Ready Capital Corp (RC) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to

provide a reader of our consolidated 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

•Liquidity and Capital Resources

•Contractual Obligations and Off-Balance Sheet Arrangements

•Critical Accounting Estimates

The following discussion should be read in conjunction with our consolidated financial statements and accompanying

Notes included in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K. The discussion and

analysis of our financial condition and results of operations is for the year ended December 31, 2024 compared with the

year ended December 31, 2023. Discussions of our financial condition and results of operations for the year ended

December 31, 2023 compared with the year ended December 31, 2022 that have been omitted under this item can be

found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

included in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities

and Exchange Commission on February 28, 2024.

In addition to historical data, this discussion contains forward-looking statements about our business, operations and

financial performance based on current expectations that involve risks, uncertainties and assumptions. See “Forward-

Looking Statements” and “Critical Accounting Estimates” in this 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 Form 10-K.

Our actual results may differ materially from those in this discussion as a result of various factors, including but not

limited to those discussed in Part, 1. Item 1A, “Risk Factors” in this Form 10-K.

Overview

Our Business

We are a multi-strategy real estate finance company that originates, acquires, finances, and services LMM loans, SBA

loans, construction loans, USDA loans and, to a lesser extent, MBS collateralized primarily by LMM 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.

Our Residential Mortgage Banking segment meets the criteria to be classified as held for sale and presented as a

discontinued operation. For all periods presented, the operating results for these operations have been removed from

continuing operations. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted. We

report our activities in the following two operating segments:

•LMM Commercial Real Estate. We originate LMM loans across the full life-cycle of an LMM property

including construction, bridge, stabilized and agency loan origination channels through our subsidiary,

ReadyCap Commercial. These originated loans are generally held-for-investment or placed into

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securitization structures. As part of this segment, we originate and service multi-family loan products under

the Freddie Mac SBL program. These originated loans are held for sale, and subsequently 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, a subsidiary. In addition, we acquire

LMM loans as part of our business strategy. We hold performing LMM loans to term and seek to maximize

the value of the non-performing LMM loans acquired by us through borrower-based resolution strategies.

We typically acquire non-performing loans at a discount to their unpaid principal balance 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 the SBA Section 7(a) Program through our subsidiary, ReadyCap Lending. We hold an SBA license

as one of only 20 non-bank Small Business Lending Companies and have been granted preferred lender

status by the SBA. These originated loans are either held-for-investment, placed into securitization

structures, or sold. In addition, we acquire, originate and service USDA loans through our subsidiary,

Madison One, as well as originate and service small business loans through our subsidiary iBusiness

Funding LLC.

We are organized and conduct our operations to qualify as a REIT under the Code. To qualify as a REIT, we are required

to annually distribute substantially all of our net taxable income, excluding capital gain, to stockholders. To the extent

that we do not distribute all of our net capital gain, or distribute at least 90%, but less than 100%, of our REIT taxable

income, as adjusted, we will be required to pay U.S. federal corporate income tax on the undistributed income. 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.

Acquisitions

United Development Funding IV. On November 29, 2024, the Company entered into a definitive merger agreement

with UDF IV, a real estate investment trust providing capital solutions to residential real estate developers and regional

homebuilders. Upon completion of the merger, the Company is expected to have a pro forma equity capital base in

excess of $2.2 billion. Under the terms of the merger agreement, UDF IV will be permitted to distribute the Pre-Closing

Distribution, representing value distributed by UDF IV to its shareholders of up to $2.44 per share. Following such

distribution, as part of the merger consideration, each UDF IV share will then be converted into a number of shares of

Ready Capital common stock equal to the Exchange Ratio, with UDF IV shareholders receiving a total of approximately

12.8 million shares of Ready Capital common stock. The Exchange Ratio was negotiated to reflect an adjustment for the

expected Pre-Closing Distribution, as well as other valuation adjustments. Based on Ready Capital’s closing share price

on November 29, 2024, the implied value of the Ready Capital shares expected to be issued in connection with this

closing is approximately $94 million or $3.07 per UDF IV share. At closing, UDF IV shareholders are expected to own

approximately 7% of Ready Capital’s outstanding shares. In addition, as part of the merger consideration, UDF IV

shareholders will be entitled to receive a number of CVRs equal to the Exchange Ratio per UDF IV share, representing

the potential right to receive additional stock consideration after closing. The transaction is expected to close in the first

half of 2025, subject to the approval of UDF IV shareholders and other customary closing conditions.

Funding Circle. On July 1, 2024, the Company acquired Funding Circle through its subsidiary, iBusiness Funding LLC,

for approximately $41.2 million in cash plus the assumption of certain liabilities (the “Funding Circle Acquisition”).

Funding Circle is an online lending platform that originates and services small business loans. The Funding Circle

Acquisition integrates Funding Circle’s loan origination servicing platform with the Company’s Lending as a Service

("LaaS") and LenderAI product offerings. Refer to Notes 1 and 5, included in Part II, Item 8, “Financial Statements and

Supplementary Data,” of this Form 10-K, for more information about the Funding Circle Acquisition and the assets

acquired and liabilities assumed as a result of the Funding Circle Acquisition.

