Ready Capital Stock: dividend yields and favorable risk-reward ratio (NYSE: RC)

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Investment thesis

Loan capital (NYSE: RC) is a REIT that operates with residential mortgages, construction loans and secured MBS. The company’s policy of stable and high dividend yield with limited risk is the main catalyst for the action. The The company has completed a strategic merger with Mosaic Real Estate Credit TE, which will positively impact the company’s earnings over the next few quarters. I think the company’s dividend yield is attractive and I give the stock a buy rating.

Company presentation

Ready Capital is a real estate finance company that develops, acquires, finances and services residential mortgage loans, construction loans, MBS secured primarily by SBC loans and other real estate related investments. The company’s typical loan amount can be up to $40 million, which is used to purchase real estate such as multi-family buildings, offices, retail, mixed-use, or warehouses. The company, a commercial mortgage REIT, seeks to provide shareholders with attractive risk-adjusted returns, primarily through dividends and capital gains. It has a policy of paying investors 90% of net profits after tax in the form of dividends. The company generated revenue from the operating segment: SBC Lending and Acquisitions, Small Business Lending and Residential Mortgage Banking.

SBC loan and acquisition: Through its subsidiary, ReadyCap Commercial, the Company issues SBC loans using various channels of loan origination secured by stabilized or transitional investor properties. These newly originated loans are usually kept for investment purposes or added to securitization frameworks. This section includes origination and servicing of multi-family loans made through the Federal Home Loan Mortgage Corporation’s Small Balance Loan Program (Freddie Mac and Freddie Mac Program). These issued loans are blocked until Freddie Mac purchases them. The company also provides temporary and long-term financing, primarily through Red Stone tax-exempt bonds, for the construction and preservation of affordable housing. This segment contributes more than 56% of the company’s operating revenue.

Small business loans: Owner-occupied loans that are guaranteed by the SBA are acquired, issued and serviced by the company under this segment. These originated loans are either sold, placed in securitization frameworks, or kept for investment purposes. In addition, the company buys future receivables. This segment typically generates over 27% of total revenue.

Residential Mortgage Banking: Through its subsidiary, GMFS, the company operates the residential mortgage origination division under this section. This subsidiary originates residential mortgages that the Federal National Mortgage Association is prepared to purchase, guarantee or insure. Then those loans that were originally produced are sold to third parties, usually agency loan programs. This segment contributes more than 14% of the company’s total revenue.

Income distribution

Investor Presentation: Slide 6

Stable and high dividend yield

The company is a real estate finance REIT that distributes 90% of net after-tax profits as dividends to shareholders. The stock currently trades at $12.65 and pays an annual dividend of $1.68 per share, which represents an outstanding yield of 13.65% based on the current share price. The company has a long history of high dividend payments without any price volatility.

Stock Price Chart

Looking for Alpha

In the chart above, we can clearly see that the stock price has always been stable. It was only at the time of Covid-19 that the share price showed a sharp decline, but as we can see the share price almost reached pre-pandemic levels. I believe this stock is a golden opportunity to earn a stable return of 13.67% on a very low risk investment. In the current scenario of rising interest rates, the question that will come to everyone’s mind is the sustainability of income and dividend payments. I think the dividends are sustainable in the period ahead, as most of the company’s loan agreements are the company’s long-term and effective hedging strategies. I think this two-year interest rate hike scenario acts as a margin expansion for the company. Also, I think the company’s share price won’t budge, but shareholders can expect stable dividend payouts over the next few quarters.

Merger with Mosaic Real Estate Credit TE

Recently, Ready Capital announced the completion of its merger with Mosaic Real Estate Credit TE. The combined company will operate a business under the same title, “Ready Capital Corporation“, and will be available for trading on the New York Stock Exchange. After the merger, the Mosaic director’s delegate, Julius W. Erving, was appointed to the RC board of directors. The company acquired a market-leading commercial real estate investment platform that is focused on providing differentiated capital solutions to all entities in the middle market sector with this merger.

Thomas Capasso, Chairman and CEO of Ready Capital, said:

We believe this transaction is a compelling opportunity for Ready Capital to acquire a market-leading commercial real estate investment platform focused on providing differentiated capital solutions in the middle market sector, with an emphasis on construction loans. We are excited to join the Mosaic team and the origination platform and believe the diversified portfolio of construction assets with attractive portfolio yields will further differentiate Ready Capital’s financing solutions for borrowers and investors.

The effects of this merger were visible in the results of the last quarter, and I believe that the positive impact of this event will drive the company’s revenues higher in the coming quarters.

finance

income statement

SEC: Capital ready for 10 Q

Ready Capital reported interest income of $124.5 million in the first quarter of 2022 compared to $73.37 million in the first quarter of 2021, a spectacular increase of 70%. This increase in interest income from the Mosaic merger was the main reason for the overall profitable quarter for the company. Net interest income was $61.84 million, a jump of 173% from the prior year period. This increase is explained by a minimal increase in interest expense compared to interest income during the period. Reported non-interest income remained stable at $87.8 million compared to $88.9 million. The main cause of this decline was a decline in income from the residential mortgage banking business. Overall, total net income jumped 122% to $64.26 million from $28.94 million in the corresponding quarter. Rising interest income was the main driver of this growth. The company reported diluted EPS of $0.66. The company said a dividend of $0.42, a payout ratio of 63.6% of net earnings. The company plans to increase the payout ratio in the future to maintain its REIT status. Overall, the company reported strong first quarter results with a positive outlook for the coming quarters.

Balance sheet

SEC: Capital ready for 10 Q

The company reported cash and cash equivalents of $211.3 million, which is down. The company obtained loans of $3,274.3 million. Overall, the company’s asset quality looks good, but liquidity is a concern that management needs to address.

Risk factor

Rising interest rates: The United States has seen a record high in interest rates in recent months, and with inflation around, interest rates don’t appear to be falling any time soon. Higher interest rates increase the borrowing rate, which puts pressure on profit margins. Speculation about a possible recession adds to the turmoil. A recession would lead to job losses, which is reflected in Fed data; unemployment is currently at its highest level in a decade. This will result in payment defaults. This could have negative effects on the company’s liquidity. In the short term, we could see the effects of inflation on the company’s results, but in the long term, the company is well positioned in the industry to manage these risks. Ready Capital has successfully mitigated these risks so far by employing effective hedging strategies, and I believe it will continue to do so even in the future.

Evaluation

The company has a market capitalization of $1.43 billion and is currently trading at a price of $12.31. The company has seen a year-to-date decline of 23.49%. The main reason for this drop is the general market sentiment, which is currently not favorable at the macro level. Ready Capital is trading at a P/E multiple of 6.57x. I think the company is correctly valued at the current price level.

I think Ready Capital is a great bet for investors looking for stable dividend income. The company is known for price stability while consistently delivering a dividend yield of over 10% over the years. At the current dividend yield of 13.65%, with scope for increased dividend payout in the future, I think Ready Capital is a great investment opportunity.

Conclusion

My final thoughts on Ready Capital are that it is an excellent stock for investors looking for a high dividend yield with a favorable risk-reward profile. A dividend yield of 13.65% with fair stock valuation makes me recommend this stock to long-term investors. After reviewing the risks and analyzing the company’s financial data, I believe that Ready Capital is an excellent investment opportunity and I rate the stock as Buy.

Sallie R. Loera