Ready Capital Corporation (NYSE:RC) Q1 2023 Results Conference Call May 9, 2023 8:30 AM ET

Company Participants

Andrew Ahlborn - Chief Financial Officer

Tom Capasse - Chief Executive Officer

Adam Zausmer - Chief Credit Officer

Conference Call Participants

Stephen Laws - Raymond James

Jade Rahmani - KBW

Steven DeLaney - JMP Securities

Matthew Howlett - the B. Riley

Operator

Greetings, and welcome to the Ready Capital First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Andrew Ahlborn. Thank you. You may begin.

Andrew Ahlborn

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 measures is available in our fourth quarter 2023 earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital Web site. In addition to Tom and myself on today's call, we are also joined by Adam Zausmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capasse.

Tom Capasse

Thanks, Andrew. Good morning everyone, and thank you for joining the call today. Given the seemingly full-on recession in CRE, ReadyCap was not immune to pressures we and others in the industry are navigating. That said, our core capital light Freddie Mac SBL and SBA 7(a) originations and multi-family centric credit metrics outperformed. While results did not quite achieve our 10% ROE target for the first time in 12 quarters, the business demonstrated its resiliency. Distributable earnings of $0.31 per share were pressured largely by non-recurring items, resulting in a $0.06 per shared deviation compared to our 10% return on equity target. Approximately 50% of the shortfall was due to mark to market losses on our opportunistic investment allocations, such as CRE equity and an additional 25% was due to higher operating costs from the buildout of our small business fintech platform. Of note, the mark to market losses did not result from credit impairment but increases in valuation metrics such as cap rate assumptions. In our lower middle market CRE lending business, originations declined to $411 million. Our volume was 94% multi-family, including 67% in our capital light Freddie Mac SBL channel. The year over year decline in our bridge lending was due to two main factors. First, the unfolding CRE recession stoked by reduced demand stemming from an approximate 100 basis point increase in multi-family cap rates, and a doubling in debt cost of 7% reflected in the first quarter over 50% decline in overall CRE transaction volume compared to the same period last year. Of note, the change in demand for multi-family is less than other CRE sectors due to an estimated 4 million unit housing shortage in the US, particularly in Ready Capital's affordable monthly family segment.