Madison One. On June 5, 2024, the Company acquired Madison One, a leading originator and servicer of USDA and

SBA guaranteed loan products, for an initial purchase price of approximately $32.9 million paid in cash (the “Madison

One Acquisition”). Approximately $3.6 million of the initial purchase price was paid as bonuses to certain key Madison

One personnel in cash. Additional purchase price payments, including cash payments and the issuance of shares of

common stock of the Company, may be made over the four years following the acquisition date contingent upon the

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Madison One business achieving certain performance metrics. Part of the Company’s strategy in acquiring Madison One

included 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. Refer to Notes 1 and 5, included in Part II,

Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K, for more information about the Madison

One Acquisition and the assets acquired and liabilities assumed as a result of the Madison One Acquisition.

Broadmark. On May 31, 2023, the Company, Broadmark, a Maryland corporation, and RCC Merger Sub, LLC, a

Delaware limited liability company and a wholly owned subsidiary of the operating partnership (“RCC Merger Sub”),

completed a merger (the “Broadmark Merger”) in which Broadmark merged with and into RCC Merger Sub, with RCC

Merger Sub remaining as a wholly owned subsidiary of the operating partnership. As a result of the Broadmark Merger,

the number of directors on the Company's board of directors (the “Board”) increased by three members, from nine to

twelve, with the three additional directors each having served on the board of directors of Broadmark immediately prior

to the effective time of the Broadmark Merger. The Broadmark Merger further diversified our business by expanding on

our residential and commercial construction lending platforms. Refer to Notes 1 and 5, included in Part II, Item 8,

“Financial Statements and Supplementary Data,” of this Form 10-K, for more information about the Broadmark Merger

and the assets acquired and liabilities assumed as a result of the Broadmark Merger.

For additional information on our business, refer to Part I, Item 1, “Business” in this Form 10-K.

Factors Impacting Operating Results

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 and fair value of our assets and the supply of, and demand for, LMM loans,

SBA loans, USDA 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, changes in

credit spreads, 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, 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 and floating rate

mortgages 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. Fixed rate mortgage 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 fixed rate mortgages. As of December 31, 2024, all fixed rate loans are match funded in securitization.

Floating rate mortgage loans generally have an adjustable interest rate equal to the sum of a fixed spread plus an index

rate, such as the SOFR, which typically resets monthly. As of December 31, 2024, approximately 84% of the loans in

our portfolio were floating rate mortgages, and 16% were fixed rate mortgages, based on UPB.

Current market conditions. During the fourth quarter, macroeconomic concerns persisted including uncertainty about the

commercial real estate sector, inflationary pressures, elevated interest rates, and geopolitical tensions. In an effort to ease

borrowing costs and restore price stability, there has been a shift towards a less aggressive monetary policy by the U.S.

Federal Reserve. Although the full impact of these changes remains uncertain and difficult to predict, concerns and

uncertainties about the economic outlook may adversely impact our financial condition, results of operations and cash

flows.

Results of Operations

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Key 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, return on equity, 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. Refer to “—Non-

GAAP Financial Measures” below for a reconciliation of net income to distributable earnings.

The table below sets forth certain information on our operating results.

(1)Dividend yield is based on the respective period end closing share price.

Our Loan Pipeline

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 deposit.

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 our investment portfolio originations (based on fully committed amounts).

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The table below presents information on our origination pipeline opportunities (based on fully committed amounts).

(1)Includes 2025 fundings

Balance Sheet Analysis and Metrics

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As of December 31, 2024, total assets in our consolidated balance sheet were $10.1 billion, a decrease of $2.3 billion

from December 31, 2023, primarily reflecting a decrease in Assets of consolidated VIEs and Loans, net. Assets of

consolidated VIEs decreased $1.7 billion, due to paydowns on securitized loans. Loans, net decreased $642.0 million,

primarily due to an increase in CECL reserves and loans transferred to Loans, held for sale.

As of December 31, 2024, total liabilities in our consolidated balance sheet were $8.2 billion, a decrease of $1.6 billion

from December 31, 2023, primarily reflecting a decrease in Securitized debt obligations of consolidated VIEs, net.

Securitized debt obligations of consolidated VIEs, net decreased $1.5 billion due to paydowns on securitized loans.

As of December 31, 2024, total stockholders’ equity was $1.9 billion, a decrease of $702.7 million from December 31,

2023, primarily due to net losses, dividends paid and common stock repurchased through the Company’s share

repurchase program.

Selected Balance Sheet Information by Business Segment. The table below presents certain selected balance sheet data

by business segments, with the remaining amounts reflected in Corporate –Other.

In the table above,

•Loans, net includes assets of consolidated VIEs.

•Loans, held for sale includes assets of consolidated VIEs, net of valuation allowance.

•Real estate owned, held for sale includes assets of consolidated VIEs.

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Statement of Operations Analysis and Metrics

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Results of Operations – Supplemental Information. Realized and unrealized gains (losses) on financial instruments are

recorded in the consolidated statements of operations and classified based on the nature of the underlying asset or

liability.

The table below presents the components of realized and unrealized gains (losses) on financial instruments.

LMM Commercial Real Estate Segment Results.

