Ladder Capital Corp — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Ladder completed its IPO and reorganization on February 11, 2014. The quarter combines predecessor LCFH results before that date with Ladder Capital Corp results afterward. The 2013 comparison is predecessor-only, so taxes, ownership and per-share measures are not fully comparable.
Business context and financial results
Ladder is a commercial real estate finance company operating in commercial mortgage lending, commercial real estate securities and real estate. At quarter-end, it reported $3.49 billion of assets, including $837.1 million of loans, $1.75 billion of securities and $603.8 million of real estate.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Interest income | $36.8 million | $31.3 million |
| Interest expense | $14.8 million | $11.2 million |
| Net interest income | $22.0 million | $20.1 million |
| Provision for loan losses | $0.15 million | $0.15 million |
| Other income | $40.4 million | $99.6 million |
| Income before taxes | $23.7 million | $90.1 million |
| Net income | $18.4 million | $88.0 million |
| Net income attributable to Class A shareholders | $12.7 million | Not applicable |
| Class A EPS | $0.26 basic; $0.24 diluted | Not applicable |
| Operating cash flow | $296.4 million | $150.3 million |
Management reported Core Earnings, a non-GAAP measure, of $57.2 million, down from $94.4 million. Net revenues, as defined by the company, were approximately $62.3 million (net interest income after provision plus other income). No conventional operating margin was disclosed.
Liquidity, debt and capital
- Cash and cash equivalents were $115.5 million, up from $78.7 million at December 31, 2013; an additional $32.6 million was restricted cash collateral.
- Total liabilities were $2.06 billion and total equity was $1.43 billion. Debt financing totaled approximately $1.96 billion, down from $2.21 billion at year-end; management reported debt-to-equity of 1.4:1 and a target of 3.0:1 or below.
- Debt included $933 million of FHLB borrowings, $325 million of 7.375% senior notes due October 2017, $331.9 million of long-term financing and $371.0 million of repurchase agreements.
- The company reported $518.9 million of unencumbered loans and $360.1 million of unencumbered securities. It had $472 million of additional committed FHLB financing, $1.3 billion of committed secured facility capacity available, and no borrowings under its $75 million revolving credit facility or $50 million credit agreement.
- The February IPO issued 15.2 million shares to the public and generated approximately $238.8 million of net proceeds. The filing also reports $259.0 million of gross common-stock issuance proceeds and $20.2 million of offering costs.
Material changes and unusual items
- Net income fell sharply year over year, principally because loan-sale income declined to $41.3 million from $83.0 million and derivative results swung to a $26.3 million loss from a $2.3 million gain. The derivative loss was attributed mainly to falling interest rates reducing the value of hedges against fixed-rate assets.
- Despite the lower loan-sale income, Ladder sold 42 loans with $772.4 million face value in two securitizations, versus 35 loans totaling $797.2 million in two securitizations a year earlier. Net results from securitized loan sales, including related hedge results, were $35.4 million versus $84.4 million.
- Interest income increased with a larger average securities portfolio; interest expense also increased as average debt rose to $2.1 billion from $1.3 billion. Management’s non-GAAP interest income, net of cost of funds, was $20.8 million versus $17.8 million.
- Operating lease income increased to $13.2 million from $6.5 million, reflecting a larger real estate portfolio. Real estate operating expenses and depreciation and amortization also rose.
- The IPO and corporate reorganization made a portion of income subject to corporate income tax; reported tax expense was $5.3 million versus $2.1 million. The predecessor’s partnership income was generally not subject to U.S. federal income tax.
- Operating cash flow benefited from the conduit lending and securitization cycle, including $783.8 million of loan-sale proceeds. Investing activities used $214.6 million and financing activities used $45.1 million; operating cash flow should not be read as recurring earnings.
- The filing revised 2013 comparative financial statements for accounting errors, including a $2.0 million reduction in reported 2013 net income. The displayed 2013 results are revised.
Outlook, risks and contingencies
Management cited opportunities from maturing commercial real estate debt, a low-rate environment and financing demand, and said it can shift capital among lending, securities and real estate. It provided no quantified earnings or revenue guidance. Management described the market opportunity as conditional, with results dependent on securitization profitability, loan volume, credit performance, financing availability and cost, net interest margins and hedging effectiveness.
- Interest-rate sensitivity analysis estimated that a 100-basis-point LIBOR decrease would reduce projected 12-month net income by $4.5 million while increasing portfolio value by $34.9 million; a 100-basis-point increase would raise projected net income by $5.7 million while decreasing portfolio value by $34.7 million.
- Funding and liquidity risks include margin calls, collateral haircuts, lender discretion and possible reduced availability of financing during market disruption. The company reported compliance with debt covenants at March 31, 2014.
- Loan credit risks include borrower, collateral-value and refinancing deterioration. No originated loans were individually impaired; the loan-loss reserve was $2.65 million. One acquired, previously credit-impaired loan of $4.62 million was on non-accrual.
- Unfunded loan commitments were $66.0 million. Separately, $30.3 million remained to be funded under commitments to purchase GN construction securities. These commitments are conditional and create funding and credit exposure.
- About $210.3 million of a subsidiary’s capital was restricted from transfer to its parent without regulatory approval. The filing also identifies real estate concentration, derivative valuation, regulatory, covenant and counterparty risks.
- No material litigation or material changes to the annual report’s risk factors were reported. On April 29, 2014, after quarter-end, a bank repurchase facility’s temporary capacity was increased from $300 million to $450 million, no later than April 18, 2015.
Important facts for investors to verify
- Reconcile GAAP net income of $18.4 million, Class A-attributable income of $12.7 million, EPS and non-GAAP Core Earnings; confirm the effects of the IPO and noncontrolling ownership.
- Assess whether the Q1 derivative loss reflects hedge timing and interest-rate movements or signals persistent volatility; review hedge positions and exposure assumptions.
- Verify the sustainability of loan securitization volumes and margins, including the difference between loan-sale income and related hedge results.
- Review debt maturities, secured borrowing terms, collateral and margin-call provisions, covenant headroom, and restricted cash and subsidiary capital.
- Monitor credit quality, the acquired non-accrual loan, the reserve, unfunded commitments and real estate occupancy and tenant concentrations.
- Consider the revised 2013 comparison and the company’s stated limitations of non-GAAP Core Earnings when comparing performance.