READY CAPITAL CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)


Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial
condition, results of operations, liquidity and certain other factors that may
affect our future results. Our MD&A is presented in five main sections:

 ? Overview

 ? Results of Operations

? Cash and capital resources

? Contractual obligations and off-balance sheet arrangements

? Critical accounting estimates

The following discussion should be read in conjunction with our unaudited
interim consolidated financial statements and accompanying Notes included in
Part I, Item 1, "Financial Statements," of this quarterly report on Form 10-Q
and with Items 6, 7, 8, and 9A of our annual report on Form 10-K. See
"Forward-Looking Statements" in this quarterly report on Form 10-Q and in our
annual report on Form 10-K and "Critical Accounting Estimates" in our annual
report on Form 10-K for certain other factors that may cause actual results to
differ, materially, from those anticipated in the forward-looking statements
included in this quarterly report on Form 10-Q.


Our business

We are a multi-strategy real estate finance company that originates, acquires,
finances, and services SBC loans, SBA loans, residential mortgage loans,
construction loans, and to a lesser extent, MBS collateralized primarily by SBC
loans, or other real estate-related investments. Our loans generally range in
original principal amounts up to $40 million and are used by businesses to
purchase real estate used in their operations or by investors seeking to acquire
multi-family, office, retail, mixed use or warehouse properties. Our objective
is to provide attractive risk-adjusted returns to our stockholders, primarily
through dividends as well as through capital appreciation. In order to achieve
this objective, we continue to grow our investment portfolio and believe that
the breadth of our full service real estate finance platform will allow us to
adapt to market conditions and deploy capital in our asset classes and segments
with the most attractive risk-adjusted returns. We report our activities in the
following three operating segments:

SBC loans and acquisitions. We issue SBC loans throughout the lifecycle

of an SBC property including construction, transition, stabilization and agency

loan origination channels through our wholly owned subsidiary, ReadyCap

Commercial, LLC (“ReadyCap Commercial”). These initiated loans are generally

held for investment purposes or placed in securitization structures. As part of this

segment, we create and manage multi-family loan products under the Freddie

Mac SBL program. These insider loans are held for sale and then sold to Freddie

? Mac. We provide construction and permanent funding for the preservation and

construction of affordable housing, mainly using tax-exempt bonds

through Red Stone, a wholly owned subsidiary. In addition, we acquire small

balance commercial lending as part of our commercial strategy. We would like to perform

Term SBC loans and seek to maximize the value of non-performing SBCs

loans we acquired through borrower-based resolution strategies. We usually have

acquire non-performing loans at a discount to their outstanding principal balance

   when we believe that resolution of the loans will provide attractive
   risk-adjusted returns.

Small business loan. We acquire, issue and service homeowner loans

guaranteed by the SBA under the SBA Section 7(a) program through our

wholly-owned subsidiary, ReadyCap Lending. We hold an SBA license as one of

? only 14 non-bank SBLCs and have been granted preferred lender status by the

SBA. These issued loans are either held for investment purposes or placed in

securitization structures, or sold. We also acquire purchased futures contracts

receivables through Knight’s Capitalwhich is a technology-driven platform that

provides working capital to small and medium-sized businesses across the WE


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   Residential Mortgage Banking. We operate our residential mortgage loan

origination segment through our wholly owned subsidiary, GMFS. GMFS originated

? residential mortgage loans that may be purchased, guaranteed or insured by

Fannie Mae, Freddie Mac, FHA, USDA and Virginia via retail, correspondent and

brokerage channels. These originated loans are then transferred to third parties,

primarily agency loan programs.

We are organized and conduct our operations to qualify as a REIT under the Code.
So long as we qualify as a REIT, we are generally not subject to U.S. federal
income tax on our net taxable income to the extent that we annually distribute
substantially all of our net taxable income to stockholders. We are organized in
a traditional UpREIT format pursuant to which we serve as the general partner
of, and conduct substantially all of our business through our operating
partnership. We also intend to operate our business in a manner that will permit
us to be excluded from registration as an investment company under the 1940 Act.

For more information about our business, see Part I, Item 1, “Business” of the Company’s Annual Report on Form 10-K.


Mosaic. On March 16, 2022, pursuant to the terms of that certain Merger
Agreement, dated as of November 3, 2021, as amended on February 7, 2022, the
Company acquired, in a series of mergers (collectively, the "Mosaic Mergers"), a
group of privately held, real estate structured finance opportunities funds,
with a focus on construction lending (collectively, the "Mosaic Funds"), managed
by MREC Management, LLC ("the "Mosaic Manager").

