income per quarter. Third, non-performing loans with longer-term workouts comprise 28 assets with a carrying value of $515 million. For this population, we believe value is best maximized by stabilizing operations before exit rather than selling at today's prices. The current quarterly earnings drag associated with this portfolio is $1.7 million. The portfolio is 93% multifamily and has an average carrying value of $18.4 million.
In addition to the non-performing loans identified for long-term hold, there are five REO assets totaling approximately $67 million in carrying value, which we believe will also benefit from a longer-term hold strategy, allowing sufficient time to stabilize operations and for market recovery. While we undertook asset sales early in the credit cycle, which reduced the relative size of the non-performing loan book and have active management plans in place for all 28 remaining non-performing assets, the recent increase in the 10-year treasury has created another leg down in multifamily transaction volume and prices, potentially extending realizations. Additionally, we believe that continued focus on increasing liquidity and reducing leverage remains paramount under current market conditions. This framework makes the path forward measurable.
The performing book supports current income, the resolution segment drives near-term liquidity and earnings recovery, and the workout segment is where patient asset management can recover value over time. With that, I'll turn it over to Andrew for a detailed review of the quarterly results.
Thanks, Tom. Third quarter results reflect the substantial completion of our 2026 liquidity plan and a continued deceleration in the pressure on book value. For the quarter, we reported a GAAP loss from continuing operations of $0.40 per common share, an improvement from the $0.63 loss in the second quarter. Distributable earnings were a loss of $0.53 per common share and a loss of $0.21 per common share, excluding realized losses, compared to losses of $0.47 and $0.24 respectively in the prior quarter. The higher distributable loss reflects $53.9 million of realized losses, primarily from resolving assets that were already in part reserved. Those resolutions released $33.1 million of combined CECL and valuation allowances. At quarter end, book value per share was $6.44 versus $6.83 at June 30th.
The quarter-over-quarter percentage decline in book value is a substantial reduction from the declines in the two previous quarters. The change was primarily due to a $0.17 per share loss on operations, a $0.14 per share loss on loan sales, and a $0.06 per share decline due to additional reserves. The $26.9 million net loss from normal operations before tax, which can be found on slide 14 in the earnings deck, improved 33% quarter-over-quarter. On the revenue side, recurring revenue was $20.7 million compared to $15.3 million in the prior quarter. Net interest income improved $6.4 million- $3.4 million. Interest income rose $6.4 million- $83.8 million, driven by improved collections on non-performing loans, while interest expense was broadly flat at $80.4 million. Gain on sale revenue was $11.2 million, of which $6.1 million came from SBA 7(a).
We expect net interest income to continue improving as non-accrual loans and REO are resolved, corporate debt is reduced, and capital is recycled into SBA and current yield CRE. On the expense side, operating expenses were $47.6 million compared to $55.5 million in the prior quarter. Compensation and benefits declined $1.1 million- $21.8 million. Servicing expense was $7.6 million compared to $3.4 million in Q2 due to increased costs on SBA loan deferments and a quarter-over-quarter reduction in protective advance recoveries. Fixed operating costs improved to $10.3 million. On the Portland asset, the net loss, inclusive of financing costs, improved to $4.2 million as NOI from hotel operations turned positive and the carry on condos was reduced due to continued sales. Other items included in earnings totaled a loss of $35.4 million compared to a loss of $68.3 million last quarter.
These included $53.9 million of realized losses and charge-offs, net of tax, $23 million of reserve recoveries, and approximately $4.5 million of additional non-cash tax and one-time expenses. Regarding liquidity and capitalization, we ended the quarter with $157.1 million of unrestricted cash, up from $124.1 million at June 30th. Total assets were $5.78 billion compared to $6.26 billion in June. Secured borrowings improved $185 million to $1.69 billion, and during the quarter, we renewed our largest CRE and SBA warehouse facilities. We also moved $161 million of loans from held for sale back to held for investment, consistent with our shift away from portfolio sales. Total leverage was 2.8x , an improvement from three times and approaching our 2.5x target. We held $606 million of unencumbered assets at quarter end. With that, we will open the line for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Jade Rahmani with KBW. Please proceed with your question. Jade, your line is now live. All right. All right. Therefore, we'll go to the next question. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.
Hey, guys. Andrew, how much Assuming the Portland property is held at cost, how much of the loan loss allowance accounted for that particular asset?
Sorry, in the current quarter?
Just what is the balance sheet loan loss reserve for that? How much does Portland account for the loan loss reserve?
Well, remember, when we took that REO, we wrote it down to its as-is value per the appraisal, so it is no longer sitting in the allowance. It is sitting in the REO bucket, and it has been written down to its as-is value. And the value you have seen decreasing is primarily due to the condo sales.
Got it. Tom, thanks for the comments on the going forward. For the SBA business, how much are you going to look to increase your equity allocation to that business? I think right now it is roughly 13%.
Platform, broadly speaking, but ideally, we get it to around 25%-30% over a 12 to 24-month period.
Great. Final question is, when are you hoping to get to your goal of breakeven distributable? I think I heard year-end 2027, but is that correct?