YTD 2024 versus YTD 2023. Interest income of $766.4 million represented a decrease of $80.9 million, primarily due to

decreased loan balances, partially offset by increases in interest rates. Interest expense of $598.8 million represented a

decrease of $51.8 million, driven by decreased debt balances, partially offset by increases in interest rates. Provision for

loan losses of $283.8 million represented an increase of $282.4 million, primarily due to an increase in CECL reserves,

partially offset by loans transferred to Loans, held for sale in the first half of 2024. Non-interest loss of $239.0 million

represented an increase of $324.9 million, primarily due to net realized losses on financial instruments and real estate

owned and the valuation allowance related to the transfer of Loans, net to Loans, held for sale in the first half of 2024.

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Non-interest expense of $148.2 million represented an increase of $44.5 million, due to increases in charge-offs of real

estate acquired in settlement of loans and loan servicing expenses, partially offset by a decrease in employee

compensation and benefits.

Small Business Lending Segment Results.

YTD 2024 versus YTD 2023. Interest income of $130.6 million represented an increase of $32.1 million, primarily due

to increases in interest rates and increased loan balances. Interest expense of $97.6 million represented an increase of

$31.8 million, driven by increases in interest rates and increased debt balances. Provision for loan losses of $9.0 million

represented an increase of $3.1 million, due to changes in the forecasted macroeconomic inputs for reserve modeling,

partially offset by a decrease in specific loan reserves. Non-interest income of $118.6 million represented an increase of

$6.5 million, primarily due to decreases in ERC income, partially offset by increases in gains on sale of agency loans,

net. Non-interest expense of $96.9 million represented an increase of $8.6 million, primarily due to decreases in

professional fees related to ERC activities.

Unallocated- Corporate.

YTD 2024 versus YTD 2023. Non-interest income of $18.6 million represented a decrease of $191.8 million, primarily

due to a gain on bargain purchase recognized from the Broadmark Merger in the prior year period. Non-interest expense

of $77.4 million represented a decrease of $2.7 million, primarily due to transaction related expenses for the Broadmark

Merger in the prior year period.

Non-GAAP financial measures

We believe that providing investors with distributable earnings, formerly referred to as core earnings, gives investors

greater transparency into the information used by management in our financial and operational decision-making,

including the determination of dividends.

We calculate distributable earnings as GAAP net income (loss) excluding the following:

i)any unrealized gains or losses on certain MBS not retained by us as part of our loan origination businesses

ii)any realized gains or losses on sales of certain MBS

iii)any unrealized gains or losses on Residential MSRs from discontinued operations

iv)any unrealized change in current expected credit loss reserve and valuation allowances

v)any unrealized gains or losses on de-designated cash flow hedges

vi)any unrealized gains or losses on foreign exchange hedges

vii)any unrealized gains or losses on certain unconsolidated joint ventures

viii)any non-cash compensation expense related to stock-based incentive plan

ix)any unrealized gains or losses on preferred equity, at fair value

x)one-time non-recurring gains or losses, such as gains or losses on discontinued operations, bargain

purchase gains, or merger related expenses

In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains and

losses on MBS acquired by us in the secondary market but is not adjusted to exclude unrealized gains and losses on

MBS retained by us as part of our loan origination businesses, where we transfer originated loans into an MBS

securitization and retain an interest in the securitization. In calculating distributable earnings, we do not adjust net

income (in accordance with GAAP) to take into account unrealized gains and losses on MBS retained by us as part of

our loan origination businesses because we consider the unrealized gains and losses that are generated in the loan

origination and securitization process to be a fundamental part of this business and an indicator of the ongoing

performance and credit quality of our historical loan originations. In calculating distributable earnings, net income (in

accordance with GAAP) is adjusted to exclude realized gains and losses on certain MBS securities due to a variety of

reasons which may include collateral type, duration, and size.

In addition, in calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude

unrealized gains or losses on residential MSRs, held at fair value from discontinued operations. Servicing rights relating

to our small business commercial business are accounted for under ASC 860, Transfer and Servicing. In calculating

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distributable earnings, we do not exclude realized gains or losses on commercial MSRs, as servicing income is a

fundamental part of our business and an indicator of the ongoing performance.

Furthermore, we believe it is useful to present distributable earnings before realized losses on certain investments, such

as charge-offs and losses realized on sales of real estate owned assets and LMM loans, to reflect our direct operating

results. We utilize distributable earnings before realized losses as an additional performance metric to consider when

assessing our ability to declare and pay dividends. Distributable earnings and distributable earnings before realized

losses are non-U.S. GAAP financial measures and because these non-U.S. GAAP measures are incomplete measures of

our financial performance and involve differences from net income computed in accordance with U.S. GAAP, they

should be considered along with, but not as alternatives to, our net income as measures of our financial performance. In

addition, because not all companies use identical calculations, our presentations of distributable earnings and

distributable earnings before realized losses may not be comparable to other similarly-titled measures of other

companies.

To qualify as a REIT, we must distribute to our stockholders each calendar year dividends equal to at least 90% of our

REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for

dividends paid and excluding net capital gain. There are certain items, including net income generated from the creation

of MSRs, that are included in distributable earnings but are not included in the calculation of the current year’s taxable

income. These differences may result in certain items that are recognized in the current period’s calculation of

distributable earnings not being included in taxable income, and thus not subject to the REIT dividend distribution

requirement, until future years.

