UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2022 annual meeting of stockholders are incorporated by reference into Part III of this annual report on Form 10-K.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this annual report on Form 10-K within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained therein. Forward-looking statements contained in this annual report reflect our current views about future events and are inherently subject to substantial risks and uncertainties, many of which are difficult to predict and beyond our control, that may cause our actual results to materially differ These forward-looking statements include information about possible or assumed future results of our operations, financial condition, liquidity, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may,” “potential” or other comparable terminology, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:
● | the severity and duration of the novel coronavirus (“COVID-19”) pandemic and its impact on our business and operations, financial condition, results of operations, liquidity and capital resources; |
● | the impact of the COVID-19 pandemic on our borrowers, the real estate industry and global markets; |
● | our investment objectives and business strategy; |
● | our ability to borrow funds or otherwise raise capital on favorable terms; |
● | our expected leverage; |
● | our expected investments; |
● | estimates or statements relating to, and our ability to make, future distributions; |
● | projected capital and operating expenditures; |
● | availability of qualified personnel; |
● | prepayment rates; |
● | projected default rates; |
● | increased rates of default and/or decreased recovery rates on our investments; |
● | changes in interest rates, interest rate spreads, the yield curve or prepayment rates; changes in prepayments of our assets; |
● | our ability to complete the contemplated acquisition of the Mosaic Funds (as defined herein) and achieve the expected synergies, cost savings and other benefits from the acquisition of the Mosaic Funds; |
● | risks associated with achieving expected synergies, cost savings and other benefits from acquisitions, including the contemplated acquisition of the Mosaic Funds, and our increased scale; |
● | risks related to integrating a construction lending platform into our existing operations and the origination and ownership of construction loans, which are subject to additional risks as compared to loans secured by existing structures or land, following the contemplated acquisition of the Mosaic Funds; |
● | market, industry and economic trends; |
● | our ability to compete in the marketplace; |
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● | the availability of attractive risk-adjusted investment opportunities in small to medium balance commercial loans (“SBC loans”), loans guaranteed by the U.S. Small Business Administration (the “SBA”) under its Section 7(a) loan program (the “SBA Section 7(a) Program”), mortgage backed securities (“MBS”), residential mortgage loans and other real estate-related investments that satisfy our investment objectives and strategies; |
● | general volatility of the capital markets; |
● | changes in our investment objectives and business strategy; |
● | the availability, terms and deployment of capital; |
● | the availability of suitable investment opportunities; |
● | recent market developments and actions taken and to be taken by the U.S. Government, the U.S. Department of the Treasury (“Treasury”) and the Board of Governors of the Federal Reserve System, the Federal Depositary Insurance Corporation, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac” and together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), Federal Housing Administration (“FHA”) Mortgagee, U.S. Department of Agriculture (“USDA”), U.S. Department of Veterans Affairs (“VA”) and the U.S. Securities and Exchange Commission (“SEC”); |
● | applicable regulatory changes; |
● | changes in our assets, interest rates or the general economy; |
● | mortgage loan modification programs and future legislative actions; |
● | our ability to maintain our qualification as a real estate investment trust (“REIT”) and limitations on our business as a result of our qualification as a REIT; |
● | our ability to maintain our exemption from qualification under the Investment Company Act of 1940, as amended (the “1940 Act”); |
● | factors described in this annual report on Form 10-K, including those set forth under the captions “Risk Factors” and “Business”; |
● | our dependence on our external advisor, Waterfall Asset Management, LLC (“Waterfall” or the “Manager”), and our ability to find a suitable replacement if we or Waterfall were to terminate the management agreement we have entered into with Waterfall (the “management agreement”); and |
● | the degree and nature of our competition, including competition for SBC loans, MBS, residential mortgage loans and other real estate-related investments that satisfy our investment objectives and strategies. |
Upon the occurrence of these or other factors, our business, financial condition, liquidity and consolidated results of operations may vary materially from those expressed in, or implied by, any such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this annual report on Form 10-K. We are not obligated, and do not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this annual report on Form 10-K.
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RISK FACTOR SUMMARY
We are subject to a variety of risks that are inherent to our business, including risks that may prevent us from achieving our business objectives or may adversely affect our financial condition, results of operations and liquidity. The following list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. The risk factor summary should be read together with the more detailed discussion of risks and uncertainties set forth in Item 1A. “Risk Factors” of this annual report on Form 10-K.
