Ladder Capital Corp. — Q1 2023 Form 10-Q
Business context and reporting period. Ladder is an internally managed REIT focused on commercial real estate finance. It originates senior mortgage loans, invests in commercial real estate securities, and owns and operates real estate. This unaudited filing covers the three months ended March 31, 2023; comparisons below are primarily with Q1 2022 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
- Income: Interest income was $103.8 million versus $56.2 million; interest expense was $60.7 million versus $47.0 million. Net interest income rose to $43.0 million from $9.2 million, and net interest income after loan-loss provision was $38.3 million versus $8.3 million.
- Profit: Net income was $22.2 million versus $19.2 million. Net income attributable to Class A shareholders was $22.4 million versus $19.0 million; diluted EPS was $0.18 versus $0.15. The filing does not provide a conventional net interest margin figure.
- Other income and expenses: Real estate operating income was $23.2 million versus $26.4 million. Q1 2023 included a $9.2 million gain from repurchasing senior notes; Q1 2022 included a $29.2 million gain on real estate sales. Compensation and employee benefits were $22.1 million versus $29.9 million.
- Cash flow: Operating activities provided $111.4 million, investing activities provided $188.3 million, and financing activities used $198.3 million. Cash, cash equivalents and restricted cash increased $101.4 million. Operating cash flow included $109.7 million of unsettled U.S. Treasury purchases, which were recorded in other assets pending settlement.
- Liquidity: At quarter-end, balance-sheet cash and cash equivalents were $626.1 million, with $25.2 million restricted. The company also reported $109.7 million of unsettled short-term Treasury securities. It had a fully undrawn $323.9 million revolver and $548.8 million of available committed loan-repurchase capacity. Management reported $2.9 billion of unencumbered assets.
- Debt and equity: Debt obligations, net, were $4.08 billion, down from $4.25 billion at December 31, 2022. Total equity was $1.53 billion; total assets were $5.86 billion. The company reported compliance with debt covenants. The board declared a $0.23 per-share dividend for the quarter.
- Loan credit: Investment mortgage loans had a $3.79 billion carrying value and a 9.18% weighted-average yield. The allowance for loan losses was $25.5 million, up from $20.8 million at year-end; management attributed the increase primarily to adverse macroeconomic scenarios. Loans on non-accrual totaled $53.6 million.
Material changes and management commentary
- Compared with Q1 2022, higher benchmark rates and the portfolio’s floating-rate exposure materially increased interest income. Higher borrowing rates and balances also raised interest expense, but net interest income still increased substantially.
- Loan originations were $32.6 million and principal repayments were $131.3 million, resulting in a smaller loan portfolio. Securities declined by $67.5 million during the quarter, primarily from paydowns, sales and maturities.
- The company repurchased principal amounts of $16.2 million of 2025 notes, $36.4 million of 2027 notes and $6.1 million of 2029 notes, recognizing the $9.2 million aggregate extinguishment gain.
- Management said it is actively managing liquidity and operations amid rising interest rates and potential recessionary conditions. It provided no numerical earnings or investment guidance in the supplied filing text.
Risks, contingencies and unusual items
- Key disclosed risks include commercial real estate weakness, borrower defaults and collateral-value declines; higher rates and asset-liability mismatches; market liquidity and financing availability; repurchase-agreement margin calls; and changes in credit spreads. The filing also identifies inflation, recession risk and the LIBOR-to-SOFR transition as relevant uncertainties.
- The $289.8 million of unfunded mortgage-loan commitments is off balance sheet and may require funding subject to borrower conditions; 54% relates to specified “good news” events. Restricted capital at the captive insurer and covenant restrictions may limit transfers or distributions within the group.
- A first mortgage loan with a $51.5 million amortized-cost basis was modified in February 2023, including a maturity extension, a rate change to 7% (5% current pay and 2% deferred), a $3.5 million paydown and $6.5 million of funded reserves. The deferred interest component was not accruing at quarter-end.
- Management said risk factors were not materially changed from the 2022 annual report, the company was not party to material litigation, and disclosure controls were effective. A New York City tax audit settlement reached in April 2023 was for $2.6 million and resulted in $0.2 million of incremental Q1 tax expense.
Most important facts for investors to verify
- Whether the sharp year-over-year increase in net interest income is sustainable as floating-rate asset yields and borrowing costs evolve.
- Loan performance, collateral values and reserve adequacy, particularly the $53.6 million non-accrual balance and rising CECL allowance.
- Liquidity and refinancing capacity, including upcoming facility maturities, available committed borrowing capacity, and potential collateral or margin-call requirements.
- The cash-flow effect of unsettled Treasury trades and the distinction between reported cash and cash, cash equivalents and restricted cash.
- How much reported earnings depended on the $9.2 million debt-extinguishment gain and how dividend coverage compares with GAAP earnings and distributable earnings.