Ladder Capital Corp — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Ladder is an internally managed REIT focused on commercial real estate lending, real estate securities and property ownership. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless indicated.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $54.6 | $82.3 | $189.3 | $254.0 |
| Interest expense | $56.4 | $51.4 | $176.2 | $155.0 |
| Net interest income | $(1.8) | $30.9 | $13.1 | $99.0 |
| Net income (loss), consolidated | $21.4 | $30.9 | $2.1 | $91.6 |
| Net income (loss) attributable to Class A shareholders | $17.2 | $27.6 | $(2.7) | $82.0 |
| Diluted EPS | $0.14 | $0.26 | $(0.02) | $0.77 |
| Core earnings, non-GAAP | $19.7 | $44.1 | $63.3 | $142.0 |
Q3 net income included $21.6 million of gains on real estate sales; the nine-month period included $32.1 million of such gains and $22.2 million of gains on debt extinguishment. These items, along with credit provisions and market-related losses, materially affected GAAP results. The filing does not present a conventional operating-margin measure.
Financial position, cash flow and debt
- At September 30, 2020, total assets were $6.36 billion, total equity $1.52 billion, and debt obligations, net, $4.71 billion. Unrestricted cash was $875.8 million; restricted cash was $41.9 million.
- Portfolio balances included $2.71 billion of loans, net of reserves, $1.45 billion of real estate securities and $990.6 million of real estate. The loan allowance for credit losses was $47.1 million.
- Adjusted leverage, a company-defined non-GAAP measure excluding consolidated CLO debt, was 2.9x, versus 3.0x at December 31, 2019. Management reported compliance with all financial covenants at quarter-end. It disclosed that a March covenant breach was cured by debt paydowns within the applicable cure period.
- For the nine months, operating cash flow was $88.0 million, investing cash flow was $690.5 million and financing cash flow was $(216.5) million. Cash, cash equivalents and restricted cash increased $562.0 million.
- Contractual debt maturities include $919.9 million in the final quarter of 2020 and $915.0 million in 2021; the filing says some near-term obligations are subject to company-controlled extensions or may be refinanced. Approximately $849 million of equity was restricted from dividend payment under debt covenants.
- Declared dividends were $0.20 per share in Q3 and $0.74 per share for the first nine months, compared with $0.34 and $1.02, respectively, in 2019.
Material changes versus prior periods
- Nine-month net income attributable to Class A shareholders fell from $82.0 million to a $2.7 million loss. Management cited lower LIBOR, smaller average loan and securities portfolios, higher financing costs and increased loan-loss provisions.
- Nine-month interest income declined $64.7 million while interest expense rose $21.2 million. Net interest income after loan-loss provisions fell to a $10.3 million loss from $98.4 million of income in 2019.
- The company adopted CECL on January 1, recording an initial $11.6 million reserve and a $5.8 million reduction to equity. Nine-month loan-loss provision was $23.3 million; Q3 included a $2.5 million release.
- Loan and securities balances contracted as Ladder prioritized liquidity and deleveraging. For the nine months, loan originations were $556.1 million versus $1.5 billion in 2019, and the securities portfolio decreased by $273.7 million.
- Cash and cash equivalents rose substantially from $58.2 million at year-end 2019, while restricted cash declined from $297.6 million. Debt, net, decreased by $145.4 million from year-end.
Management commentary, outlook and risks
- Management said COVID-19’s duration and ultimate effects on revenues, profitability and financial position remained difficult to assess. It cited active liquidity management and expected current cash, operating cash flow and financing access to support operations for more than one year from filing issuance.
- Liquidity actions included drawing the $266.4 million revolver, selling assets, paying down repurchase and FHLB financing, repurchasing unsecured notes, and completing a $310.2 million gross-proceeds CLO financing. Management said these actions reduced exposure to mark-to-market financing. A separate secured facility carries a 10.75% rate and includes a minimum interest premium.
- Credit exposure is sensitive to pandemic-related disruption, particularly in hospitality and retail. At quarter-end, hotels and retail represented approximately 13.8% and 8.0% of the loan portfolio, respectively; hotel and retail properties represented approximately 6.0% and 48.0% of the real estate portfolio. The company reported $201.5 million of loans on non-accrual status.
- Management reported collecting 100% of Q3 rent on net-leased properties and approximately 96.1% on diversified properties. It noted that borrowers had sought or could seek forbearance, interest deferrals or other modifications, and that asset-level construction, leasing and capital projects may be delayed.
- Other material risks include collateral valuation declines, short-term funding availability and margin calls, refinancing and covenant risk, interest-rate and credit-spread volatility, real estate concentration, and restricted access to certain subsidiary capital. Ladder said it had satisfied margin calls on time.
- Unfunded loan commitments were $227.0 million at September 30, down from $286.5 million at year-end; funding depends on borrower conditions and other events. The filing reports no material litigation and no material changes to previously disclosed risk factors other than the expanded COVID-19 discussion.
Important facts for investors to verify
- Whether liquidity remains adequate as near-term debt maturities and the FHLB financing reduction requirement approach, and whether extension or refinancing options are available on acceptable terms.
- Performance and collateral values for the $201.5 million non-accrual loan balance, the $47.1 million credit allowance and the continuing effects of CECL assumptions.
- COVID-19 effects on hospitality, retail, office and other borrower cash flows, tenant collections, loan modifications and Ladder’s real estate valuations.
- The sustainability of earnings as asset sales, reduced originations, lower interest rates and higher financing costs affect net interest income; assess non-GAAP core earnings alongside GAAP results.
- Dividend capacity given REIT distribution requirements, debt restrictions, the reduced per-share dividend and the company’s liquidity and capital needs.