The table below presents a reconciliation of net income to distributable earnings before realized losses and distributable

earnings.

Q4 2024 versus Q4 2023. Consolidated net loss of $314.8 million for the fourth quarter of 2024 represented a decrease

of $325.6 million from the fourth quarter of 2023, primarily due to an increase in provision for loan losses and net

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realized losses on financial instruments and real estate owned, and a decrease to other income, partially offset by a

decrease to the valuation allowance. Consolidated distributable earnings before realized losses of $44.5 million for the

fourth quarter of 2024 represented a decrease of $4.0 million from the fourth quarter of 2023. The increase in the

distributable earnings reconciling items is primarily due to an increase in provision for loan losses and realized losses on

sale of investments, partially offset by a decrease to the valuation allowance. Consolidated distributable losses of $0.3

million for the fourth quarter of 2024 represented a decrease of $48.3 million from the fourth quarter of 2023 due to

certain charge-offs and losses realized on sales of real estate owned assets and LMM loans.

YTD 2024 versus YTD 2023. Consolidated net loss of $430.4 million for the year ended December 31, 2024 represented

a decrease of $778.8 million from the year ended December 31, 2023, primarily due to a gain on bargain purchase

recognized from the Broadmark Merger, net realized losses on financial instruments and real estate owned, a valuation

allowance related to the transfer of Loans, net to Loans, held for sale and an increase in provision for loan losses.

Consolidated distributable earnings before realized losses of $181.9 million for the year ended December 31, 2024

represented a decrease of $8.2 million from the year ended December 31, 2023. The increase in the distributable earnings

reconciling items is primarily due to a gain on bargain purchase recognized from the Broadmark Merger in the prior year

period, realized losses on sale of investments, a valuation allowance related to the transfer of Loans, net to Loans, held

for sale and an increase in provision for loan losses. Consolidated distributable earnings of $28.4 million for the year

ended December 31, 2024 represented a decrease of $161.8 million from the year ended December 31, 2023 due to

certain charge-offs and losses realized on sales of real estate owned assets and LMM loans.

Incentive distribution payable to our Manager

Under the partnership agreement of our operating partnership, our Manager, the holder of the Class A special unit in our

operating partnership, is entitled to receive an incentive distribution, distributed quarterly in arrears in an amount, not

less than zero, equal to the difference between (i) the product of (A) 15% and (B) the difference between (x) IFCE (as

described below) of our operating partnership, on a rolling four-quarter basis and before the incentive distribution for the

current quarter, and (y) the product of (1) the weighted average of the issue price per share of common stock or operating

partnership unit (“OP unit”) (without double counting) in all of our offerings multiplied by the weighted average number

of shares of common stock outstanding (including any restricted shares of common stock and any other shares of

common stock underlying awards granted under our 2013 Equity Incentive Plan, our 2023 Equity Incentive Plan and the

Broadmark Equity Plan) and OP units (without double counting) in such quarter and (2) 8%, and (ii) the sum of any

incentive distribution paid to our Manager with respect to the first three quarters of such previous four quarters;

provided, however, that no incentive distribution is payable with respect to any calendar quarter unless cumulative IFCE

is greater than zero for the most recently completed 12 calendar quarters.

The incentive distribution shall be calculated within 30 days after the end of each quarter and such calculation shall

promptly be delivered to our Company. We are obligated to pay the incentive distribution 50% in cash and 50% in either

common stock or OP units, as determined in our discretion, within five business days after delivery to our Company of

the written statement from the holder of the Class A special unit setting forth the computation of the incentive

distribution for such quarter. Subject to certain exceptions, our Manager may not sell or otherwise dispose of any portion

of the incentive distribution issued to it in common stock or OP units until after the three-year anniversary of the date

that such shares of common stock or OP units were issued to our Manager. The price of shares of our common stock for

purposes of determining the number of shares payable as part of the incentive distribution is the closing price of such

shares on the last trading day prior to the approval by our Board of the incentive distribution.

For purposes of determining the incentive distribution payable to our Manager, incentive fee core earnings (“IFCE”) is

defined under the partnership agreement of the operating partnership as GAAP net income (loss) of the operating

partnership excluding non-cash equity compensation expense, the expenses incurred in connection with the operating

partnership's formation or continuation, the incentive distribution, real estate depreciation and amortization (to the extent

that we forecloses on any properties underlying our assets) and any unrealized gains, losses, or other non-cash items

recorded in the period, regardless of whether such items are included in other comprehensive income or loss, or in net

income. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-

cash charges after discussions between our Manager and our independent directors and after approval by a majority of

the independent directors.

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Liquidity and Capital Resources

Liquidity is a measure of our ability to turn non-cash assets into cash and to meet potential cash requirements. We use

significant cash to purchase LMM loans and other target assets, originate new LMM loans, pay dividends, repay

principal and interest on our borrowings, fund our operations and meet other general business needs. Certain of our loans

pay PIK interest rather than cash interest payments and from time to time, we may grant concessions to borrowers

experiencing significant financial difficulties in the form of modified terms such as interest rate reductions and other

terms described elsewhere in this Form 10-K. These factors may increase our reliance on our primary sources of

liquidity, including our existing cash balances, borrowings, including securitizations, re-securitizations, repurchase

agreements, warehouse facilities, bank credit facilities and other financing agreements (including term loans and

revolving facilities), the net proceeds of offerings of equity and debt securities, including our senior secured notes,

corporate debt, and net cash provided by operating activities.

