Ladder Capital Corp quarterly report, Q3 FY2016

Ladder Capital Corp — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016. Ladder is an internally managed commercial real estate finance REIT operating across loans, real estate securities, and real estate. Financial statements are unaudited; amounts below are in U.S. dollars.

Financial performance and position

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Net interest income	$29.6m	$33.5m	$87.0m	$94.8m
Net income	$49.6m	$2.8m	$42.1m	$89.5m
Net income attributable to Class A shareholders	$27.6m	$3.3m	$24.9m	$46.7m
Diluted EPS	$0.44	$0.06	$0.40	$0.91
Core Earnings (non-GAAP)	$44.5m	$41.2m	$113.6m	$141.3m

Q3 total other income was $69.3m versus $7.5m a year earlier, including a $9.4m derivative gain versus a $42.2m loss in Q3 2015. The resulting comparison drove much of the increase in quarterly earnings.
For the first nine months, total other income was $74.1m versus $129.0m. Derivatives produced a $66.1m loss, compared with a $54.6m loss in 2015; loan-sale income and securities and property gains were also lower.
Interest income was $60.3m in Q3 and $175.7m year to date. Interest expense was $30.7m and $88.6m, respectively. Management cited lower yields on newly originated loans and higher financing costs. Non-GAAP cost of funds was $39.3m for Q3 and $111.9m year to date; interest income less cost of funds was $20.9m and $63.8m, respectively.
Class A dividends were $0.275 per share for Q3 and $0.825 per share year to date, versus $0.275 and $0.775 in the comparable 2015 periods.

Balance sheet and liquidity at September 30, 2016

Total assets were $6.22bn, including $2.43bn of loans (net of allowance), $2.65bn of securities, and $825.6m of real estate. Total equity was $1.50bn.
Debt obligations were $4.60bn, up from $4.27bn at December 31, 2015. Debt-to-equity was 3.1:1; management’s general target is approximately 3.0:1 or below.
Unrestricted cash and cash equivalents were $59.7m, down from $109.0m at year-end; cash collateral held by brokers was a further $37.5m. The company reported $1.5bn of committed, undrawn financing capacity and $552.9m of unencumbered loans and $90.3m of unencumbered securities.
Cash flows for the nine months were $(138.7)m from operating activities, $(126.7)m from investing activities, and $216.1m from financing activities; cash declined by $49.3m to $59.7m. Operating cash flow is affected by the origination and sale cycle of loans held for sale.
The loan portfolio’s reported weighted-average yield was 6.2% in MD&A, down from 7.1% at September 30, 2015. Investment securities’ yield was 2.9%; management reported borrowing rates of 2.1% against loans, 1.2% against securities, and 4.8% against real estate financing.

Material changes versus comparable periods

Q3 Class A earnings rose to $27.6m from $3.3m, mainly reflecting the sharp year-over-year derivative improvement, higher securities gains and loan-sale income. Higher income tax expense partly offset these gains.
Nine-month Class A earnings fell to $24.9m from $46.7m. Core Earnings also declined, to $113.6m from $141.3m. Management attributed the decrease principally to lower loan-sale income, securities gains and real estate sale gains, partly offset by lower expenses.
Loan originations were $1.4bn for the first nine months, versus $2.6bn in 2015; three securitizations sold 60 loans with $664.1m principal, compared with seven securitizations and $2.0bn in 2015. Securities holdings grew to $2.65bn from $2.41bn at year-end.
Debt increased $326.3m from year-end. The company repurchased portions of its senior notes, recording a $5.4m gain on extinguishment of debt for the nine-month period.

Outlook, risks, contingencies, and unusual items

Management described commercial property values as relatively stable and the CMBS market as improving in Q3, with credit spreads tightening. It noted weaker issuance: U.S. CMBS issuance for the first nine months of 2016 was $49.0bn, down 36.9% year over year. New Dodd-Frank rules due in December 2016 could affect CMBS pricing and liquidity. No earnings guidance was provided.
FHLB advances represented 40.1% of debt. The captive insurer subsidiary may remain an FHLB member through February 19, 2021 under a transition rule; access thereafter is uncertain and alternative funding could cost more. State insurance regulation restricted $591.5m of the subsidiary’s capital from transfer to its parent without approval.
Repurchase financing exposes the company to collateral valuation, margin-call, and renewal risk. The filing reports covenant compliance at quarter-end, but lenders may demand added collateral or repayment if collateral values fall. Interest-rate, credit-spread, real estate valuation, funding-market, and REIT qualification risks remain material.
Two related loans with a combined carrying value of $26.9m were in default. Management reported no impairment, continued accruing interest based on collateral value, and disclosed $2.3m of accrued but unpaid interest, including $1.5m of default interest. No loans were on non-accrual status.
Unfunded loan commitments were $88.0m, subject to borrower conditions. Contractual debt maturities include $1.44bn in the remainder of 2016 and $1.27bn in 2017, some subject to extension; the $297.7m 2017 Notes mature in October 2017.
A proposed New York State tax-audit settlement generated $3.2m of Q3 tax expense and a matching $3.2m indemnification receivable and other income; management expected recovery. A first-quarter out-of-period correction included $0.5m of financing-cost amortization, $1.2m of state taxes, and $0.9m of joint-venture return adjustments; management judged the adjustments immaterial.
After quarter-end, a company subsidiary launched the Ladder Select Bond Fund on October 18, 2016, and Ladder invested $10.0m. Senior management invested $1.6m in aggregate.
Management reported effective disclosure controls, no material changes to internal control over financial reporting, and no material litigation or material risk-factor changes during the quarter.

Important facts for investors to verify

Whether quarterly earnings are sustainable without the unusually favorable Q3 derivative result, and how management’s non-GAAP Core Earnings reconciliation treats hedge timing and other adjustments.
Loan credit performance, including collateral support and collections for the two defaulted loans, and the adequacy of the $4.0m portfolio loan-loss allowance.
Funding availability and collateral headroom under repurchase facilities, the repayment or refinancing plan for near-term maturities and the 2017 Notes, and the company’s leverage relative to its target.
Potential effects of FHLB membership limits and the December 2016 CMBS regulatory changes on funding costs, securitization volumes, and liquidity.
REIT distribution requirements, the capacity to pay dividends while retaining capital, and the realization of deferred tax assets and the tax indemnification receivable.