04/27/2023 | by Keith Loria

Ready Capital (NYSE: RC) is a multi-strategy real estate finance company that originates, acquires, finances, and services small to medium balance commercial loans. With a strong track record of accretive acquisitions, and a merger expected to close this year, it expects to play a major role in the mREIT space in the years ahead.

Ready Capital was founded in 2013 and its external manager, Waterfall Asset Management, is one of the largest standalone structured credit firms globally with about $12 billion of net assets and $20 billion in gross assets. Thomas Capasse, Ready Capital’s CEO and chief investment officer, and co-founder of Waterfall Asset Management, says, “A lot of what we do at the external manager level is invest in opportunistic commercial real estate debt and residential credit.”

Following the global financial crisis, Waterfall was one of the largest buyers of small balance commercial real estate loans from banks and was looking at ways to sell non-performing assets to improve its capital position.

“We bought about $5 billion during that period,” Capasse says. “We have a lot of infrastructure around loan workouts and resolved around 6,000 loans. At the same time, we were buying and realizing significant returns on the non-performing loans—a function led by my partner Jack Ross (Ready Capital’s president) and I.”

Waterfall saw an opportunity to not only buy non-performing loans, but on the recovery post-GFC, to form a new direct lender that utilized a lot of the data from why the default occurred in the small balance commercial space.

“In 2013, we seeded Ready Capital by converting a Waterfall private fund to a commercial mREIT and subsequently took that vehicle public,” Capasse says.

Evolving Though M&A

Fast forward to 2023 and the company has successfully completed six M&A transactions, with a seventh slated to close this year as Ready Capital works to finalize a merger with Broadmark Realty. This will catapult Ready Capital to become the fourth largest commercial mREIT with a capital base of $2.8 billion, and the largest non-bank lender to the lower middle market, according to the company.

“Given that REITs have to pay out almost all of their income in the form of dividends, it’s difficult to retain and grow book value, but what’s unique about our model beyond M&A is that we own our own operating companies that originate loans in the form of taxable REIT subsidiaries,” Capasse says.

So, Ready Capital does both strategic and capital raising acquisitions, with a hybrid between the two also a possibility.

Thomas Capasse, Ready Capital’s CEO
Ready Capital CEO Thomas Capasse

One transaction that was purely capital raising was the acquisition of a subscale residential mREIT, Anworth, in 2020. Ready Capital sold off the liquid agency mortgage-backed bonds and reinvested in the core commercial lending business.

A more recent example of a hybrid deal was a merger with private fund Mosaic Real Estate Credit in March 2022. That transaction provided an additional product in the form of construction lending, where Ready Capital hadn’t previously been active.

“These are examples of how we’ve used M&A in a niche manner, and as a corporate financing tool, to grow our capital base to position the company in the number one spot in terms of market share as a non-bank lender in the lower middle market commercial real estate debt space,” Capasse says.

Framing its Niche

One of the mREIT’s theses since inception has been the chronic housing shortage in the United States, especially affordable and middle-income housing.

“As a result, we’ve gravitated toward lower middle market multifamily,” Capasse says. “We look for sectors that conform to our macroeconomic thesis around the housing of residential units, and other sectors that have a low beta relative to the economic cycle. Another example is the industrial sector. Those two sectors account for about 80-90% of our exposure.”

One of the things that Ready Capital looks for in any transaction is a consistent track record of performance, such as businesses with over a decade of positive outcomes in terms of business execution.

“What’s unique about our business model is we have a proprietary scoring system, which scores markets from one to five based on a lot of quantitative data from the most obvious things like CoStar and Moody’s, to more niche data correlated with single family housing,” Capasse says. “As a lender, we are probably right up the middle of the fairway for non-bank, private debt lenders.”

Hunkering Down in the Pandemic

During the first two years of the pandemic, Ready Capital’s performance underscored its unique business model versus its peer group, Capasse says.

“Our business platform is focused on our core capital-heavy traditional lending, which involves around 85% of the net capital deployed and generates a high (8% to9%) return on equity (ROE),” Capasse says. “Additionally, within our REIT subsidiaries, we own a number of government-guaranteed lending programs, which delivered just amazing performance during COVID because they benefitted from the stimulus programs.”

Therefore, Ready Capital achieved record years during the first few years of the pandemic, with its ROE exceeding 12.5%.

Ready Capital was also a top 15 provider for the Payment Protection Plan (PPP). One of Ready Capital’s fintech companies provides unsecured loans for small businesses using front-end technology which it adapted to the early PPP program. In May 2020, it became one of the largest lenders of the program, as it delivered almost $250 million in revenue.

“We hunkered down and we didn’t lose a nickel of book value, nor did we incur any significant defaults,” Capasse says. “While we initially stopped lending for a period of two quarters during 2020 in order to survive the early stages of the COVID crisis without any book value erosion, we ultimately came out as one of the strongest performing companies in the industry.”

Matt Howlett, senior research analyst for B. Riley Securities, has been impressed with the mREIT’s significant growth over the last five years. “What stands out with Ready is the strength of its origination platform,” he says. “It is really driven by the diversification within that platform.”

Howlett is also bullish on the mREIT’s multifamily government sponsored enterprise (GSE) originator that can refinance bridge loans and sell them to the agencies, which, combined with a special deposit account (SDA) originator, residential mortgage platform, and a channel that buys distressed and non-performing commercial originations, means that it’s not just a one-stop shop like a lot of its peers.

“We’re always impressed by its middle-market focus in the small commercial balance space,” Howlett says. “They have the ability to find very attractive spreads; they’re not doing $150 million loans, they’re doing $25 million to $30 million loans. They have a unique niche in the market where they can target more the middle market sponsors and properties.”

We’ve used M&A in a niche manner, and as a corporate financing tool, to grow our capital base to position the company in the number one spot in terms of market share as a non-bank lender in the lower middle market commercial real estate debt space.

Thomas Capasse, Ready Capital’s CEO and chief investment officer

The Road Ahead

Ready Capital sees another opportunity now to buy into the current cycle of distressed loans from the two recent failures of Silicon Valley Bank and Signature Bank. “We’re going to continue to protect our dividends by investing in depressed portfolios from banks,” Capasse says.

Meanwhile, the biggest challenge right now is a contracted period of reduced loan demand.

“We do see in certain markets, a temporary switch to negative absorption due to oversupply, but we have a number of projects that are relatively insulated from it,” Capasse says.

Ready Capital views the next couple of quarters as something of a defensive period as the cycle unfolds, but is excited about what’s ahead.

“In terms of our growth strategy, we are excited about the Broadmark merger because it increases our capital base by a third,” Capasse says. “The other aspect of the portfolio is that they do a very small balance multifamily lending to more of a hard-money type approach, as opposed to our traditional lending. That capital is unlevered so it will provide us with additional liquidity to deploy into small balance loans from banks as we move through the balance of the year.”

And just as Ready Capital did with its acquisition of Mosaic in 2021, when it added construction lending, the Broadmark merger will bring in new geographic markets including Denver, Florida, and the Pacific Northwest, Capasse says.

A 2024 initiative will be focused on expanding into the multifamily space in Europe. Ready Capital currently has approximately 10% of its assets there, while Waterfall has offices in Spain, Ireland, and the U.K..Given the presence in these markets, the company views Europe as a savvy and natural future growth opportunity.

“We also see growth in the Small Business Administration (SBA) business, given its high profit margin. That is another strategic long term initiative for us,” Capasse says.