We are continuing to monitor the impact of shifts in interest rates, credit spreads and inflation on the Company, the

borrowers underlying our real estate-related assets, the tenants in the properties we own, our financing sources, and the

economy as a whole. Because the severity, magnitude and duration of these economic events remain uncertain, rapidly

changing and difficult to predict, the impact on our operations and liquidity also remains uncertain and difficult to

predict.

Cash flow

Year Ended December 31, 2024. Cash and cash equivalents as of December 31, 2024, decreased by $79.7 million to

$182.8 million from December 31, 2023, primarily due to net cash used for financing activities, partially offset by net

cash provided by investing and operating activities. The net cash used for financing activities primarily reflected

repayments of securitized debt obligations of consolidated VIEs, dividend payments and repayments of secured

borrowings. The net cash provided by investing activities primarily reflected proceeds from disposition and principal

payments of loans, partially offset by net cash used for loan originations. The net cash provided by operating activities

reflected sales on loans, held for sale and an increase in the provision for loan losses, partially offset by an increase in

operating assets and net loss from continuing operations.

Year Ended December 31, 2023. Cash and cash equivalents as of December 31, 2023, decreased by $11.1 million to

$262.5 million from December 31, 2022, primarily due to net cash used for financing activities, partially offset by net

cash provided by investing and operating activities. The net cash used for financing activities primarily reflected the

repayments of secured borrowings, Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings and the

convertible note and dividend payments, partially offset by proceeds from secured borrowings and net proceeds from the

issuance of securitized debt obligations of consolidated VIEs. The net cash provided by investing activities primarily

reflected proceeds from dispositions and paydowns, partially offset by loan originations. The net cash provided by

operating activities primarily reflected net income, partially offset by a bargain purchase gain in connection with the

Broadmark Merger.

Financing Strategy and Leverage

In addition to raising capital through offerings of our public equity and debt securities, we finance our investment

portfolio through securitization and secured borrowings. We generally seek to match-fund our investments to minimize

the differences in the terms of our investments and our liabilities. Our secured borrowings have various recourse levels

including full recourse, partial recourse and non-recourse, as well as varied mark-to-market provisions including full

mark-to-market, credit mark only and non-mark-to-market. Securitizations allow us to match fund loans pledged as

collateral on a long-term, non-recourse basis. Securitization structures typically consist of trusts with principal and

interest collections allocated to senior debt and losses on liquidated loans to equity and subordinate tranches, and provide

debt equal to 50% to 90% of the cost basis of the assets.

We also finance originated SBL with secured borrowings until the loans are sold, generally within 30 days.

As of December 31, 2024, we had a total leverage ratio of 3.8x and recourse leverage ratio of 1.3x. Our operating

segments have different levels of recourse debt according to the differentiated nature of each segment. Our LMM

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Commercial Real Estate and Small Business Lending segments have recourse leverage ratios of 0.4x and 0.1x,

respectively. The remaining recourse leverage ratio is from our corporate debt offerings.

Secured Borrowings

Credit Facilities and Other Financing Agreements. We utilize credit facilities and other financing arrangements to

finance our business. The financings are collateralized by the underlying mortgages, assets, related documents, and

instruments, and typically contain index-based financing rate and terms, haircut and collateral posting provisions which

depend on the types of collateral and the counterparties involved. These agreements often contain customary negative

covenants and financial covenants, including maintenance of minimum liquidity, minimum tangible net worth,

maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions,

transactions with affiliates and maintenance of positive net income.

The table below presents certain characteristics of our credit facilities and other financing arrangements.

(1)Represents the total number of facility lenders.

(2)Current maturity does not reflect extension options available beyond original commitment terms.

(3)Asset class pricing is determined using an index rate plus a weighted average spread.

(4)Non-USD denominated credit facilities have been converted into USD for purposes of this disclosure.

Repurchase Agreements. Under the loan repurchase facilities and securities repurchase agreements, we may be required

to pledge additional assets to our counterparties in the event that the estimated fair value of the existing pledged

collateral under such agreements declines and such lenders demand additional collateral, which may take the form of

additional assets or cash. Generally, the loan repurchase facilities and securities repurchase agreements contain a SOFR-

based financing rate, term and haircuts depending on the types of collateral and the counterparties involved. The loan

repurchase facilities also include financial maintenance covenants.

If the estimated fair values of the assets increase due to changes in market interest rates or other market factors, lenders

may release collateral back to us. Margin calls may result from a decline in the value of the investments securing the

loan repurchase facilities and securities repurchase agreements, prepayments on the loans securing such investments and

from changes in the estimated fair value of such investments generally due to principal reduction of such investments

from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties

also may choose to increase haircuts based on credit evaluations of our Company and/or the performance of the assets in

question. Historically, disruptions in the financial and credit markets have resulted in increased volatility in these levels,

and this volatility could persist as market conditions continue to change. Should prepayment speeds on the mortgages

underlying our investments or market interest rates suddenly increase, margin calls on the loan repurchase facilities and

securities repurchase agreements could result, causing an adverse change in our liquidity position. To date, we have

satisfied all of our margin calls and have never sold assets in response to any margin call under these borrowings.