As consideration for the Mosaic Mergers, each former investor was entitled to
receive an equal number of shares of each of Class B-1 Common Stock, $0.0001 par
value per share (the "Class B-1 Common Stock"), Class B-2 Common Stock, $0.0001
par value per share (the "Class B-2 Common Stock") Class B-3 Common Stock,
$0.0001 par value per share (the "Class B-3 Common Stock"), and Class B-4 Common
Stock, $0.0001 par value per share (the "Class B-4 Common Stock" and, together
with the Class B-1 Common Stock, the Class B-2 Common Stock and the Class B-3
Common Stock, the "Class B Common Stock"), of Ready Capital, contingent equity
rights ("CERs") representing the potential right to receive shares of Common
Stock as of the end of the three-year period following the closing date of the
Mosaic Mergers based upon the performance of the assets acquired by Ready
Capital pursuant to the Mosaic Mergers, and cash consideration in lieu of any
fractional shares of Class B Common Stock.

The Class B Common Stock ranked equally with the common stock, except that the
shares of Class B Common Stock were not listed on the New York Stock Exchange.
On May 11, 2022, each issued and outstanding share of Class B Common Stock
automatically converted, on a one-for-one basis, into an equal number of shares
of Common Stock, and as such, no shares of Class B Common Stock remain

The CERs are contractual rights and do not represent any equity or ownership
interest in Ready Capital or any of its affiliates. If any shares of common
stock are issued in settlement of the CERs, each former investor will also be
entitled to receive a number of additional shares of common stock equal to (i)
the amount of any dividends or other distributions paid with respect to the
number of whole shares of common stock received in respect of CERs and having a
record date on or after the closing date of the Mosaic Mergers and a payment
date prior to the issuance date of such shares of common stock, divided by (ii)
the greater of (a) the average of the volume weighted average prices of one
share of common stock over the ten trading days preceding the determination date
and (b) the most recently reported book value per share of common stock as of
the determination date.

The acquisition further broadened the company’s investment portfolio and origination platform to include a diversified portfolio of construction assets with attractive portfolio yields. See Note 5, included in Part I, Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q, for assets acquired and liabilities assumed in connection with the merger.



Red Stone. On July 31, 2021, the Company acquired Red Stone, a privately owned
real estate finance and investment company that provides innovative financial
products and services to multifamily affordable housing, in exchange for an
initial purchase price of approximately $63 million paid in cash, retention
payments to key executives aggregating $7 million in cash and 128,533 shares of
common stock of the Company issued to Red Stone executives under the Company's
2013 equity incentive plan (the "Equity Incentive Plan"). Additional purchase
price payments may be made over the three years following the acquisition date
if the Red Stone business achieves certain hurdles. The acquisition of Red Stone
supported a significant growth opportunity for the Company by expanding presence
in a sector with otherwise low correlation to our assets. In acquiring Red
Stone, we considered the value of the anticipated synergies arising from the
acquisition and the value of the acquired assembled workforce, neither of which
qualify for recognition as an intangible asset.

Anworth Mortgage Asset Corporation. On March 19, 2021, we completed the
acquisition of Anworth, through a merger of Anworth with and into a wholly-owned
subsidiary of ours, in exchange for approximately 16.8 million shares of our
common stock ("Anworth Merger"). In accordance with the Agreement and Plan of
Merger, dated as of December 6, 2020 (the "Anworth Merger Agreement"), by and
among us, RC Merger Subsidiary, LLC and Anworth, the number of shares of our
common stock issued was based on an exchange ratio of 0.1688 per share plus
$0.61 in cash per share. The total purchase price for the merger of $417.9
million consists of our common stock issued in exchange for shares of Anworth
common stock and cash paid in lieu of fractional shares of our common stock,
which was based on a price of $14.28 per share of our common stock on the
acquisition date and $0.61 in cash per share.

In addition, we issued 1,919,378 shares of newly designated 8.625% Series B
Cumulative Preferred Stock, par value $0.0001 per share (the "Series B Preferred
Stock"), 779,743 shares of newly designated 6.25% Series C Cumulative
Convertible Preferred Stock, par value $0.0001 per share (the "Series C
Preferred Stock") and 2,010,278 shares of newly designated 7.625% Series D
Cumulative Redeemable Preferred Stock, par value $0.0001 per share (the "Series
D Preferred Stock"), in exchange for all shares of Anworth's 8.625% Series A
Cumulative Preferred Stock, 6.25% Series B Cumulative Convertible Preferred
Stock and 7.625% Series C Cumulative Redeemable preferred stock outstanding
prior to the effective time of the Anworth Merger. On July 15, 2021, the Company
redeemed all of the outstanding Series B and Series D Preferred Stock, in each
case at a redemption price equal to $25.00 per share, plus accrued and unpaid
dividends up to, but excluding, the redemption date.

