Executive Summary / Key Takeaways

• Strategic Repositioning Underway: Ready Capital is executing a comprehensive balance sheet reset, aggressively liquidating low-yielding, non-core commercial real estate (CRE) assets to free up capital for reinvestment into higher-quality, market-yielding multifamily bridge loans.
• Small Business Lending as a Differentiator: The Small Business Lending segment, including SBA 7(a) and USDA loans, is a high-growth, capital-light engine, demonstrating strong origination volumes and outsized contributions to return on equity, bolstered by innovative AI technology.
• Financial Reset and Liquidity: Recent actions, including a significant $284 million CECL and valuation allowance, a dividend reduction to $0.125 per share, and strategic debt management, aim to stabilize book value, align payouts with cash earnings, and generate substantial liquidity for future growth.
• Path to Earnings Recovery: Management projects modest earnings growth in the second half of 2025, with full dividend coverage expected for the full year and a return to a 10% stabilized core return by year-end 2025, leading to accretion in 2026.
• Competitive Strengths: RC's niche expertise in government-backed lending, diversified loan portfolio, and technological advancements in small business underwriting provide a distinct competitive edge against broader commercial real estate lenders.

Ready Capital's Strategic Pivot

Ready Capital Corporation (NYSE:RC) operates as a multi-strategy real estate finance company, specializing in originating, acquiring, financing, and servicing lower-to-middle-market (LMM) commercial real estate loans, Small Business Administration (SBA) loans, construction loans, and United States Department of Agriculture (USDA) loans. Founded in 2007, the company established its Real Estate Investment Trust (REIT) status in 2011, leveraging securitization activities as a primary funding mechanism for its LMM and SBA loan portfolios. This foundational strategy of diversified real estate finance has evolved, with a significant strategic shift initiated in the fourth quarter of 2023 to sharpen its focus on LMM CRE and small business lending, leading to the planned disposition of its Residential Mortgage Banking segment.

In the competitive landscape of real estate finance, Ready Capital distinguishes itself from larger, more diversified commercial real estate lenders like Blackstone Mortgage Trust (BXMT) through its specialized focus on small and medium-sized commercial (SBC) and government-backed SBA loans. While BXMT excels in global, large-scale commercial mortgages, RC's U.S.-centric approach offers targeted services for domestic small to medium enterprises. Compared to Arbor Realty Trust (ABR), which emphasizes larger-scale structured finance, RC's balanced approach across SBC, SBA, and residential segments provides greater operational flexibility. Ladder Capital Corp (LADR), with its heavier focus on senior commercial loans, contrasts with RC's broader product mix, which includes government-guaranteed products, appealing to a different segment of the market. RC's expertise in SBA lending, where it holds the position of the number one non-bank and fourth overall SBA 7(a) lender, provides a unique value proposition and a qualitative edge against rivals.

A critical differentiator for Ready Capital, particularly within its Small Business Lending segment, is its technological prowess. The company's iBusiness Funding (iBF) subsidiary, acquired in 2019, has been instrumental in this regard. iBF recently launched Lendsey AI, touted as the "industry's first agentic AI platform specifically designed for SMB lending." This technology offers tangible benefits by streamlining the underwriting process for small loans, which are often below $350,000. The platform's ability to utilize a scorecard methodology, similar to unsecured lending, enhances efficiency and speed, a crucial advantage in attracting small business borrowers.

Ready Capital has committed $100 million towards the advancement and integration of AI across its platform. The strategic intent behind this investment is to market iBusiness's tech stack as a third-party underwriting model for banks, which typically do not focus on smaller SBA loans. This initiative not only expands RC's revenue streams beyond direct lending but also positions iBusiness Funding for a potential "backdoor IPO via a tax-free spin-off to shareholders" once it achieves sufficient scale. This technological leadership contributes significantly to RC's competitive moat, driving operational efficiencies, expanding market reach, and potentially unlocking substantial shareholder value.

The broader industry backdrop for Ready Capital is characterized by a commercial real estate cycle believed to be "at or near the bottom," particularly in the core multifamily sector. Stabilization in rent growth and property prices is observed, driven by factors such as rate cuts, a nearly 50% reduction in multifamily starts, and strong occupant demand. This stabilization is expected to lead to firmness in rents as the oversupply from 2021-2023 works its way through the market in 2025-2026. This improving market sentiment, coupled with an influx of "opportunistic capital" from private equity targeting the multifamily sector, creates a favorable environment for Ready Capital's repositioning strategy.

