Ready Capital is actively implementing a significant two-phase strategy to restructure its balance sheet, aiming to generate more than $850 million in free cash and reduce its commercial real estate (CRE) portfolio by approximately 60%, bringing it down to roughly $2 billion. This strategic overhaul, which saw approximately $380 million generated in the fourth quarter, is targeting an additional $500 million by year-end through asset runoff and about $1.5 billion in loan sales. The fourth quarter results indicated a GAAP loss of $1.46 per share and a distributable loss of $0.43, with the book value declining to $8.79 from $10.28, largely due to a $173 million increase in valuation allowances and CECL reserves. Non-accrual loans also saw a notable increase, reaching 27%.
Alongside these financial adjustments, the company announced leadership transitions and plans for a 25% reduction in operational costs. There is also a strategic pivot to allocate more capital towards capital-light small business lending, increasing its share from 10% to 20%, even as SBA originations experienced a 50% decrease to $84 million, primarily influenced by a prior government shutdown. This repositioning effort is centered on enhancing liquidity, divesting underperforming CRE assets, and establishing a robust foundation for future growth. The approach involves aggressive asset management initially, followed by streamlining CRE origination into a more cost-efficient model with increased reliance on external management.
Looking ahead, the company forecasts generating an additional $500 million in free cash flow by the end of the year, sourced from portfolio runoff and further loan sales, with a particular focus on non-performing and sub-yielding assets. These loan sales are expected to be largely completed by the close of the second quarter. While acknowledging potential near-term book value pressures from liquidity initiatives, the company anticipates a more attractive portfolio and a reduction in leverage to approximately 2.5x. Furthermore, the company provided updates on its Ritz property, noting progress in condominium sales and improved hotel occupancy rates, and reaffirmed its commitment to managing upcoming debt obligations with strong liquidity. Despite recent challenges in SBA originations, Ready Capital maintains its position as a leading SBA lender and anticipates its fourth SBA securitization, signaling confidence in its future earnings capacity and overall strategic direction.
This strategic restructuring by Ready Capital demonstrates a proactive and determined approach to adapting to market dynamics and strengthening its financial health. By focusing on liquidity, efficient asset management, and targeted growth areas like small business lending, the company is laying the groundwork for sustained success and enhanced value for its stakeholders. This forward-thinking strategy not only addresses current financial challenges but also positions Ready Capital to capitalize on future opportunities, fostering long-term stability and growth in a dynamic economic landscape.