● | We depend on Waterfall and its key personnel for our success and we may not find a suitable replacement for Waterfall if the management agreement with Waterfall is terminated, or if key personnel leave the employment of Waterfall or otherwise become unavailable to us; |
● | There are various conflicts of interest in our relationship with Waterfall which could result in decisions that are not in the best interests of our stockholders; |
● | The termination of the management agreement may be difficult and require payment of a substantial termination fee or other amounts, including in the case of termination for unsatisfactory performance, which may adversely affect our inclination to end our relationship with Waterfall; |
● | The ongoing COVID-19 pandemic has caused severe disruptions in the U.S. and global economy and to our business, and may continue to have an adverse impact on our performance, financial condition and results of operations; |
● | The lack of liquidity of our assets may adversely affect our business, including our ability to value and sell our assets; |
● | We anticipate a significant portion of our investments will be in the form of SBC loans that are subject to risks, such as credit risk; |
● | Some of the mortgage loans we will originate or acquire are loans made to self-employed borrowers who have a higher risk of delinquency and default, which could have a material and adverse effect on our business, results of operations and financial condition; |
● | New entrants in the market for SBC loans could adversely impact our ability to acquire such loans at attractive prices and originate such loans at attractive risk-adjusted returns; |
● | We cannot predict the unintended consequences and market distortions that may stem from far-ranging interventions in the financial system and oversight of financial markets; |
● | Maintenance of our 1940 Act exception imposes limits on our operations; |
● | Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions and changes in such rules, accounting interpretations or our assumptions could adversely impact our ability to timely and accurately prepare our consolidated financial statements; |
● | Provisions for credit losses under the Current Expected Credit Loss (“CECL”) model are difficult to estimate; |
● | Our board of directors will not approve each investment and financing decision made by Waterfall unless required by our investment guidelines; |
● | We use leverage as part of our investment strategy, but we do not have a formal policy limiting the amount of debt we may incur, and our board of directors may change our leverage policy without stockholder consent; |
● | We may enter into hedging transactions that could expose us to contingent liabilities in the future and adversely impact our financial condition; |
● | Complying with REIT requirements may force us to liquidate or forego otherwise attractive investments, which could reduce returns on our assets and adversely affect returns to our stockholders; |
● | The percentage of our assets represented by taxable REIT subsidiaries (“TRSs”) and the amount of our income that we can receive in the form of TRS dividends and interest are subject to statutory limitations that could jeopardize our REIT qualification and could limit our ability to acquire or force us to liquidate otherwise attractive investments; and |
● | Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow. |
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PART I
Item 1. Business
In this Annual Report on Form 10-K, we refer to Ready Capital Corporation and its subsidiaries as “we,” “us,” “our,” or “our Company” unless we specifically state otherwise or the context indicates otherwise.
General
We are a multi-strategy real estate finance company that originates, acquires, finances, and services SBC loans, SBA loans, residential mortgage loans, and to a lesser extent, MBS collateralized primarily by SBC loans, or other real estate-related investments. Our loans range in original principal amounts generally 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 to asset classes and segments with the most attractive risk-adjusted returns. We report our activities in the following three operating segments:
● | SBC Lending and Acquisitions. We originate SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels through our wholly-owned subsidiary, ReadyCap Commercial, LLC (“ReadyCap Commercial”). These originated loans are generally held-for-investment or placed into securitization structures. As part of this segment, we originate and service multi-family loans under the Federal Home Loan Mortgage Corporation’s Small Balance Loan Program (“Freddie Mac” and the “Freddie Mac program”). These originated loans are held for sale, then sold to Freddie Mac. We provide construction and permanent financing for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds through Red Stone and its affiliates (“Red Stone”), a wholly owned subsidiary. |
In addition, we acquire small balance commercial loans as part of our business strategy. We hold performing SBC loans to term and seek to maximize the value of the non-performing SBC loans acquired by us through borrower-based resolution strategies. We typically acquire non-performing loans at a discount to their unpaid principal balance (“UPB”) when we believe that resolution of the loans will provide attractive risk-adjusted returns.