The Balance Sheet Reset: Deleveraging and Reinvestment

In response to the challenging commercial real estate cycle, Ready Capital initiated aggressive actions in the fourth quarter of 2024 to reset its balance sheet and go-forward earnings profile. This included a substantial $284 million combined CECL (Current Expected Credit Loss) and valuation allowance, effectively marking 100% of its non-performing loans to current values. This "ring-fencing" action, while resulting in a 14% reduction in book value per share to $10.61, was designed to establish a "bottom" for book value and provide asset managers with greater flexibility for accelerated resolutions. Concurrently, the company reduced its dividend to $0.125 per share for the first quarter of 2025, a move aimed at aligning payouts with projected cash earnings and preserving book value for reinvestment.

Ready Capital has bifurcated its CRE portfolio into two distinct segments to enhance transparency and guide its asset management strategy. The Core Portfolio, valued at $5.4 billion as of Q2 2025, consists of legacy loans designated for a hold-to-maturity strategy. This segment exhibits strong credit metrics, with an 8.1% interest yield and a 6.1% cash yield in Q2 2025. Negative credit migration in this portfolio has been muted, with only 17 loans totaling $71 million transitioning to 60-day+ delinquency in Q2 2025. The Non-Core Portfolio, totaling $695 million as of Q2 2025, comprises lower-yielding assets targeted for accelerated liquidation. This segment had a significantly lower interest yield of 2.4% in Q2 2025.

The company's liquidation strategy has already yielded tangible results. A bulk sale of $494 million of legacy multifamily bridge assets, settling in Q3 2025, generated $85 million in net proceeds. This transaction strategically eliminated 100% of the 2021 vintage syndicated loans and is expected to provide an immediate $0.05 per share per quarter increase from reduced negative carry, with a further $0.02 per share from reinvestment. The cumulative loss from this transaction will flow through distributable earnings in Q3 2025, with no material impact on book value per share.

A notable asset within the non-core portfolio is the Portland, Oregon mixed-use asset (Ritz-Carlton Hotel, branded residences, Class A office, and retail), which Ready Capital took ownership of in July 2025. This asset incurred a negative carry of $5.3 million, or $0.03 per share, in Q2 2025. The strategy is to stabilize the asset in partnership with Lincoln Property Company and sequentially exit its components, with full condo sales expected to take 2-3 years.

In terms of liability management, Ready Capital collapsed two of its five outstanding CRE CLOs in Q2 2025, improving advance rates by 7% and generating $71 million in proceeds, alongside a nearly 100-basis-point improvement in financing costs. The company plans to re-enter the CRE origination market in Q3 2025, focusing on high-quality multifamily bridge loans underwritten at lower LTVs and healthy in-place debt yields, aiming for projected retained yields of 13% to 15%. This strategy is designed to rebuild the core portfolio and facilitate a return to the CLO market in early 2026. The non-core portfolio, reduced by an additional 52% to $333 million after the bulk sale, will continue to be liquidated to minimize financial drag.

Small Business Lending: A Differentiated Growth Engine

Ready Capital's Small Business Lending segment stands out as a robust and differentiated growth engine. In 2024, this segment achieved record originations of $1.2 billion, including $1.1 billion of SBA loans, $78 million of unsecured working capital loans, and $7 million of USDA production. This performance positioned Ready Capital as the number one non-bank and fourth overall SBA 7(a) lender in the country. The segment's contribution to the company's profitability is significant, representing only 8% of capital but contributing an outsized $0.08 per share, or 290 basis points, to ROE in Q4 2024.

The segment employs a dual SBA 7(a) strategy, targeting both large loans (up to $5 million) and small loans (below $350,000), with its FinTech iBusiness platform leading in the origination of small SBA 7(a) loans. This strategic mix has resulted in higher SBA guarantee percentages (averaging 81%) and attractive gain on sale premiums (averaging 11% in Q3 2024). In Q2 2025, gain on sale income, net of variable costs, increased by $2.5 million to $22.7 million, driven by $121.2 million of SBA 7(a) loan sales at 9.9% average premiums, $151 million of Freddie Mac loans at 265 basis points, and $41.9 million of USDA production at 9.7% average premiums.

