Ladder Capital Corp — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial results compared with Q1 2015, and balance-sheet amounts generally compared with December 31, 2015. Ladder is an internally managed commercial real estate finance REIT with loan, securities, and real estate businesses. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $59.6 million | $56.4 million in Q1 2015 |
| Interest expense | $29.5 million | $26.8 million in Q1 2015 |
| Net interest income | $30.1 million; $29.9 million after loan-loss provision | $29.6 million; $29.4 million after provision in Q1 2015 |
| Net income (loss) | $(11.4) million consolidated; $(5.5) million attributable to Class A shareholders; diluted EPS $(0.09) | $18.0 million consolidated; $9.2 million attributable to Class A shareholders; diluted EPS $0.15 in Q1 2015 |
| Core Earnings (non-GAAP) | $38.2 million | $48.0 million in Q1 2015 |
| Cash flow | $182.3 million operating; $22.0 million investing; $(230.6) million financing | $168.9 million operating; $(172.6) million investing; $10.9 million financing in Q1 2015 |
| Cash and cash equivalents | $82.7 million | $109.0 million at December 31, 2015 |
| Total assets / equity | $5.66 billion / $1.48 billion | $5.90 billion / $1.49 billion at December 31, 2015 |
| Debt obligations | $4.09 billion; company-reported debt-to-equity ratio 2.8:1 | $4.27 billion at December 31, 2015 |
| Class A dividend | $0.275 per share declared | $0.25 per share in Q1 2015 |
Business and portfolio context
- At quarter-end, investment assets included $1.93 billion of loans, $2.60 billion of securities, and $809.2 million of real estate and related lease intangibles. Securities were 46.0% of total investments and loans 34.0%.
- Loan portfolio weighted-average yield was 7.0%; securities yield was 3.0%. Most held-for-investment loans were floating-rate, while all loans held for sale were fixed-rate.
- Net leased properties had 100% occupancy and a 15.7-year weighted-average remaining lease term. Ladder also held condominium inventory for sale.
Changes versus the prior comparable period
- Class A shareholders moved from $9.2 million of income to a $5.5 million loss. The primary driver was a $42.1 million decline in total other income: loan-sale gains fell $22.2 million, realized securities gains declined $12.7 million, and derivative losses worsened by $11.8 million. A $5.4 million debt-extinguishment gain partly offset the decline.
- Loan-sale income fell to $7.8 million from $30.0 million. Ladder sold 26 loans with $249.2 million aggregate principal in two securitizations, versus 45 loans and $634.4 million in two securitizations in Q1 2015.
- Derivative transactions produced a $50.9 million loss, compared with a $39.1 million loss. The filing attributes results mainly to interest-rate movements and notes these derivatives are not designated for hedge accounting.
- Net interest income after provision edged up $0.5 million, as larger average loan and securities balances were partly offset by higher interest expense and financing costs. Total costs and expenses fell $8.2 million, including lower incentive compensation and real estate operating costs.
- Investments shifted toward securities: the securities portfolio grew $191.7 million during the quarter, while total loans declined from $2.31 billion at year-end to $1.93 billion. No real estate was acquired; $23.5 million of real estate was sold.
Liquidity, debt, and capital
- Ladder reported $82.7 million unrestricted cash, $475.1 million of unencumbered loans, and $70.1 million of unencumbered securities. It also reported $1.6 billion of committed, undrawn financing capacity, including $340.8 million of FHLB capacity.
- Debt included $1.88 billion of FHLB advances, $1.10 billion of repurchase agreements, $547.8 million of nonrecourse mortgage financing, and $558.1 million carrying value of senior unsecured notes. About 46% of debt was FHLB financing.
- Contractual debt payments totaled $1.78 billion for the remainder of 2016, some subject to extension options. The company reported compliance with its debt covenants at quarter-end. Approximately $900.3 million of equity was restricted from dividend payment under financing covenants.
- Financing cash outflow included $33.0 million in cash dividends and $4.7 million of share repurchases. The company paid a portion of its 2015 distribution in stock; REIT distribution requirements constrain retained earnings.
Outlook, risks, and unusual items
- Outlook: Management cited generally stable property values, low interest rates, and substantial commercial real estate loan maturities as opportunities. It also noted CMBS spread widening and market volatility, and expects new Dodd-Frank rules effective in December 2016 could affect CMBS pricing and liquidity. Q1 2016 CMBS issuance was $19.0 billion, down 30% year over year. No quantified earnings or investment guidance was provided.
- Funding and market risks: Reliance on secured funding exposes Ladder to collateral valuation changes, margin calls, refinancing needs, and possible reduced financing availability. Interest-rate and credit-spread movements can affect both asset values and earnings; the quarter’s derivative loss illustrates potential volatility.
- FHLB access: A 2016 rule allows captive insurer subsidiary Tuebor to remain an FHLB member through February 19, 2021, subject to limits on new advances. Management did not expect a material near-term impact, but noted there is no assurance access will continue on current terms or that replacement funding will not cost more. $451.9 million of Tuebor capital was restricted from transfer to its parent without regulatory approval.
- Credit and commitments: Two loans from one transaction, with $26.7 million carrying value, were in default; Ladder recorded no specific impairment and continued accruing interest, citing collateral liquidation value. No loans were on non-accrual status. Unfunded loan commitments were $97.6 million, subject to borrower conditions.
- Unusual items: The quarter included a $5.4 million gain on extinguishment of debt from repurchasing senior notes. Ladder also recorded prior-period corrections totaling approximately $2.6 million—additional deferred financing-cost amortization, state taxes, and joint-venture return adjustments—which management judged immaterial to current and prior periods.
- Other: The filing reported no material litigation and no material changes to the risk factors in the 2015 Form 10-K. Management stated disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether the lower conduit loan-sale volume and reduced Core Earnings persist, and how management’s non-GAAP adjustments reconcile with GAAP results.
- The drivers and potential future volatility of derivative results, including the economic performance of hedges relative to the assets hedged.
- Liquidity and refinancing exposure against the $1.78 billion of debt payments scheduled for the remainder of 2016, including extensions and collateral or margin requirements.
- Whether FHLB funding remains available through the transition period and the cost and capacity of alternative financing.
- Performance and resolution of the two defaulted loans, the $97.6 million unfunded commitments, and Ladder’s assumptions supporting the loan-loss reserve.
- REIT qualification and distribution requirements, restricted subsidiary capital, and the effects of paying distributions partly in stock.