Upon closing of the transaction and after giving effect to the issuance of ordinary shares in consideration for the merger, our historical shareholders held approximately 77% of our outstanding ordinary shares, while historical Anworth shareholders held approximately 23 % of our common shares outstanding. .

The acquisition of Anworth increased our equity capitalization, supported
continued growth of our platform and execution of our strategy, and provided us
with improved scale, liquidity and capital alternatives, including additional
borrowing capacity. Also, the stockholder base resulting from the acquisition of
Anworth enhanced the trading volume and liquidity for our stockholders. In
addition, part of our strategy in acquiring Anworth was to manage the
liquidation and runoff of certain assets within the Anworth portfolio and repay
certain indebtedness on the Anworth portfolio following the completion of the
Anworth Merger, and to redeploy the capital into opportunities in our core SBC
strategies and other assets we expect will generate attractive risk-adjusted
returns and long-term earnings accretion.

In addition, concurrently with entering into the Anworth Merger Agreement, we,
our operating partnership and the Manager entered into the First Amendment to
the Amended and Restated Management Agreement (the "Amendment"), pursuant to
which, upon the closing of the Anworth Merger, the Manager's base management fee
was reduced by $1,000,000 per quarter for each of the first full four quarters
following the effective time of the Anworth Merger (the "Temporary Fee
Reduction"). Other than the Temporary Fee Reduction set forth in the Amendment,
the terms of the Management Agreement remain the same.



Factors Affecting Results of Operations

We expect that our results of operations will be affected by a number of factors
and will primarily depend on the level of interest income from our assets, the
market value of our assets and the supply of, and demand for, SBC loans, SBA
loans, residential loans, construction loans, MBS and other assets we may
acquire in the future, demand for housing, population trends, construction
costs, the availability of alternative real estate financing from other lenders
and the financing and other costs associated with our business. These factors
may have an impact on our ability to originate new loans or the performance of
our existing loan portfolio. Our net investment income, which includes the
amortization of purchase premiums and accretion of purchase discounts, varies
primarily as a result of changes in market interest rates, the rate at which our
distressed assets are liquidated and the prepayment speed of our performing
assets. Interest rates and prepayment speeds vary according to the type of
investment, conditions in the financial markets, competition and other factors,
none of which can be predicted with any certainty. Our operating results may
also be impacted by our available borrowing capacity, conditions in the
financial markets, credit losses in excess of initial estimates or unanticipated
credit events experienced by borrowers whose loans are held directly by us or
are included in our MBS. Difficult market conditions as well as inflation,
energy costs, geopolitical issues, health epidemics and outbreaks of contagious
diseases, such as the outbreak of COVID-19 and the emergence and severity of
variants, unemployment and the availability and cost of credit are factors which
could also impact our operating results.

Changes in Market Interest Rates. We own and expect to acquire or originate
fixed rate mortgages ("FRMs") and adjustable rate mortgages ("ARMs") with
maturities ranging from two to 30 years. Our loans typically have amortization
periods of 15 to 30 years or balloon payments due in two to 10 years. FRM loans
bear interest that is fixed for the term of the loan and we typically utilize
derivative financial and hedging instruments in an effort to hedge the interest
rate risk associated with such FRMs. As of September 30, 2022, 75% of fixed rate
loans are match funded in securitization. ARM loans generally have a fixed
interest rate for a period of five, seven or 10 years and then an adjustable
interest rate equal to the sum of a fixed spread plus an index rate, such as the
Secured Overnight Financing Rate ("SOFR"), which typically resets monthly. As of
September 30, 2022, approximately 85% of the loans in our portfolio were ARMs,
and 15% were FRMs, based on UPB.

With respect to our business operations, increases in interest rates may
generally over time cause the interest expense associated with our variable-rate
borrowings to increase, the value of fixed-rate loans, MBS and other real
estate-related assets to decline, coupons on variable-rate loans and MBS to
reset to higher interest rates, and prepayments on loans and MBS to slowdown.
Conversely, decreases in interest rates generally tend to have the opposite

Non-performing loans are not as interest rate sensitive as performing loans, as
earnings on non-performing loans are often generated from restructuring the
assets through loss mitigation strategies and opportunistically disposing of
them. Because non-performing loans are short-term assets, the discount rates
used for valuation are based on short-term market interest rates, which may not
move in tandem with long-term market interest rates.

