Ladder Capital Corp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 8, 2019. Ladder is an internally managed REIT focused on commercial real estate loans, securities and property investments. Financial figures below are in U.S. dollars; millions are abbreviated as “million.”
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Interest income | $86.5 million | $78.2 million |
| Interest expense | $51.2 million | $44.7 million |
| Net interest income | $35.2 million | $33.5 million |
| Net interest income after loan-loss provision | $34.9 million | $30.5 million |
| Net income | $24.5 million | $67.8 million |
| Net income attributable to Class A shareholders | $22.2 million | $50.9 million |
| Diluted EPS | $0.21 | $0.53 |
| Class A dividend per share | $0.340 | $0.315 |
| Operating cash flow | $(22.0) million | $(65.1) million |
- Total assets were $6.53 billion and total equity was $1.64 billion at quarter-end. Loans were $3.49 billion, securities $1.62 billion and real estate $1.01 billion.
- Debt obligations, net, were $4.73 billion, up from $4.45 billion at December 31, 2018. Reported debt-to-equity was 2.9:1; adjusted leverage, a company-defined non-GAAP measure, was 2.6:1.
- Cash and cash equivalents were $45.2 million; restricted cash was $80.1 million, for combined cash and restricted cash of $125.2 million. Ladder reported $2.4 billion of committed, undrawn financing capacity.
- Net interest income increased, but no conventional revenue or operating-margin measure is presented as a single headline figure in the filing. The company reported $28.9 million of operating lease income and $7.1 million of net income from loan sales.
Changes versus the prior comparable period
- Class A shareholder income fell $28.7 million year over year. The main contributors were the absence of the prior-year $31.0 million real estate sale gain and a $26.0 million adverse swing in derivative results; these were partly offset by higher net interest income and securities gains.
- Core earnings, a non-GAAP measure, declined to $46.9 million from $63.8 million. Management attributed the decrease chiefly to lower real estate sale gains and less favorable derivative results.
- Interest income rose $8.3 million, while interest expense increased $6.5 million. The company cited higher LIBOR and a funding mix shift toward higher-cost loan repurchase financing and mortgage debt.
- Loan originations and fundings were $399.7 million, compared with $967.5 million in Q1 2018. Securities holdings increased by approximately $209 million during the quarter.
- Stock-based compensation expense rose to $11.3 million from $2.4 million, contributing to higher salaries and employee benefits.
Outlook, risks and unusual items
- Management described commercial real estate financing demand and property values as generally stable, with maturities in the market supporting financing demand. It also noted the flattening yield curve as a possible signal of slower growth and said CMBS spreads had generally tightened since late 2018. No specific earnings or dividend guidance was provided.
- Interest-rate sensitivity analysis estimated that a 100-basis-point rate increase would raise 12-month net income by $20.0 million while reducing portfolio value by $16.6 million; a 100-basis-point decrease would reduce net income by $14.3 million and increase portfolio value by $15.2 million. Estimates reflect hedges and rate floors.
- FHLB borrowings were $1.29 billion. The company’s captive insurer, Tuebor, is permitted to remain an FHLB member through February 19, 2021 under a transition rule; future access beyond that date is uncertain. Approximately $1.8 billion of Tuebor capital could not be transferred to its parent by dividend without regulatory approval.
- At March 31, $36.9 million of loan principal was on non-accrual. Two defaulted loans with a combined carrying value of $26.9 million had been reserved against in 2018; management recorded no additional specific reserve in Q1. A separate $45 million loan was restructured into A- and B-notes plus an equity interest and remains non-accrual.
- A foreclosure added real estate with a fair value of $18.2 million. The quarter also included a $1.35 million real estate impairment and a $1.07 million debt-extinguishment loss related to a Wayne, New Jersey property. The property was sold May 1, 2019; the filing reports a subsequent net sale loss of approximately $20,000.
- Unfunded mortgage-loan commitments were $375.9 million, subject to borrower conditions. Repurchase facilities permit margin calls or additional collateral demands if pledged assets decline in value. The company said it was in compliance with debt covenants at quarter-end.
- For its 24 Second Avenue joint venture, Ladder converted $35.0 million of common equity to priority preferred equity and provided a $50.4 million first mortgage loan and a $6.5 million mezzanine loan. Its reported joint-venture investment was $91.2 million; management reported no further capital commitment at quarter-end.
Important facts for investors to verify
- How much of the decline in GAAP earnings reflects volatile real estate sales and derivative results, and how sustainable core earnings are given its non-GAAP adjustments.
- The performance, collateral values and resolution timing for non-accrual and restructured loans, including the defaulted loans and $45 million TDR.
- The availability and cost of refinancing, repurchase funding and FHLB financing, including the 2021 captive-insurer membership transition deadline and margin-call exposure.
- The liquidity impact of $375.9 million in unfunded loan commitments, restricted cash and capital that cannot be freely upstreamed from regulated subsidiaries.
- Whether the 24 Second Avenue project completes and sells remaining units as expected, and how the preferred equity and related loan exposures perform.