Ready Capital's Dividend Sustainability: A Balancing Act Between Earnings and Liquidity

Ready Capital Corporation (RC) recently declared a dividend cut to $0.125 per share from $0.30 in Q1 2024, sparking questions about the sustainability of payouts amid shifting financial dynamics. While GAAP earnings surged to $0.47 per share, distributable earnings—a critical metric for dividends—turned negative at $(0.09). This article dissects the interplay between distributable earnings trends and balance sheet resilience to assess whether investors can rely on future dividends.

The Disconnect Between GAAP Earnings and Distributable Losses

RC's Q1 2025 results highlight a stark dichotomy: GAAP net income jumped to $81.97 million, driven by a $102.5 million bargain purchase gain from the United Development Funding IV acquisition and a $109.6 million loan loss recovery. However, distributable earnings—adjusted for non-cash items and realized losses—dipped into negative territory. Key adjustments included:
- Unrealized losses on mortgage servicing rights (MSRs) of $8.95 million.
- Valuation allowances on loans held for sale totaling $99.7 million.
- Realized losses on investments of $15.5 million.

This divergence underscores a critical point: dividends are paid from distributable earnings, not GAAP profits. The $(0.09) distributable loss in Q1 2025—versus $0.01 in Q1 2024—suggests the dividend cut was unavoidable. Investors must ask: Will distributable earnings recover, or is this a new normal?

Balance Sheet Resilience: Strengths and Vulnerabilities

RC's balance sheet offers both reassurance and red flags.

Liquidity and Debt Management

• Cash reserves: Increased to $205.9 million from $143.8 million, bolstering short-term flexibility.
• Debt refinancing: A $270 million private placement of 9.375% Senior Secured Notes due 2028 reduced reliance on short-term borrowings. Total secured borrowings rose to $2.71 billion, but leverage improved to 3.5x debt-to-equity, a manageable level.

Strategic Moves

• Acquisition of UDF IV: Expanded access to residential real estate developers, diversifying revenue streams.
• Stock repurchases: Bought back 3.4 million shares at $5.02 each, signaling confidence in valuation.

Risks

• Delinquency trends: 60+ day delinquencies rose by $117 million (to 4% of the portfolio), hinting at credit quality erosion.
• Interest rate exposure: A significant portion of debt is floating-rate, leaving margins vulnerable to rising rates.

Dividend Sustainability Outlook: Cautious Optimism

While distributable losses in Q1 2025 are troubling, several factors argue for cautious optimism:
1. SBL Segment Strength: Small Business Lending originations hit $387 million, with $343 million in SBA 7(a) loans—a stable, government-backed niche.
2. Balance Sheet Flexibility: The $1 billion in uncovered assets and strong cash reserves provide a buffer against shocks.
3. Distributable Earnings Drivers:
- If unrealized losses on MSRs reverse (as rates stabilize), distributable earnings could rebound.
- The SBL segment's consistent performance may offset volatility in commercial real estate.

However, risks loom large:
- Macroeconomic headwinds: RC's management cited “declining consumer confidence” and “tariff impacts” as threats to originations.
- Debt maturity profile: $2.71 billion in secured borrowings require careful management as interest rates remain elevated.

Investment Thesis and Recommendations

Buy the dip? Or stay away?
- Hold for now: While the dividend cut was necessary, the balance sheet's liquidity and SBL segment's resilience suggest stability. Monitor Q2 distributable earnings for signs of recovery.
- Avoid if earnings miss expectations: Persistent distributable losses or rising delinquencies could force further dividend reductions.

Actionable advice:
1. Focus on distributable earnings trends: If they turn positive in 2025H2, consider adding a small position.
2. Watch leverage: A debt-to-equity ratio above 4x would raise red flags.
3. Consider sector alternatives: Investors seeking steady dividends might prefer peers with clearer distributable earnings visibility, such as New Residential Investment (NRZ) or Two Harbors (TWO).

Conclusion

Ready Capital's dividend sustainability hinges on whether distributable losses are a temporary blip or a structural issue. While its balance sheet remains resilient and strategic moves like the UDF acquisition offer growth avenues, the path to recovery is fraught with macroeconomic and credit risks. For now, investors should proceed with caution—holding shares if liquidity remains strong, but keeping a close eye on distributable earnings. As the old adage goes, “cash is king,” and RC's near-term survival depends on turning that cash into sustainable profits.

Stay vigilant—and invest wisely.