Ladder Capital Corp — Q2 2019 Form 10-Q
Business context and period. Ladder is an internally managed REIT focused on commercial real estate loans, securities and property investments. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $85.3 | $85.2 | $171.8 | $163.4 |
| Interest expense | $52.4 | $48.4 | $103.6 | $93.1 |
| Net interest income | $33.0 | $36.8 | $68.2 | $70.3 |
| Net interest income after loan-loss provision | $32.7 | $36.5 | $67.6 | $67.0 |
| Net income attributable to Class A shareholders | $32.2 | $38.4 | $54.4 | $89.3 |
| Diluted EPS | $0.30 | $0.40 | $0.51 | $0.93 |
| Dividends per Class A share | $0.340 | $0.325 | $0.680 | $0.640 |
- Q2 other income included $27.8 million of operating lease income and $20.3 million of net loan-sale gains. Derivative transactions produced a $15.5 million loss, versus a $7.1 million gain a year earlier.
- For the first half, operating cash flow was $132.5 million, investing cash flow was negative $49.4 million, and financing cash flow was $33.8 million. Cash, cash equivalents and restricted cash increased by $117.0 million to $215.4 million.
- At June 30, total assets were $6.407 billion, total debt obligations net were $4.613 billion, and total equity was $1.648 billion. Unrestricted cash was $126.5 million; restricted cash was $88.9 million.
- Management reported debt-to-equity of 2.8:1 and adjusted leverage of 2.6:1, compared with 2.3:1 adjusted leverage at year-end 2018. Adjusted leverage is a non-GAAP measure that excludes specified consolidated CLO debt.
- Committed undrawn funding capacity was approximately $2.5 billion, including $266.4 million on the revolver, $754.3 million from the FHLB and about $1.5 billion from other committed facilities. The revolver had no borrowings outstanding.
- The portfolio included $3.2 billion of loans, $1.8 billion of securities and $984.4 million of real estate and related lease intangibles. Balance-sheet investment loans had a weighted-average yield of 8.01%; securities had a weighted-average yield of 3.34%.
- No standard operating or net margin figure is clearly provided in the filing. The company reported a $0.6 million first-half loan-loss provision and an $18.5 million provision balance at June 30.
Material changes versus the prior comparable period
- Q2 net income attributable to Class A shareholders fell $6.2 million year over year; first-half net income fell $34.9 million. First-half GAAP income before taxes declined to $60.0 million from $115.8 million.
- Net interest income declined in Q2 and modestly for the first half. The company cited higher borrowing costs, including LIBOR-related increases and a funding mix shift toward higher-cost loan repurchase financing and unsecured notes.
- First-half derivative results swung to a $26.5 million loss from a $22.0 million gain. Real estate sale results also weakened, from a $32.6 million gain in first-half 2018 to a $1.1 million loss in first-half 2019.
- These declines were partly offset by higher loan-sale gains ($27.3 million versus $11.0 million) and securities-sale gains ($7.3 million versus a $2.3 million loss). Core earnings, a non-GAAP measure, were $97.9 million versus $114.2 million for the first half.
- Total debt obligations net increased $160.5 million from year-end 2018. CLO debt fell from $601.5 million to $263.2 million, while repurchase-facility borrowings rose from $663.7 million to $1.267 billion.
Outlook, risks and unusual items
- Management described commercial real estate financing demand and property values as generally stable, noted tighter CMBS spreads and $39.1 billion of U.S. CMBS issuance in the first half, and cited the flattening yield curve as a possible signal of slower future growth. It expects to remain active in transitional-property lending and CMBS loan securitizations. No quantified earnings or dividend guidance was provided.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase in LIBOR would raise projected 12-month net income by $19.0 million but reduce portfolio value by $14.5 million; a 100-basis-point decrease would reduce projected net income by $10.1 million and raise portfolio value by $15.1 million. These are modeled sensitivities, not forecasts.
- Credit matters include $36.9 million of loan principal on non-accrual status. Two defaulted loans secured by the same property had a $26.9 million carrying value. A separate $45.0 million loan was restructured into a $35.0 million A-note, a $10.0 million B-note and an equity interest; its extension runs up to 12 months, including extensions.
- A Wayne, New Jersey property experienced a lease prepayment, a $1.4 million impairment and a $1.1 million debt-extinguishment loss in the first quarter, then was sold in May. First-half property sales resulted in a net realized loss of $1.1 million.
- FHLB financing represented 25.8% of debt. The subsidiary’s FHLB membership transition period ends February 19, 2021, with scheduled limits on advances beginning in 2020. Management does not anticipate a material impact but acknowledges replacement funding may be more costly or harder to obtain. About $1.9 billion of the captive insurer subsidiary’s capital was restricted from dividend transfer without regulatory approval.
- Unfunded loan commitments were $228.6 million, subject to borrower conditions. Repurchase facilities permit margin calls if collateral values decline. Management reported compliance with debt covenants and effective disclosure controls; it reported no material litigation or material risk-factor changes.
Important facts for investors to verify
- Whether changes in derivative gains and losses, loan securitization timing and real estate dispositions obscure underlying recurring earnings; compare GAAP results with management’s non-GAAP core earnings and its reconciliation.
- Performance and recovery prospects for non-accrual and restructured loans, collateral valuations, and whether the $18.5 million loan-loss provision is adequate.
- Funding costs, collateral haircuts and margin-call exposure as repurchase borrowing has increased; confirm access to committed facilities and the plan for FHLB transition-related funding changes.
- Liquidity available for debt maturities, $228.6 million of unfunded loan commitments and dividends, including restrictions on subsidiary capital transfers.
- Occupancy, leasing and disposition progress for real estate holdings and the 24 Second Avenue joint venture; assess the risks and returns of the company’s increased securities exposure.