Ready Capital Stock: Outstanding 2021 Results (NYSE:RC)
Loan Capital Corporation (NYSE: RC) closed a fantastic 2021 with record net income, loan originations, CRE originations and acquisitions and distributable income. Even with a slight dividend increase in 2022 and more moderate growth, the payout ratio may to stay healthy. In my opinion, despite these high growth numbers, this is already taken into account in the current valuation and RC is correctly valued. This makes the company a low-priority investment target for growth or value investors, but income-seeking investors will find it attractive with a dividend yield of over 11% and stable fundamentals.
Ready Capital is a non-bank and small business real estate lender that has provided over $3 billion in capital nationwide. The Company provides capital to real estate finance transactions primarily to multi-family and commercial real estate. RC operates through three segments: SBC Loans and Acquisitions; small business loans; and Residential Mortgage Banking. Although RC is classified as a mortgage REIT, only about 11% of its revenue comes from the Residential Mortgage Banking segment. However, the company is in a strong position in multi-family lending through SBC product offerings. Furthermore, RC is also strong not only in terms of organic growth, but also mergers and acquisitions. 6 acquisitions made over the past 6 years have fueled RC’s balance sheet. The latest was just completed in mid-March with shareholder approval for RC to acquire Mosaic.
Finances and income
“Ready Capital’s record fourth quarter results capped an exceptional year marked by record originations in our SBC and SBA 7(A) lending businesses, growth in our equity and debt capitalization and strong performance in credit,” commented Thomas Capasse, Chairman and CEO of RC.
This is a strong and fair statement as their ROE is over 12% ttm (over 18% for Q4), well above the mREIT industry average. Book value per share increased 1.93% in the fourth quarter from $15.06 to $15.35 per share. Moreover, from the first quarter of 2021 to the fourth quarter of 2021, the BV per share could grow by 3.09% while its net income increased by 85.47% during the same period. Net profit increased from $45.8 million in the third quarter of 2021 to $53.2 million in the fourth quarter of 2021. Comparing the results of the fourth quarter of 2020 and 2021, RC could almost double its net profit in one year only. With the Mosaic merger, I am confident that this growth rate can be sustained relatively easily for the next 2-3 quarters.
It’s very interesting at the moment because there are factors that suggest RC is a bit undervalued and there are factors that suggest it’s fairly valued. Let’s start with the positives: the company has a return on equity of 12% ttm while the mREIT industry average is 7%. RC’s non-GAAP price-to-earnings ratio of 6.8 is well below the industry median of 10.69. Let’s look at the factors that indicate RC is properly priced: Looking at the stock price, it’s at the upper end of the 52-week range, and RC’s price performance is almost identical to the returns of the S&P 500 in 2022. The price of the business to book ratio is 0.99. Comparing the price to book value of the entire mortgage REIT industry, we can see that RC’s P/B is in the top 30% of all publicly traded MREITs (there are 41 mREITs listed on the stock exchange and 10 of them have higher P/B ratios than RC), so we can say that the company is fairly valued based on this factor alone.
Company specific risks
In my view, the company’s success is highly dependent on its ability to effectively analyze potential acquisition and origination opportunities in order to assess the level of risk-adjusted return that management should expect from any particular investment. This is a major factor as RC is passionate about M&As as it has averaged 1 M&A each year for the past 6 years.
Another risk factor to note is the concentration of the loan portfolio in Texas and California. It represents approximately 19.2% and 14.3% of total RC loans as of December 31, 2021. The majority of these loans (58%) in the SBC loans and acquisitions segment are multi-family home loans. Additionally, many of their borrowers are self-employed. Self-employed borrowers may be more likely to default on their mortgages than salaried or commission borrowers and generally have less predictable income. Additionally, (as you would expect from any REIT) their real estate investments, including properties acquired by them through foreclosure, are relatively illiquid and difficult to buy and sell. sell quickly.
As of December 31, 2021, the average loan-to-value ratio of the portfolio originated from RC Commercial was 79%. The weighted average LTV of their acquired loans was 54%. If these SBC loans with higher LTV ratios become delinquent, the company may experience greater credit losses compared to properties with lower leverage.
My take on the RC dividend
RC has been paying consecutive dividends for 8 years, 3 years less than the industry average. Ready Capital is yielding 11.03%, which is relatively high compared to the last 9 months. Above 11% is considered an excellent dividend based on the last 8-9 months. You can only buy RC above the current yield about 5-6% of the time. Also, the average dividend yield for the past 4 years is 9.29%, so 11.03% is really a great yield.
The company has increased its dividend for 1 consecutive year and the last increase was in the second half of 2021 when management raised the dividend above pre-pandemic levels.
Although it is a mortgage REIT, RC has a well-covered dividend. The payout ratio should increase a little in the second half. I calculated with the estimated EPS numbers and the payout ratio will still be in the healthy and safe zone for investors looking for income. Analysts are not calculating any dividend increase for 2022, but I see a slight possibility that management could increase the dividend by $0.01 to $0.43 per share just to build another year of consecutive dividend growth.
Based on RC’s valuation, it’s safe to say that the company is fairly valued with excellent and solid fundamentals and with above-average mREIT ROE figures, and excellent M&A decisions. The million dollar question is: how long can this exceptional growth be sustained? My response is that for the next 2-3 quarters it is absolutely real, but if management can continue this M&A policy over the next two years, this exceptional growth could be sustained (of course not the doubling net income each year). I don’t plan to buy RC as a growth or value investor, but as an income investor it can add dividend value to my portfolio with its dividend yield above the 11% threshold. I would be happier with a share price of $14, but a little above $15 is also acceptable if we are thinking long term.