● | Small Business Lending. We acquire, originate and service owner-occupied loans guaranteed by the SBA under its SBA Section 7(a) Program through our wholly-owned subsidiary, ReadyCap Lending, LLC (“ReadyCap Lending”). We hold an SBA license as one of only 14 non-bank Small Business Lending Companies (“SBLCs”) and have been granted preferred lender status by the SBA. These originated loans are either held-for-investment, placed into securitization structures, or sold. We also acquire purchased future receivables through Knight Capital LLC (“Knight Capital”), which is a technology-driven platform that provides working capital to small and medium sized businesses across the United States. |
● | Residential Mortgage Banking. We operate our residential mortgage loan origination segment through our wholly-owned subsidiary, GMFS, LLC ("GMFS"). GMFS originates residential mortgage loans eligible to be purchased, guaranteed or insured by the Federal National Mortgage Association (“Fannie Mae”), Freddie Mac, Federal Housing Administration (“FHA”), U.S. Department of Agriculture (“USDA”) and U.S. Department of Veterans Affairs (“VA”) through retail, correspondent and broker channels. These originated loans are then sold to third parties, primarily agency lending programs. |
Prior to the fourth quarter of 2021, we reported our activities in the following four business segments: Acquisitions, SBC Originations, Small Business Lending and Residential Mortgage Banking. Our Chief Executive Officer, as our Chief Operating Decision Maker (“CODM”), realigned our business segments to incorporate results from our Acquisitions segment in our SBC Lending and Acquisitions segment. We believe this to be more closely aligned with the activities of and projections for our business models. We have recast prior period amounts and segment information to conform to this presentation.
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We are organized and conduct our operations to qualify as a REIT under the Internal Revenue Code of 1986, as amended (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 dividends equal to at least 90% of our net taxable income to stockholders. We are organized in a traditional umbrella partnership REIT (“UpREIT”) format pursuant to which we serve as the general partner of and conduct substantially all of our business through Sutherland Partners, LP (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.
Our Manager
We are externally managed and advised by Waterfall, an SEC registered investment adviser. Formed in 2005, Waterfall specializes in acquiring, managing, servicing and financing SBC and residential mortgage loans, as well as asset backed securities (“ABS”) and MBS. Waterfall has extensive experience in performing and non-performing loan acquisition, resolution and financing strategies. Waterfall’s investment committee is chaired by Thomas Capasse and Jack Ross, who serve as our Chief Executive Officer and President, respectively. Messrs. Capasse and Ross, who are co-founders of Waterfall, each have over 30 years of experience in managing and financing a range of financial assets, including having executed the first public securitization of SBC loans in 1993, through a variety of credit and interest rate environments. Messrs. Capasse and Ross have worked together in the same organization for more than 30 years. They are supported by a team of approximately 170 investment and other professionals with extensive experience in commercial mortgage credit underwriting, distressed asset acquisition and financing, SBC loan originations, commercial property valuation, capital deployment, financing strategies and legal and financial matters impacting our business.
We rely on Waterfall’s expertise to establish investment strategies and in identifying loan acquisitions and origination opportunities. Waterfall uses the data and analytics developed through its experience as an owner of SBC loans and in implementing loss mitigation actions to support our origination activities and to develop our loan underwriting standards. Waterfall makes decisions based on a variety of factors, including expected risk-adjusted returns, credit fundamentals, liquidity, availability of financing, borrowing costs and macroeconomic conditions, as well as maintaining our REIT qualification and our exclusion from registration as an investment company under the 1940 Act.
Our Investment Strategy and Market Opportunities Across Our Operating Segments
Our investment strategy is to opportunistically expand our market presence in our acquisition and origination platforms and to further grow our SBC securitization capabilities which serve as a source of attractively priced, match-term financing. Capitalizing on our experience in underwriting and managing commercial real estate loans, we have grown our SBC and SBA origination and acquisition capabilities and selectively complemented our SBC strategy with acquisitions of future receivables and residential agency mortgage originations. As such, we have become a full-service real estate finance platform and we believe that the breadth of our business allows us to adapt to market conditions and deploy capital in our asset classes with the most attractive risk-adjusted returns.
Our acquisition strategy complements our origination strategy by increasing our market intelligence in potential origination geographies, providing additional data to support our underwriting criteria and offering securitization market insight for various product offerings. The proprietary database on the causes of borrower default, loss severity, and market information that we developed from our SBC loan acquisition experience has served as the basis for the development of our SBC and SBA loan origination programs. Additionally, our origination strategy complements our acquisition strategy by providing additional captive refinancing options for our borrowers and further data to support our investment analysis while increasing our market presence with potential sellers of SBC assets.