Yeah. Andrew, you want to comment on the timing?
Yeah, sure. If you look at the earnings bridge that Tom prepared in his opening remarks, the revenue items he described account for closing the gap in current normal operations by around 50%. You will see SBA 7(a) volume ramp from its levels in the third quarter to our $1 billion run rate sometime in early 2027. We believe the working capital or loans that Tom also described is an early 2027 event. I think you will start to see the revenue items increase in the early parts of 2027. The other portion of the shortfall is going to come from reducing the operating expenses in the company. In Tom's remarks, he sort of described two different components of that reduction. The first are just right-sizing the company to a balance sheet that is smaller today.
You will see those right-sizings occur in the fourth quarter with the full benefits of those hitting earnings in full in the beginning parts of 2027. The other component of it is divesting of sort of non-core operations that have weighed on earnings over the last couple of quarters. Those transactions take a little bit of time. We think a portion of those should get completed in 2026 and some of them in 2027. The reason for going down that path rather than a sort of an immediate reduction in those operations is we believe we can recover some of the book value associated with those assets, and that recovery is in excess of what it cost us to carry them.
We think we'll make material progress as we go into 2027 on the earnings. The other part of it is just the turnover of the CRE portfolio, which we'll track the outline we put in the supplemental information.
Great. Thank you.
Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thank you very much. Was wondering if you could give your thoughts on the recent spike in interest rates and if it pressures credit incrementally.
Yeah, I mean, I will defer to Dom and Dom Scali in terms of our Chief Credit Officer in terms of some of the specifics. Just broadly speaking, the rate increase has reduced transaction volume and probably resulted in another leg down in multifamily prices of around 5%-10%. At this point, our portfolio is very, the legacy book is very concentrated. Dom, maybe you could just, beyond the broader market.
Yeah.
Just comment on it.
Yeah, sure. Good morning. I would say, listen, obviously the transitional book and the securitized book, given that transitional loans float over SOFR and the securitized book is match funded, we are more insulated there. I think the real issue is sort of on exits, right? With 10-year at 5% earlier in the year, it does put stress on refis.
What typically happens is on resolutions where borrowers are looking for refinance proceeds or potentially selling assets, that could delay resolutions. We are encouraged to see that it is sort of on the way down. I think it was at 4.9% as of yesterday. Obviously, the elevated rate environment may cause some delays on some of the takeouts.
Okay, thank you very much. The supplemental shows about 10 CRE NPL positions with around $330 million in multifamily you expect to foreclose on. I was wondering if you could give any color as to what the current debt yield is on in-place NOI and how much capital you think would be required to stabilize these assets?
Yeah, [crosstalk] sure. This is Dominic again. As Tom mentioned in his remarks, we have a long-term strategy for a bucket of assets. I think it's roughly 20 assets, just about a half a billion in CV. That portfolio is probably 70% occupied. I'd say debt yield's probably 2.5%. I think the strategy there is given that most of it, over 70%, is located in markets that are currently bottoming out, for example, Phoenix, Dallas, some parts outside of Atlanta. The strategy there is really to hold those long term and allow the market to recover. Obviously, bringing occupancy up to market occupancy and taking a look at the expense side of the equation, we hope to increase NOI over time. Obviously, that comes at a cost.
I think we have penciled now around $15 million or so for that portfolio of assets. Obviously, we're going through each asset at the moment, developing detailed business plans. I think we have $15 million± pegged for that portfolio.
Sorry, what percentage of the portfolio do you think is just waiting for the market to recover? What percent of this foreclosure portfolio is things that you can immediately do to bolster? It seems to me that 2.5% in-place NOI and waiting for the market to recover, it's going to take quite a long time to get that to be 6.5%.
Yeah, listen, I think the 2.5% is a function of current occupancy. I think you get immediate pickup by getting into the assets, putting in management that has experience in those markets, turning over the rent roll, and getting that occupancy up to market occupancy. There is a pickup there. And obviously on the expense side, ensuring that you are grieving taxes, revisiting insurance, which are the two largest line items for expenses, and monitoring the expense side. I think in the supplemental, and Andrew, feel free to jump in, I think we have about 42 assets listed as non-performing. As Tom mentioned in his earlier remarks, we feel that 14 assets, or around $300 million of CV, we can exit out of through remainder of 2026 and 2027 at CV or higher.
But unfortunately, just given some of the markets that the residual portfolio is in, those will take longer for recovery. But we do think, listen, there is a pickup on occupancy. There is an NOI optimization play. And we feel over the long term, 12 to 24 months, we will see some pickup in the market as well.
Thanks very much.
Thank you. Our next question comes from the line of Chris Muller with Citizens Capital Markets. Please proceed with your question.
Hey, guys. Thanks for taking the questions this morning. Slide eight in the deck is very helpful, but a lot of those resolution timelines fall well into 2029. I hear you guys on the longer hold period kind of shift in strategy there, but what things either within your control or outside your control could help accelerate those resolution timelines?
Dom, you want to count this maybe at a more granular level?
Yeah. Well, yeah, I think
talk about some of the reasons you've described these earlier exits, right?
