Ladder Capital Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; financial statements are unaudited. Ladder is an internally managed REIT focused on commercial real estate lending, real estate ownership and commercial real estate securities.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $77.4 million | $46.2 million | $198.8 million | $123.1 million |
| Interest expense | $48.5 million | $49.3 million | $138.2 million | $140.5 million |
| Net interest income | $28.9 million | $(3.1) million | $60.6 million | $(17.4) million |
| Net income | $28.7 million | $18.9 million | $91.1 million | $29.8 million |
| Net income attributable to Class A shareholders | $28.6 million | $18.9 million | $82.7 million | $29.4 million |
| Diluted EPS | $0.23 | $0.15 | $0.66 | $0.24 |
Q3 real estate operating income was $27.7 million. Other notable Q3 items included a $6.6 million net gain on derivatives and a $4.4 million gain on a real estate sale. The filing does not provide a single conventional revenue total or a consolidated margin measure.
- Assets and equity: Total assets were $5.87 billion and total equity was $1.50 billion at September 30, 2022, broadly similar to year-end 2021.
- Loans and investments: Loans totaled $4.03 billion, including a $4.00 billion net held-for-investment portfolio; securities were $610.5 million and real estate was $777.3 million, including property held for sale.
- Credit metrics: The held-for-investment loan portfolio’s weighted-average yield was 7.45%, versus 5.65% at December 31, 2021. Non-accrual loans were $54.1 million, down from $80.2 million at year-end. The loan allowance was $18.5 million, plus $0.7 million for unfunded commitments.
- Cash and liquidity: Cash, cash equivalents and restricted cash totaled $357.2 million, including $328.4 million unrestricted, versus $621.5 million total at year-end. The company reported $323.9 million available under its undrawn revolving credit facility and approximately $753.5 million of unused committed loan repurchase capacity. It also cited a $2.8 billion pool of unencumbered assets.
- Debt: Debt obligations, net, were $4.24 billion, compared with $4.22 billion at year-end. This included $1.63 billion of senior unsecured notes, $1.06 billion of CLO debt, $723.9 million of repurchase borrowings, $616.4 million of mortgage financing and $213.0 million of FHLB borrowings. The company reported compliance with debt covenants.
- Cash flow, nine months: Operating activities provided $52.2 million; investing activities used $208.1 million; and financing activities used $108.5 million. Cash, cash equivalents and restricted cash declined $264.4 million. Cash dividends paid were $78.5 million.
Changes and drivers
- Compared with the first nine months of 2021, 2022 net interest income improved substantially, reflecting higher benchmark rates and a larger average loan portfolio. Interest expense was slightly lower overall, while loan yields and funding costs both rose.
- Nine-month net income attributable to shareholders increased to $82.7 million from $29.4 million. The comparison also reflects $62.1 million of real estate sale gains in 2022 versus $37.2 million in 2021, and $12.4 million of derivative gains versus $1.0 million.
- Compensation and employee benefits increased $31.7 million year over year, primarily because of the timing of stock and bonus compensation. Real estate operating expenses rose $9.4 million, including higher costs related to acquired or foreclosed assets and hotel operations.
- Available-for-sale securities generated a $14.7 million nine-month other comprehensive loss, primarily reflecting unrealized valuation changes; accumulated other comprehensive loss widened to $18.8 million from $4.1 million at year-end.
- During the first nine months, the company originated $1.2 billion of held-for-investment loans, sold five properties for $173.1 million of proceeds, and repurchased $7.3 million of its shares. The declared dividend was $0.23 per share for Q3; declared dividends totaled $0.65 per share for the first nine months.
Outlook, risks and notable items
- The filing provides no specific earnings or investment guidance. Management said it was actively managing liquidity and operations amid rising interest rates and potential recessionary conditions.
- Management’s rate-sensitivity scenario estimated that a 100-basis-point rate increase would raise projected 12-month net income by $27.7 million, while a 100-basis-point decrease would reduce it by $26.8 million. The corresponding estimated portfolio-value changes were approximately negative $5.1 million and positive $5.1 million, respectively. These are modeled sensitivities, not forecasts.
- Key exposures include commercial real estate values and borrower credit, refinancing and property performance, rising interest rates, credit spreads, market liquidity, funding availability and potential collateral margin calls. Management also identified inflation, possible recession, supply-chain and labor issues, and continuing effects of COVID-19 as relevant market conditions.
- Unfunded loan commitments were $363.2 million, subject to borrower conditions and other funding triggers. Certain subsidiaries’ cash and equity are restricted from transfer, including approximately $1.3 billion of Tuebor capital requiring regulatory approval for dividends.
- The company recorded a $1.5 million Q3 loan-loss provision, citing adverse macroeconomic scenarios. It stated that it was in compliance with covenants and had no material litigation or material change to previously disclosed risk factors.
- The July 2022 revolving-credit amendment increased capacity to $323.9 million, extended the stated maturity to July 2023 with four one-year extension options, and set pricing at one-month Term SOFR plus 2.50%, subject to reductions upon qualifying investment-grade ratings.
Important facts for investors to verify
- Whether loan yields continue to outpace rising financing costs, and how floating-rate asset and debt exposures behave as rates change.
- Loan credit quality, including the status and collateral coverage of the $54.1 million of non-accrual loans and the adequacy of CECL reserves under changing economic assumptions.
- Liquidity after distributions and investment funding, including access to committed facilities, collateral requirements and the $363.2 million of unfunded loan commitments.
- Debt maturities, refinancing options and covenant headroom, particularly for secured borrowings and facilities with lender extension or collateral discretion.
- The sustainability of earnings excluding property-sale and derivative gains, and the timing and size of compensation expense.
- The effect of securities fair-value losses, commercial real estate market conditions, and restrictions on transferring subsidiary cash to the parent.