The table below presents information with respect to our three business segments.
December 31, 2021 | |||||||
SBC Lending and Acquisitions | Small Business Lending | Residential Mortgage Banking | |||||
Coordinating Affiliate/ Manager | Waterfall, ReadyCap Commercial and Red Stone | ReadyCap Lending and Knight Capital | GMFS | ||||
Strategy | SBC loan originations and acquisitions | SBA loan originations, acquisitions and servicing | Residential mortgage originations and servicing | ||||
Gross Assets | $ | 7.1 billion | $ | 1.6 billion | $ | 482.2 million | |
% Equity Allocation | 89.0 | % | 6.8 | % | 4.2 | % | |
Personnel | 143 | 189 | 298 |
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The commercial mortgage market is largely bifurcated by loan size between “large balance” loans and “small balance” loans. Large balance commercial loans typically include those loans with original principal balances of at least $40 million and are primarily financed by insurance companies and commercial mortgage backed securities (“CMBS”) conduits. SBC loans typically include those loans with original principal amounts of between $500,000 and $40 million and are primarily financed by community and regional banks, specialty finance companies and loans guaranteed under the SBA loan programs.
SBC loans are used by small businesses to purchase real estate used in their operations or by investors seeking to acquire small multifamily, office, retail, mixed use or warehouse properties. SBC loans represent a special category of commercial mortgage loans, sharing both commercial and residential mortgage loan characteristics. SBC loans are typically secured by first mortgages on commercial properties or other business assets, but because SBC loans are often correlated to local housing markets and economic environments, aspects of residential mortgage credit analysis are utilized in the underwriting process. Most SBC loans are fully amortizing on a schedule of up to 30 years.
Our investment decisions with respect to allocation of capital are dependent on prevailing market conditions and may change over time in response to opportunities available in different economic and capital market environments. As a result, we cannot predict the percentage of our equity that will be invested in any particular asset or strategy at any given time.
Our Loan Portfolio
The table below presents a summary of the sourcing of our loan assets.
December 31, 2021 | |||||||||
(in thousands) | Segment | UPB | % of Total | Carrying | % of Total | ||||
Acquired loans | SBC Lending and Acquisitions | $ | 1,201,816 | 14.0 | % | $ | 1,196,809 | 14.1 | % |
Originated SBC loans | SBC Lending and Acquisitions | 1,087,239 | 12.7 | 1,096,165 | 12.9 | ||||
Originated Freddie Mac loans | SBC Lending and Acquisitions | 41,864 | 0.5 | 42,384 | 0.5 | ||||
Originated Transitional loans | SBC Lending and Acquisitions | 4,422,524 | 51.5 | 4,386,657 | 51.8 | ||||
Paycheck Protection Program loans | Small Business Lending | 931,009 | 10.9 | 870,352 | 10.3 | ||||
Acquired SBA 7(a) loans | Small Business Lending | 197,828 | 2.3 | 185,095 | 2.2 | ||||
Originated SBA 7(a) loans | Small Business Lending | 459,150 | 5.4 | 450,005 | 5.3 | ||||
Originated Residential Agency loans | Residential Mortgage Banking | 233,762 | 2.7 | 238,491 | 2.8 | ||||
Total | $ | 8,575,192 | 100.0 | % | $ | 8,465,958 | 100.0 | % |
In the table above,
● | The loan carrying value includes loan assets of consolidated variable interest entities (“VIEs”) and excludes both specific and general allowance for loan losses. |
● | Real estate, held for sale loans and mortgage servicing rights (“MSR”) are excluded. |
As noted above, prior to the fourth quarter of 2021, we reported our activities in the following four business segments: Acquisitions, SBC Originations, Small Business Lending and Residential Mortgage Banking. Our Chief Executive Officer, as our CODM, realigned our business segments to incorporate results from our Acquisitions segment in our SBC Lending and Acquisitions segment. As a result, we report our activities in the following three operating segments: (1) SBC Lending and Acquisitions, which covers our SBC loan origination and acquisition platforms, (2) Small Business Lending, which consists of our SBA loan acquisition, origination and servicing operations as well as our platform focused on the acquisition of future receivables through Knight Capital and (3) Residential Mortgage Banking, which covers our residential mortgage loan origination segment operated through GMFS. We believe this to be more closely aligned with the activities for and projections of our business models. We have recast prior period amounts and segment information to conform to this presentation.