Our borrowings under repurchase agreements are renewable at the discretion of our lenders and, as such, our ability to

roll-over such borrowings are not guaranteed. The terms of the repurchase transaction borrowings under our repurchase

agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities

Industry and Financial Markets Association, as to repayment, margin requirements and the segregation of all assets we

have initially sold under the repurchase transaction. In addition, each lender typically requires that we include

supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and

conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts and

purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be

litigated in a particular jurisdiction, and cross default and setoff provisions.

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We maintain certain assets, which, from time to time, may include cash, unpledged LMM loans, LMM ABS and short-

term investments (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and

collateral in excess of margin requirements held by our counterparties, or collectively, the “Cushion”, to meet routine

margin calls and protect against unforeseen reductions in our borrowing capabilities. Our ability to meet future margin

calls will be impacted by the Cushion, which varies based on the fair value of our investments, our cash position and

margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities

and is managed based on our anticipated cash needs.

The table below presents certain characteristics of our repurchase agreements.

(1)Represents the total number of facility lenders.

(2)Current maturity does not reflect extension options available beyond original commitment terms.

(3)Asset class pricing is determined using an index rate plus a weighted average spread.

(4)Non-USD denominated repurchase agreements have been converted into USD for purposes of this disclosure.

Collateralized borrowings under repurchase agreements

The table below presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end

of each quarter, the average amount of collateralized borrowings outstanding under repurchase agreements during the

quarter and the highest balance of any month end during the quarter.

Year Ended December 31, 2024. The net decrease in the outstanding balances during 2024 was primarily due to the sale

of warehouse loans, partially offset by increased borrowings to fund origination volumes and the collapse of RCMT

2015-2.

Year Ended December 31, 2023. The net decrease in the outstanding balances during 2023 was primarily due to the

closings of RCMF 2023-FL11 and RCMF 2023-FL12, partially offset by the collapse of RCMF 2019-FL3 and RCMF

2020-FL4.

Paycheck Protection Program Liquidity Facility borrowings. The Company uses the PPPLF from the Federal Reserve

to finance PPP loans. The program charges an interest rate of 0.35%. As of December 31, 2024, we had approximately

$20.9 million outstanding under this credit facility.

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Senior Secured Notes and Corporate Debt, Net

The table below presents information about senior secured notes and corporate debt issued through public and private

transactions.

(1)Interest on the senior secured notes is payable semiannually on April 20 and October 20 of each year.

(2)Interest on the term loan is payable quarterly on January 12, April 12, July 12 and October 12 of each year.

(3)Interest on the corporate debt is payable semiannually on June 30 and December 30 of each year.

(4)Interest on the corporate debt is payable quarterly on January 30, April 30, July 30, and October 30 of each year.

(5)Interest on the corporate debt is payable semiannually on April 30 and October 30 of each year.

(6)Interest on the corporate debt is payable semiannually on January 31 and July 31 of each year.

(7)Interest on the corporate debt is payable semiannually on May 15 and November 15 of each year; assumed as part of the Broadmark Merger.

(8)Interest on the corporate debt is payable quarterly on March 15, June 15, September 15, and December 15 of each year.

(9)Interest on the Junior subordinated notes I-A is payable quarterly on March 30, June 30, September 30, and December 30 of each year.

(10) Interest on the Junior subordinated notes I-B is payable quarterly on January 30, April 30, July 30, and October 30 of each year.

The table below presents the contractual maturities for senior secured notes and corporate debt.

ReadyCap Holdings 4.50% senior secured notes due 2026. On October 20, 2021, ReadyCap Holdings, an indirect

subsidiary of the Company, completed the offer and sale of $350.0 million of its 4.50% Senior Secured Notes due 2026

(the “Senior Secured Notes”). The Senior Secured Notes are fully and unconditionally guaranteed by the Company, each

direct parent entity of ReadyCap Holdings, and other direct or indirect subsidiaries of the Company from time to time

that is a direct parent entity of Sutherland Asset III, LLC or otherwise pledges collateral to secure the Senior Secured

Notes (collectively, the “SSN Guarantors”).

ReadyCap Holdings’ and the SSN Guarantors’ respective obligations under the Senior Secured Notes are secured by a

perfected first-priority lien on certain capital stock and assets (collectively, the “SSN Collateral”) owned by certain

subsidiaries of the Company.

The Senior Secured Notes are redeemable by ReadyCap Holdings’ following a non-call period, through the payment of

the outstanding principal balance of the Senior Secured Notes plus a “make-whole” or other premium that decreases the

closer the Senior Secured Notes are to maturity. ReadyCap Holdings is required to offer to repurchase the Senior

Secured Notes at 101% of the principal balance of the Senior Secured Notes in the event of a change in control and a

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downgrade of the rating on the Senior Secured Notes in connection therewith, as set forth more fully in the note purchase

agreement.

The Senior Secured Notes were issued pursuant to a note purchase agreement, which contains certain customary negative

covenants and requirements relating to the collateral and our company, ReadyCap Holdings, and the SSN Guarantors,

including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and

limitations on transactions with affiliates.