Changes in Fair Value of Our Assets. Certain originated loans, MBS, and
servicing rights are carried at fair value, while future assets may also be
carried at fair value. Accordingly, changes in the fair value of our assets may
impact the results of our operations in the period such changes occur. The
expectation of changes in real estate prices is a key determinant for the value
of loans and ABS. This factor is beyond our control.

Prepayment Speeds. Prepayment speeds on loans vary according to interest rates,
the type of investment, conditions in the financial markets, competition,
foreclosures and other factors that cannot be predicted with any certainty. In
general, when interest rates rise, it is relatively less attractive for
borrowers to refinance their mortgage loans and, as a result, prepayment speeds
tend to decrease. This can extend the period over which we earn interest income
and servicing fee income. When interest rates fall, prepayment speeds increase
on loans, and therefore, ABS, thereby decreasing the period over which we earn
interest income or servicing fee income. Additionally, other factors such as the
credit rating of the borrower, the rate of property value appreciation or
depreciation, financial market conditions, foreclosures and lender competition,
none of which can be predicted with any certainty, may affect prepayment speeds
on loans.


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Credit Spreads. Our investment portfolio may be subject to changes in credit
spreads. Credit spreads measure the yield demanded on loans and securities by
the market based on their credit relative to a specific benchmark and is a
measure of the perceived risk of the investment. Fixed rate loans and securities
are valued based on a market credit spread over the rate payable on fixed rate
swaps or fixed rate U.S. Treasuries of similar maturity. Floating rate
securities are typically valued based on a market credit spread over SOFR (or
another floating rate index) and are affected similarly by changes in SOFR
spreads. Excessive supply of these loans and securities, or reduced demand, may
cause the market to require a higher yield on these securities, resulting in the
use of a higher, or "wider," spread over the benchmark rate to value such
assets. Under such conditions, the value of our portfolios would tend to
decline. Conversely, if the spread used to value such assets were to decrease,
or "tighten," the value of our loans and securities would tend to increase. Such
changes in the market value of these assets may affect our net equity, net
income or cash flow directly through their impact on unrealized gains or losses.

The spread between the yield on our assets and our funding costs is an important
factor in the performance of this aspect of our business. Wider spreads imply
greater income on new asset purchases but may have a negative impact on our
stated book value. Wider spreads generally negatively impact asset prices. In an
environment where spreads are widening, counterparties may require additional
collateral to secure borrowings which may require us to reduce leverage by
selling assets. Conversely, tighter spreads imply lower income on new asset
purchases but may have a positive impact on our stated book value. Tighter
spreads generally have a positive impact on asset prices. In this case, we may
be able to reduce the amount of collateral required to secure borrowings.

Loan and ABS Extension Risk. The Company estimates the projected
weighted-average life of our investments based on assumptions regarding the rate
at which the borrowers will prepay the underlying mortgages and/or the speed at
which we are able to liquidate an asset. If the timeline to resolve
non-performing assets extends, this could have a negative impact on our results
of operations, as carrying costs may therefore be higher than initially
anticipated. This situation may also cause the fair market value of our
investment to decline if real estate values decline over the extended period. In
extreme situations, we may be forced to sell assets to maintain adequate
liquidity, which could cause us to incur losses.

Credit Risk. We are subject to credit risk in connection with our investments in
loans and ABS and other target assets we may acquire in the future. Increases in
defaults and delinquencies will adversely impact our operating results, while
declines in rates of default and delinquencies will improve our operating
results from this aspect of our business. Default rates are influenced by a wide
variety of factors, including, property performance, property management, supply
and demand factors, construction trends, consumer behavior, regional economics,
interest rates, the strength of the United States economy and other factors
beyond our control. All loans are subject to the possibility of default. We seek
to mitigate this inherent risk by seeking to acquire assets at appropriate
prices given anticipated and unanticipated losses and by deploying a
value-driven approach to underwriting and diligence, consistent with our
historical investment strategy, with a focus on projected cash flows and
potential risks to cash flow. We further mitigate our risk of potential losses
while managing and servicing our loans by performing various workout and loss
mitigation strategies with delinquent borrowers. Nevertheless, unanticipated
credit losses could occur which could adversely impact operating results.