SBC Lending and Acquisitions
As noted above, our SBC Lending and Acquisitions segment consists of our SBC loan origination and acquisition platforms.
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SBC Originations. We operate our SBC loan originations through ReadyCap Commercial. ReadyCap Commercial is a specialty-finance nationwide originator focused on originating commercial real estate mortgage loans through its agency multifamily and transitional loan programs. ReadyCap Commercial has been approved by Freddie Mac as one of 12 originators and servicers for multifamily loan products under the Freddie Mac program. ReadyCap Commercial employs approximately 105 professionals focused on originating and supporting the SBC loan origination business. We also offer construction and permanent financing for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds through Red Stone, which employs 23 professionals focused on originating and supporting the SBC loan origination business.
We originate SBC loans generally ranging in initial principal amount of between $500,000 and $40 million, and typically with an average duration of six years at origination. Our origination platform, which focuses on first mortgage loans, provides conventional SBC mortgage financing for stabilized and transitional SBC properties nationwide through the following programs:
● | Fixed mortgage loans. Loans for the acquisition or refinancing of stabilized properties secured by multifamily, office, retail, mixed use or warehouse properties. The loans are typically amortizing and have maturities of five to 20 years. |
● | Transitional loans. Loans for the acquisition of properties requiring more substantial expenditures for stabilization, secured by multifamily, office, retail, mixed use or warehouse properties. The loans are generally interest-only and have a typical initial maturity profile of two to four years. |
● | Freddie Mac loans. Origination of loans in initial principal amounts ranging from $1 million to $7.5 million secured by multifamily properties through the Freddie Mac program. We sell qualifying loans to Freddie Mac, which, in turn, sells such loans to securitization structures. |
● | Red Stone. Loans for developers/owners of multi-family affordable rental housing utilizing streamlined tax-exempt and taxable financing solutions. The loans are typically amortizing and have maturities of 15 years. |
The following table summarizes the loan features of ReadyCap Commercial’s product types.
Through December 31, 2021, we have originated approximately $11.7 billion in SBC loans since Ready Capital’s inception. The following chart summarizes our annual SBC loan originations since 2018.
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Originated SBC loans held in our portfolio had a UPB of $5.6 billion and carrying value of $5.5 billion as of December 31, 2021. Such loans, substantially all of which are performing loans, represented approximately 64.7% of the UPB and 65.6% of the carrying value of our total loan portfolio.
Waterfall’s extensive experience in securitization strategies for SBC loans dates to the first SBC ABS for performing loans and liquidating trusts for non-performing loans purchased from the Resolution Trust Corporation in 1993. We believe that in 2011, we were the first post-financial crisis issuer of SBC ABS and have since completed several SBC bond issuances backed by newly originated and acquired SBC and SBA 7(a) loan assets. We finance our SBC loans primarily through term-match securitizations.
The table below summarizes our originated SBC loan securitization activities.
December 31, 2021 | |||||||
(in millions) | Asset Class | Issuance | Bonds Issued | Weighted Average Debt Cost | Outstanding Balances | ||
RCMT 2014-1 | SBC Originated Conventional | September 2014 | $ | 181.7 | 3.2% | $ | 21.6 |
RCMT 2015-2 | SBC Originated Conventional | November 2015 | 218.8 | 4.0% | 46.1 | ||
FRESB 2016-SB11 | Originated Agency Multi-family | January 2016 | 110.0 | 2.8% | 27.4 | ||
FRESB 2016-SB18 | Originated Agency Multi-family | July 2016 | 118.0 | 2.2% | 20.0 | ||
RCMT 2016-3 | SBC Originated Conventional | November 2016 | 162.1 | 3.4% | 47.2 | ||
FRESB 2017-SB33 | Originated Agency Multi-family | June 2017 | 197.9 | 2.6% | 102.5 | ||
RCMF 2017-FL1 | SBC Originated Transitional | August 2017 | 198.8 | L + 139 bps | — | ||
FRESB 2018-SB45 | Originated Agency Multi-family | January 2018 | 362.0 | 2.8% | 238.5 | ||
RCMT 2018-4 | SBC Originated Conventional | March 2018 | 165.0 | 3.8% | 95.8 | ||
RCMF 2018-FL2 | SBC Originated Transitional | June 2018 | 217.1 | L + 121 bps | — | ||
FRESB 2018-SB52 | Originated Agency Multi-family | September 2018 | 505.0 | 2.9% | 399.5 | ||