Ready Term Holdings, LLC (“Ready Term Holdings”) term loan due 2029. On April 12, 2024, Ready Term Holdings,

an indirect subsidiary of the Company, entered into a credit agreement which provides for a delayed draw term loan to

the Company in an aggregate principal amount not to exceed $115.25 million (the “Term Loan”). The Term Loan is fully

and unconditionally guaranteed by the Company and other direct or indirect subsidiaries of the Company from time to

time that pledge collateral to secure the Term Loan (collectively, the “Term Loan Guarantors”).

Ready Term Holdings’ and the Term Loan Guarantors’ respective obligations under the Term Loan are secured by a

perfected first-priority lien on certain capital stock and assets (collectively, the “Term Loan Collateral”) owned by

certain subsidiaries of the Company.

The Term Loan matures on April 12, 2029, and may be drawn at any time on or prior to January 12, 2025, subject to the

satisfaction of customary conditions. The Company borrowed $75.0 million in connection with the initial closing of the

Term Loan. On August 19, 2024, the Company borrowed an additional $20.0 million. The Term Loan bears interest on

the outstanding principal amount thereof at a rate equal to (a) SOFR plus 5.50% per annum or (b) base rate plus 4.50%

per annum; provided that if at any time the Term Loan is rated below investment grade, the interest rate shall increase to

(x) SOFR plus 6.50% per annum or (y) base rate plus 5.50% per annum until the rating is no longer below investment

grade. In connection with the entry into the credit agreement, the Company also agreed to pay certain upfront fees on the

initial borrowing date. The Company will also pay, with respect to any unused portion of the Term Loan, a commitment

fee of 1.00% per annum.

The Term Loan was issued pursuant to a credit agreement, which contains certain customary representations and

warranties and affirmative and negative covenants and requirements relating to the collateral and our Company, Ready

Term Holdings, and the Term Loan Guarantors, including maintenance of a minimum asset coverage ratio.

Corporate debt.

We issue senior unsecured notes in public and private transactions. The notes are governed by a base indenture and

supplemental indentures. Often, the notes are redeemable by us following a non-call period, through the payment of the

outstanding principal balance plus a “make-whole” or other premium that typically decreases the closer the notes are to

maturity. We are often required to offer to repurchase the notes, in some cases at 101% of the principal balance of the

notes, in the event of a change in control or fundamental change pertaining to our company, as defined in the applicable

supplemental indentures. The notes rank equal in right of payment to any of our existing and future unsecured and

unsubordinated indebtedness; effectively junior in right of payment to any of our existing and future secured

indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and

future indebtedness, other liabilities (including trade payables) and (to the extent not held by us) preferred stock, if any,

of our subsidiaries. The supplemental indentures governing the notes often contain customary negative covenants and

financial covenants relating to maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net

worth ratio and limitations on transactions with affiliates.

In addition, in connection with the Broadmark Merger, RCC Merger Sub, a wholly owned subsidiary of the operating

partnership, assumed Broadmark’s obligations on certain senior unsecured notes. The note purchase agreement

governing these notes contains financial covenants that require compliance with leverage and coverage ratios and

maintenance of minimum tangible net worth, as well as other customary affirmative and negative covenants.

The Debt ATM Agreement

On May 20, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B.

Riley Securities, Inc. (the “Agent”), pursuant to which it may offer and sell, from time to time, up to $100.0 million of

the 6.20% 2026 Notes and the 5.75% 2026 Notes. Sales of the 6.20% 2026 Notes and the 5.75% 2026 Notes pursuant to

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the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in

Rule 415 under the Securities Act (the “Debt ATM Program”). The Agent is not required to sell any specific number of

the notes, but the Agent will make all sales using commercially reasonable efforts consistent with its normal trading and

sales practices on mutually agreed terms between the Agent and the Company. No such sales through the Debt ATM

Program were made during the years ended December 31, 2024 or December 31, 2023, respectively.

Securitization transactions

Our Manager’s extensive experience in loan acquisition, origination, servicing and securitization strategies has enabled

us to complete several securitizations of LMM and SBA loan assets since January 2011. These securitizations allow us

to match fund the LMM and SBA loans on a long-term, non-recourse basis. The assets pledged as collateral for these

securitizations were contributed from our portfolio of assets. By contributing these LMM and SBA assets to the various

securitizations, these transactions created capacity for us to fund other investments.

The table below presents information on the securitization structures and related issued tranches of notes to investors.

(1)Contributed portion of assets into trust

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We used the proceeds from the sale of the tranches issued to purchase and originate LMM and SBL loans. We are the

primary beneficiary of all firm sponsored securitizations; therefore they are consolidated in our financial statements.

Contractual Obligations and Off-Balance Sheet Arrangements

The table below provides a summary of our contractual obligations.

The table above does not include amounts due under our management agreement or derivative agreements as those

contracts do not have fixed and determinable payments.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and

assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial

statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the

decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made,

based upon information available to us at that time. The following discussion describes the critical accounting estimates

that apply to our operations and require complex management judgment. This summary should be read in conjunction

with our accounting policies and use of estimates included in “Notes to Consolidated Financial Statements, Note 3 –

Summary of Significant Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data,” in the

Company’s Form 10-K.