I think we have been conservative with some of the timelines, just given some of the markets. Do I see a situation where some of the markets improve at an expedited rate and we are able to exit sooner than 2029? Yeah, I think that is definitely an option. I think for us, it is really optimizing NOI to reduce drag. Obviously, we will continue to test these assets throughout the whole period. To the extent we can hit on some of them and exit at CV or higher, obviously, we will do that. I think for us, the immediate focus is really increasing NOI and optimizing that NOI, and reducing drag on that portfolio.
Depending on how some of these assets, for example, San Antonio, Dallas, Phoenix, what that recovery looks like over the next year or two will dictate how we exit and the ultimate timeline.
Got it. That is helpful. It looks like 14% of the performing loan bucket is on non-accrual status. Can you guys just talk about how you delineate between the performing and non-performing buckets?
Andrew, you want to comment?
Yeah, so inside of the performing bucket, there is a certain portion of that portfolio where it is contractually current, meaning it could be a construction loan that is contractually current, but where we are not accruing non-cash paying interest. Although it is contractually current, we have taken a pretty conservative stance on accruing interest into loan balances, and so that is primarily what that bucket is there.
Got it. Very helpful. Appreciate you guys taking the questions this morning.
Thank you. Our next question comes from the line of Gabe Poggi with Raymond James. Please proceed with your question.
Good morning, guys, and thanks for taking the question. Tom, you've got about, in the CRE book, about $880 million, rounding up a bit, of performing loans across 2020, 2021, 2022 vintage, primarily multifamily, right? How should we think about that in the current rate environment? What percentage of that are you guys now going back and looking at and saying, "That could drop to non-performing"? How do we think about the performance of the performing book, is what I'm trying to ask.
Yeah, a lot of them are legacy small balance, which have been very seasoned. Dom, you could just discuss some of the credit characteristics and our expectations in terms of the near-term performance of the portfolio.
Well, yeah, and good morning, by the way. I think Tom touched on it a little bit there. I think the seasoning is important here. I think, listen, given the vintage of some of these assets, they have been on balance sheet for a while, and we've been able to sort of monitor these assets and sort of the stabilization and operations, right? I think many of the performing loans are seasoned, and we feel comfortable given the current operational side of the asset, right? I think you bring up a good point. Obviously, we can't control, and we touched on this earlier on the call, in terms of sort of exits, just given elevated rate environment. That, to me, is a potential risk that we're going to have to deal with in sort of the current rate environment in terms of exits.
But just given the seasonality of these assets and the current occupancy and cash flow, to the extent that we need to provide some additional time vis-à-vis an extension, I think they're more than capable of supporting that.
Got it. A follow-up to that is, and to your earlier comments, Tom and Dom. Dom, I think you said you have about 20 assets that RC is looking to own multifamily, own for the longer term. I think about that as kind of like an opportunistic REIT inside the REIT. Are there more assets, more than 20, if you had the capital, that you would look to own longer term, from a multifamily perspective?
Yeah, it's actually 28, and we do, with the improved flexibility we have from the execution of our liquidity plan, we've now pivoted to value creation via active ownership and property management. We're also considering joint ventures on a global and local basis with opportunistic operators that would actually put capital in these properties. I think, and Dom, you can comment on this, as we screen, as we've scrubbed the portfolio, with the obviously the intense, the benefit of the intense operations of these properties by putting in new sponsors, putting in the $15 million of CapEx in the 28 assets Dom commented, is book value preservation over the next 24 months. To answer your question, Dom, I don't think we have much in the way of additional assets that we, maybe a handful maybe, that we've thought about adding to that book.
I would say, as you mentioned in your remarks, Tom, it's just an additional five or so REO assets that we currently have. T hat's a 28 referenced in the NPL book and an additional five or so in the REO book.
Yeah, so the-
28 assets, around half a billion dollars of values, that is what you guys said? Just to make sure I have got that number right.
It is 28 assets in the NPL book, right around $515 million of CV. And then in addition to that, we currently have five REO assets at around 67 CV that would also benefit from a longer-term hold strategy.
Got it. So rounding up $600 million of hold it.
Correct.
Work it, multifamily assets. That's helpful. Now one more, Tom, if I can, because I missed what you just said earlier, is in the SBA business, what's the optimal amount of equity, right? All else equal, right? What's the right amount of equity to have in that business over time?
Yeah, I mean, it's obviously a very high ROE and capital-light business.
Yeah, twice.
However, there's a denominator effect in terms of the current equity position of the company, which will actually turbocharge, if you will, that amplify that benefit over as the kind of second leg in the rebuilding of distributable earnings. But right now, we're at 13%. To answer your question, I think the longer-term target over 24 months would be 25%-33%.
Okay. Thanks, guys.
Thank you. We have reached the end of the question and answer session. Therefore, I'd like to turn the call back to Tom Capasse for closing remarks.
Yeah, we appreciate everybody's time today and are pleased with the execution of the liquidity plan within the parameters that we set forth a year ago. Now we look forward to recycling our legacy book, building our SBA business, and rebuilding earnings and managing liquidity. Again, appreciate everybody's time on the call and look forward to the next quarter's call.
Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.