FRESB 2018-SB56 | Originated Agency Multi-family | December 2018 | 507.3 | 3.6% | 374.2 | ||
RCMT 2019-5 | SBC Originated Conventional | January 2019 | 355.8 | 4.1% | 187.6 | ||
RCMF 2019-FL3 | SBC Originated Transitional | April 2019 | 320.2 | L + 133 bps | 145.9 | ||
RCMT 2019-6 | SBC Originated Conventional | November 2019 | 430.7 | 3.2% | 318.8 | ||
RCMF 2020-FL4 | SBC Originated Transitional | June 2020 | 405.3 | L + 290 bps | 385.2 | ||
KCMT 2020-S3 | SBC Originated Conventional | September 2020 | 263.2 | 5.3% | 256.8 | ||
RCMF 2021-FL5 | SBC Originated Transitional | March 2021 | 628.9 | L + 140 bps | 624.6 | ||
RCMF 2021-FL6 | SBC Originated Transitional | August 2021 | 652.5 | L + 120 bps | 652.5 | ||
RCMF 2021-FL7 | SBC Originated Transitional | November 2021 | 927.2 | L + 150 bps | 927.2 | ||
Total | $ | 6,927.5 | 2.8% | $ | 4,871.4 |
We believe that we have significant opportunity to originate SBC loans at attractive risk-adjusted returns compared to many banks that have restrictive credit guidelines for target assets. In addition, large banks are not focused on the SBC market and smaller banks only lend in specific geographies. We see an opportunity to earn an attractive risk spread premium by lending to borrowers that do not fit the credit guidelines of many banks. We believe that increased demand, coupled with the fragmentation of the SBC lending market, provides us with opportunities to originate loans to borrowers with strong credit profiles and real estate collateral that supports ultimate repayment of the loans.
We expect to continue to source SBC loan originations through the following loan origination channels:
● | Direct and indirect lending relationships. We generate loan origination leads directly through our relationships with commercial real estate brokers, bank loan officers and mortgage brokers that refer leads to our loan officers. To a lesser extent, we also source loan leads through commercial real estate realtors, trusted advisors such as financial planners, lawyers, and certified public accountants and through direct-to-the-borrower transactions. |
● | Other direct origination sources. From time to time, we may enter into strategic alliances and other referral programs with servicers, sub-servicers, strategic partners and vendors targeted at the refinancing of SBC loans. |
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SBC Acquisitions. Our SBC Lending and Acquisitions segment also includes our acquisition platform, representing our investments in acquired SBC loans. We hold SBC loans to term, and we seek to maximize the value of the non-performing SBC loans acquired by us through proprietary loan reperformance programs. Where this is not possible, such as in the case of many non-performing loans, we seek to effect property resolution through the use of borrower based resolution alternatives to foreclosure.
Waterfall specializes in acquiring SBC loans that are sold by banks, including as part of bank recapitalizations or mergers, and from other financial institutions such as thrifts and non-bank lenders. Other sources of SBC loans include special servicers of large balance SBC ABS and CMBS trusts, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for failed banks, servicers of non-performing SBA Section 7(a) Program loans, and Community Development Companies originating loans under the SBA 504 program, GSEs, and state economic development authorities. Over the last several years, our Manager has developed relationships with many of these entities, primarily banks and their advisors. In many cases, we are able to acquire SBC loans through negotiated transactions, at times partnering with acquiring banks or private equity firms in bank acquisitions and recapitalizations. We believe that Waterfall’s experience, reputation and ability to underwrite SBC loans make it an attractive buyer for this asset class, and that its network of relationships will continue to produce opportunities for it to acquire SBC loans on attractive terms.
Competition for SBC loan asset acquisitions has been limited due to the special servicing expertise required to manage SBC loan assets due to the small size of each loan, the uniqueness of the real properties that collateralize the loans, licensing requirements, the high volume of loans needed to build portfolios, and the need to utilize residential mortgage credit analysis in the underwriting process. These factors have limited institutional investor participation in SBC loan acquisitions, which has allowed us to acquire SBC loans with attractive risk-adjusted return profiles.
The table below presents information on our acquired loan portfolio by delinquency status.