Despite a Q2 2025 quarterly origination volume decrease to $216 million due to capital constraints awaiting SBA warehouse line approvals, the company's underlying capacity remains strong, capable of $1.5 billion to $2 billion annually. Ready Capital has secured approval for $75 million of additional SBA warehouse capacity, expected to fund over $400 million of 7(a) production. Furthermore, a $100 million USDA warehouse facility was closed, with another anticipated in Q3 2025, to ramp USDA volume to a $300 million annual target. The company's SBA credit quality remains strong, with a 12-month default rate of 3.2% (compared to an industry average of 3.4%) and a five-year charge-off rate that has declined for four consecutive quarters.

Financial Performance and Outlook

Ready Capital's recent financial performance reflects the ongoing balance sheet repositioning and the mixed macroeconomic environment. For Q2 2025, the company reported a GAAP loss from continuing operations of $(0.31) per common share and a distributable loss of $(0.14) per common share. Excluding realized losses on asset sales, the distributable loss was $(0.10) per common share. Net interest income increased to $17 million in Q2 2025, benefiting from a full quarter of interest income from the UDF IV transaction and a 5-basis-point reduction in borrowing costs, which averaged 6.8%. However, this was partially offset by non-accrual loans and decreased loan balances in the LMM Commercial Real Estate segment, where interest income decreased by $79.8 million year-over-year.

The Small Business Lending segment saw a slight year-over-year decrease in interest income of $1.6 million in Q2 2025, although this was partially offset by increased loan balances. The combined provision for loan loss and valuation allowance increased by $48.4 million in Q2 2025, primarily due to a $39.7 million valuation allowance related to the bulk loan sale and $7.8 million in specific reserves. Book value per share stood at $10.44 as of June 30, 2025, a $0.17 decline from March 31, 2025, with share repurchases offsetting $0.31 per share of this reduction.

Looking forward, management projects "modest earnings growth in the back half of 2025" relative to the first and second quarters. The company expects to maintain its current dividend level of $0.125 per share "until our earnings profile warrants an increase," assuming no significant deterioration in the macro environment. Management anticipates covering the dividend approximately 1.5 times over the full year 2025, with earnings ramping up sequentially. The path to a 10% stabilized core return by the end of 2025, with accretion in 2026, is supported by several initiatives:

• An immediate $0.05 per share per quarter increase from reduced negative carry post bulk sale, with a further $0.02 from reinvestment.
• A $0.01 per share increase from the payoff of a $75 million repo on CLO retained interest.
• A $0.02 per share contribution from the USDA platform ramping to $300 million annually.
• A $0.03 to $0.05 per share increase from SBA volume returning to Q4 2024 levels.
• These gains will be partially offset by a $0.03 to $0.05 per share impact from increased corporate debt refinancing costs.

Key risks include persistent macroeconomic headwinds, particularly elevated interest rates and global market volatility, which could impact credit performance and loan demand. The stabilization of the Portland mixed-use asset and the timely approval of SBA warehouse capacity are crucial for achieving guidance targets. The company is also managing ongoing litigation related to past mergers, which could introduce uncertainty.

Conclusion

Ready Capital Corporation is at a pivotal juncture, executing a multi-faceted strategic repositioning designed to enhance its financial profile and deliver improved shareholder returns. The core investment thesis hinges on the successful deleveraging of its distressed CRE assets and their strategic reinvestment into higher-yielding opportunities, while simultaneously leveraging its robust, capital-light Small Business Lending segment as a consistent growth engine. The company's technological advancements, particularly with Lendsey AI, provide a differentiated competitive edge in the nuanced SBA lending market, offering both operational efficiencies and potential for future value creation through strategic spin-offs.

While the recent financial results reflect the challenges of the current CRE cycle and the aggressive balance sheet reset, management's clear guidance and proactive measures outline a credible path to earnings recovery and sustained dividend coverage. The strategic segmentation of its CRE portfolio, coupled with disciplined liability management and a focus on high-quality originations, positions Ready Capital to capitalize on stabilizing multifamily market fundamentals. Investors should closely monitor the execution of non-core asset liquidations, the ramp-up of SBA and USDA lending volumes, and the stabilization of key assets like Portland, as these indicators will be critical in realizing the company's projected return to a 10% stabilized core ROE by year-end 2025 and beyond. Ready Capital's blend of disciplined asset management and innovative growth engines offers a compelling narrative for long-term value creation in a dynamic real estate finance landscape.