Ladder Capital Corp — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Ladder is an internally managed commercial real estate finance REIT. The prior-year comparison includes predecessor operations before the February 2014 IPO, so earnings attributable to Class A shareholders are not directly comparable.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Interest income | $56.4 million | $36.8 million |
| Interest expense | $26.8 million | $14.8 million |
| Net interest income | $29.6 million | $22.0 million |
| Net income | $18.0 million | $18.4 million |
| Net income attributable to Class A shareholders | $9.2 million | $12.7 million |
| Basic / diluted EPS | $0.18 / $0.15 | $0.26 / $0.24 |
| Net revenues (company-defined non-GAAP) | $64.4 million | $62.3 million |
| Core Earnings (company-defined non-GAAP) | $48.0 million | $55.3 million |
Loan sales produced $30.0 million of income, down from $41.3 million; realized securities gains rose to $12.2 million from $1.8 million. Derivative transactions generated a $39.1 million net loss, compared with a $26.3 million loss. The filing does not provide a conventional consolidated operating-margin measure. Asset yields declined year over year: mortgage loan yield was 6.9% versus 8.7%, and securities yield was 2.6% versus 4.0%.
At March 31, total assets were $5.845 billion, total equity $1.515 billion, and total liabilities $4.330 billion. Debt obligations were $3.602 billion, plus $619.6 million of senior notes, or $4.222 billion total financing; reported debt-to-equity was 2.8:1. Unrestricted cash was $83.5 million, with $47.0 million of cash collateral held by brokers. Management reported $1.0 billion of committed, undrawn financing capacity. About $2.0 billion of contractual borrowings mature in the remaining nine months of 2015, some subject to extension.
Operating cash flow was $168.9 million, investing cash flow was negative $172.6 million, and financing cash flow was positive $10.9 million. Cash increased $7.2 million to $83.5 million. The company declared a $0.25 per-share Class A dividend.
Changes and notable items
- Net interest income increased $7.6 million, mainly reflecting larger average loan and securities balances; interest expense rose $12.0 million as average debt increased.
- Core Earnings decreased $7.3 million, with lower loan-sale income and more negative derivative results outweighing higher net interest and rental income.
- Loan and securities balances shifted: loans rose to $2.026 billion from $1.939 billion at year-end, while securities fell to $2.624 billion from $2.816 billion. Real estate, including assets held for sale, increased to $851.4 million from $769.0 million.
- The company acquired $103.3 million of net-lease properties and sold 58 condominium units, recognizing $7.7 million of real estate gains. Three retail properties worth $21.9 million were classified as held for sale.
- Loan originations and fundings totaled $770.0 million, compared with $611.1 million in Q1 2014. Two securitizations sold 45 loans with $634.4 million aggregate principal, versus 42 loans and $772.4 million a year earlier.
- One acquired, credit-impaired loan remained on non-accrual, with $4.6 million amortized cost and a $3.5 million unamortized discount. The company reported no individually impaired loans; its portfolio loan-loss reserve was $3.25 million.
Outlook, risks and contingencies
Management sees commercial real estate finance opportunities from stabilizing property values, low interest rates, and financing demand, and says it can shift capital among lending, securities, and real estate. No specific earnings or revenue guidance is provided. Management targets debt-to-equity of 3.0:1 or below and reported covenant compliance at quarter-end.
The company intends to elect REIT tax treatment for 2015; its REIT structuring was effective January 1, 2015, and it expected to file the election with its 2015 tax return. REIT status requires distributions of at least 90% of taxable income and depends on meeting ownership and other statutory tests. Management expects some required distributions may be paid in stock, subject to applicable requirements.
Key risks include reliance on secured and repurchase financing, collateral-value declines and margin calls, refinancing and liquidity needs, interest-rate and credit-spread movements, derivative volatility, real estate credit and valuation risks, and concentrated exposure to real estate. FHLB advances are significant; a proposed rule could affect captive-insurer membership, although the filing reported no change to borrowing ability as of quarter-end. Certain subsidiary capital and total equity are restricted from transfer or dividends. The filing reports no material litigation and no material change to previously disclosed risk factors.
After quarter-end, the company extended a securities repurchase facility to October 2016 and extended a loan repurchase facility to April 2019, increasing its maximum capacity to $400 million. The filing also revised prior-period cash-flow classification for unsettled broker amounts, stating the correction was not material.
Investor verification priorities
- Assess whether the $39.1 million derivative loss reflects hedge timing and whether hedges effectively offset asset and funding exposures.
- Verify the availability, extension terms, collateral requirements, and refinancing plans for near-term maturities and committed financing.
- Track loan-sale and securitization profitability, given lower sales income, lower loan yields, and management’s discussion of competition and tighter credit spreads.
- Review REIT qualification, required distributions, stock-versus-cash payment mechanics, and potential effects on retained capital.
- Monitor asset-quality trends, including the non-accrual loan, reserve adequacy, and real estate occupancy and sale assumptions.