Current market conditions.  The third quarter occurred in an environment of
market uncertainty amid significant inflationary pressures, macroeconomic
concerns and geopolitical shifts which continue to contribute to overall market
volatility. In an effort to combat inflation and restore price stability, the
U.S. Federal Reserve has raised interest rates and, although the full impact of
recent changes remains uncertain and difficult to predict, it is likely the U.S.
Federal Reserve will continue to raise interest rates into 2023. The persistence
of COVID-19 and its impact on the Company and our borrowers will largely depend
on future developments beyond the control of the Company including, but not
limited to the emergence and severity of variants, the efficacy of vaccinations
and booster programs, the impact and reactions on the U.S. and global economies,
the effectiveness of governmental responses thereto and the timing and speed of
economic recovery. Concerns and uncertainties about the economic outlook may
lead to an adverse impact on our financial condition, results of operations
cash flows.


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Results of Operations

Main financial measures and indicators

As a real estate finance company, we believe the key financial measures and
indicators for our business are earnings per share, dividends declared per
share, distributable earnings, and net book value per share. As further
described below, distributable earnings is a measure that is not prepared in
accordance with GAAP. We use distributable earnings to evaluate our performance
and determine dividends, excluding the effects of certain transactions and GAAP
adjustments that we believe are not necessarily indicative of our current loan
activity and operations. See "-Non-GAAP Financial Measures" below for a
reconciliation of net income to distributable earnings.

The table below sets forth certain information about our results of operations.

                                             Three Months Ended September 30,           Nine Months Ended September 30,
($ in thousands, except share data)              2022                 2021                  2022                2021
Net Income                                 $        66,253       $        46,535      $       189,481     $       106,386
Earnings per common share - basic          $          0.53       $          0.61      $          1.66     $          1.47
Earnings per common share - diluted        $          0.50       $          0.60      $          1.56     $          1.46
Distributable earnings                     $        58,186       $        49,365      $       167,151     $       115,501
Distributable earnings per common share
- basic                                    $          0.46       $          0.64      $          1.46     $          1.60
Distributable earnings per common share
- diluted                                  $          0.44       $          0.64      $          1.38     $          1.60
Dividends declared per common share        $          0.42       $         
0.42      $          1.26     $          1.24
Dividend yield                                        16.6 %                11.6 %               16.6 %              11.5 %
Return on equity                                      14.5 %                16.3 %               15.1 %              13.2 %
Distributable return on equity                        12.7 %                17.3 %               13.3 %              14.7 %
Book value per common share                $         15.40       $        

$15.07 $15.40 $15.07 Adjusted net book value per common share $15.40 $15.06 $15.40 $15.06

In the table above,

? The dividend yield is based on the closing share price at the end of the respective period.

? Adjusted net book value per common share excludes the equity component of our

Issuance of convertible notes 2017.

Our loan portfolio

We have a large and active pipeline of potential acquisition and origination
opportunities that are in various stages of our investment process. We refer to
assets as being part of our acquisition or origination pipeline if (i) an asset
or portfolio opportunity has been presented to us and we have determined, after
a preliminary analysis, that the assets fit within our investment strategy and
exhibit the appropriate risk/reward characteristics (ii) in the case of acquired
loans, we have executed a non-disclosure agreement ("NDA") or an exclusivity
agreement and commenced the due diligence process or we have executed more
definitive documentation, such as a letter of intent ("LOI"); and (iii) in the
case of originated loans, we have issued an LOI, and the borrower has paid a

We operate in a competitive market for investment opportunities and competition
may limit our ability to originate or acquire the potential investments in the
pipeline. The consummation of any of the potential loans in the pipeline depends
upon, among other things, one or more of the following: available capital and
liquidity, our Manager's allocation policy, satisfactory completion of our due
diligence investigation and investment process, approval of our Manager's
Investment Committee, market conditions, our agreement with the seller on the
terms and structure of such potential loan, and the execution and delivery of
satisfactory transaction documentation. Historically, we have acquired less than
a majority of the assets in our pipeline at any one time and there can be no
assurance the assets currently in our pipeline will be acquired or originated by
us in the future.

The table below presents information on creations and acquisitions in our investment portfolio (based on fully committed amounts).

                                 Three Months Ended
                                   September 30,              Nine Months Ended September 30,
(in thousands)                  2022              2021              2022              2021
Loan originations:
SBC loans               $          831,104   $   1,106,957    $       3,629,775   $   3,031,476
SBA loans                          133,571         144,253              362,698         345,045
Residential agency
mortgage loans                     534,339       1,020,445            2,050,568       3,332,273
Total loan
originations            $        1,499,014   $   2,271,655    $       6,043,041   $   6,708,794
Total loan
acquisitions            $                -   $     167,980    $         659,636   $     167,980
Total loan investment
activity                $        1,499,014   $   2,439,635    $       6,702,677   $   6,876,774


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