Allowance for credit losses

The allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at

amortized cost. Such loans and lending commitments are reviewed quarterly considering credit quality indicators,

including probable and historical losses, collateral values, LTV ratio and economic conditions. The allowance for credit

losses increases through provisions charged to earnings and reduced by charge-offs, net of recoveries.

We utilize loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its

loan portfolio. The Current Expected Credit Loss (“CECL”) forecasting methods used by the Company include (i) a

probability of default and loss given default method using underlying third-party CMBS/CRE loan database with

historical loan losses and (ii) probability weighted expected cash flow method, depending on the type of loan and the

availability of relevant historical market loan loss data. We might use other acceptable alternative approaches in the

future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical

market loan loss data.

We estimate the CECL expected credit losses for our loan portfolio at the individual loan level. Significant inputs to our

forecasting methods include (i) key loan-specific inputs such as LTV, vintage year, loan-term, underlying property type,

occupancy, geographic location, and others, and (ii) a macro-economic forecast. These estimates may change in future

periods based on available future macro-economic data and might result in a material change in our future estimates of

expected credit losses for its loan portfolio.

In certain instances, we consider relevant loan-specific qualitative factors to certain loans to estimate its CECL expected

credit losses. We consider loan investments that are both (i) expected to be substantially repaid through the operation or

sale of the underlying collateral, and (ii) for which the borrower is experiencing financial difficulty, to be “collateral-

dependent” loans. For such loans that we determine that foreclosure of the collateral is probable, we measure the

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expected losses based on the difference between the fair value of the collateral (less costs to sell the asset if repayment is

expected through the sale of the collateral) and the amortized cost basis of the loan as of the measurement date. For

collateral-dependent loans that we determine foreclosure is not probable, we apply a practical expedient to estimate

expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is

expected through the sale of the collateral) and the amortized cost basis of the loan.

While we have a formal methodology to determine the adequate and appropriate level of the allowance for credit losses,

estimates of inherent loan losses involve judgment and assumptions as to various factors, including current economic

conditions. Our determination of adequacy of the allowance for credit losses is based on quarterly evaluations of the

above factors. Accordingly, the provision for loan losses will vary from period to period based on management's ongoing

assessment of the adequacy of the allowance for credit losses.

Significant judgment is required when evaluating loans for impairment; therefore, actual results over time could be

materially different. Refer to “Notes to Consolidated Financial Statements, Note 6 – Loans and Allowance for Credit

Losses” included in Item 8, “Financial Statements and Supplementary Data,” in this Form 10-K for results of our loan

impairment evaluation.

Valuation of financial assets and liabilities carried at fair value

We measure our MBS, derivative assets and liabilities, and any assets or liabilities where we have elected the fair value

option at fair value, including certain loans we have originated that are expected to be sold to third parties or securitized

in the near term.

We have established valuation processes and procedures designed so that fair value measurements are appropriate and

reliable, that they are based on observable inputs where possible, that the valuation approaches are consistently applied,

and the assumptions and inputs are reasonable. We also have established processes to provide that the valuation

methodologies, techniques and approaches for investments that are categorized within Level 3 of the ASC 820 Fair

Value Measurement fair value hierarchy (the “fair value hierarchy”) are fair, consistent and verifiable. Our processes

provide a framework that ensures the oversight of our fair value methodologies, techniques, validation procedures, and

results.

When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities

or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity,

credit, market and/or other risk factors. Refer to “Notes to Consolidated Financial Statements, Note 7 – Fair Value

Measurements” included in Item 8, “Financial Statements and Supplementary Data,” in this Form 10-K for a more

complete discussion of our critical accounting estimates as they pertain to fair value measurements.

Servicing rights impairment

Servicing rights, at amortized cost, are initially recorded at fair value and subsequently carried at amortized cost.

For purposes of testing our servicing rights, carried at amortized cost, for impairment, we first determine whether facts

and circumstances exist that would suggest the carrying value of the servicing asset is not recoverable. If so, we then

compare the net present value of servicing cash flow with its carrying value. The estimated net present value of servicing

cash flows of the intangibles is determined using discounted cash flow modeling techniques which require management

to make estimates regarding future net servicing cash flows, taking into consideration historical and forecasted loan

prepayment rates, delinquency rates and anticipated maturity defaults. If the carrying value of the servicing rights

exceeds the net present value of servicing cash flows, the servicing rights are considered impaired and an impairment

loss is recognized in earnings for the amount by which carrying value exceeds the net present value of servicing cash

flows. We monitor the actual performance of our servicing rights by regularly comparing actual cash flow, credit, and

prepayment experience to modeled estimates.

Significant judgment is required when evaluating servicing rights for impairment therefore, actual results over time

could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 8 – Servicing Rights” included

in Item 8, “Financial Statements and Supplementary Data,” in this Form 10-K for a more complete discussion of our

critical accounting estimates as they pertain to servicing rights impairment.

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Refer to “Notes to Consolidated Financial Statements, Note 4– Recent Accounting Pronouncements” included in Item 8,

“Financial Statements and Supplementary Data,” in this Form 10-K for a discussion of recent accounting developments

and the expected impact to the Company.