Scott Kennedy’s mREIT + BDC Earnings Series: Assessing Ready Capital’s And SLR Investment’s Performance For Q1 2024
Summary
This earnings assessment article reviews RC’s and SLRC’s BV/NAV and core earnings/EAD/NII performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
RC’s BV largely matched my/our expectations (well within range; modest decrease) while its core earnings/EAD was a modest outperformance. This mainly related to better-than-anticipated net interest income and lower operational.
A good “bounce back” regarding RC’s core earnings/EAD. No change in RC’s percentage recommendation ranges or risk/performance rating. For risk tolerant investors, RC is currently deemed notably undervalued (STRONG BUY).
SLRC’s NAV slightly outperformed my/our expectations (within range; minor increase) while its NII was also a minor outperformance (within range; basically unchanged). Overall, SLRC reported another good quarter.
Non-Accrual percentages fractionally increased (correctly anticipated) while net PIK income decreased. No change in SLRC’s percentage recommendation ranges or risk/performance rating. SLRC is currently deemed undervalued (BUY).
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) RC:
Commentary
Quarterly BV Fluctuation: Very Minor - Minor Underperformance (1.1% Variance).
Core Earnings/EAD: Modest Outperformance ($0.044 Variance).
A largely “as expected” quarter regarding Ready Capital’s RC 0.00%↑ BV in my opinion. RC recorded a modest quarterly BV decrease which matched my expectations. Let us briefly discuss RC’s operational performance when compared to my expectations.
First, let us discuss RC’s equivalent to the company’s CECL reserve accounts. RC recorded a net increase to the company’s credit reserves of ($120) million (including assets held-for-sale; increases are bad). In comparison, I projected a net increase of ($90) million so a bit of a larger quarterly increase. This includes reserves allocated to the fairly recently acquired BRMK portfolio of commercial loans. This directly led to a BV underperformance of ($0.17) per common share which was the vast majority of the company’s overall quarterly BV underperformance of ($0.16) per common share. As stated last quarter, I believed RC’s overall reserves were simply too low. RC’s large reserves increase during Q1 2024 now better “aligns” with my prior/current modeling.
Second, outside the reserve accounts, RC’s total net valuation gain within the company’s entire investment portfolio during Q1 2024 slightly underperformed my expectations. This mainly pertained to RC’s lower middle market commercial loan sub-portfolio.
Third, similar to many other commercial mREIT peers, RC remained in “defensive mode” as the company only originated/purchased $457 million of investments during Q1 2024 (basically flat when compared to Q4 2023). This was well below 2020 – 2022 levels. When broken out, this included originations/purchases of $260 million of lower middle market commercial loans and $197 million of U.S. Small Business Administration Section 7(a) government loans. That said, RC’s lower quarterly originations/purchases were correctly anticipated on my end.
Finally, RC repurchased a minor amount of common stock during the quarter. This added a bit of BV accretion during Q1 2024 (slightly more than I anticipated).
Moving on, RC’s core earnings/EAD experienced a nice “bounce back” during Q1 2024 which was a bit of a positive surprise. I assumed RC’s smaller investment portfolio size, along with recently rising non-accruals, would negatively impact the company’s core earnings/EAD during Q1 2024. However, RC was able to defy this assumption via better-than-expected net interest income while slightly decreasing operational expenses. As such, at first glance, it would appear RC was able to generate higher returns/yields on the company’s investment portfolio (likely largely by “shedding” lower-yielding/non-producing assets).
A risk/performance rating of 4.5 for RC remains appropriate in the current environment/over the foreseeable future (“higher-for-longer” regarding rates/yields) since this mREIT continues to have commercial real estate/multifamily loan exposure. Credit risk is something I am closely monitoring with RC. I continue to expect a slight – modest additional increase in credit risk during 2024 (which is always monitored/already factored into the modeling). Remember, a good deal of credit risk already occurred during 2023 (mainly with the BRMK assets).