Ladder Capital Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are to the corresponding 2019 periods unless stated otherwise. Dollar amounts are in millions, except per-share data. Ladder is an internally managed commercial real estate finance REIT investing in loans, real estate securities, and real estate.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $62.1 | $85.3 | $134.7 | $171.8 |
| Interest expense | $68.4 | $52.4 | $119.8 | $103.6 |
| Net interest income | $(6.3) | $33.0 | $14.9 | $68.2 |
| Loan-loss provision/(release) | $(0.7) | $0.3 | $25.9 | $0.6 |
| Net income/(loss) | $(5.2) | $36.1 | $(19.3) | $60.6 |
| Net income/(loss) attributable to Class A shareholders | $(4.2) | $32.2 | $(19.9) | $54.4 |
| Basic EPS | $(0.04) | $0.31 | $(0.19) | $0.52 |
| Core earnings, non-GAAP | $12.8 | $51.0 | $43.6 | $97.9 |
Q2 net interest income was negative as interest expense exceeded interest income. Management attributed lower interest income mainly to reduced LIBOR and smaller loan and securities portfolios; higher expense reflected new financing, a fully drawn revolver, debt paydown costs, and accelerated financing-cost amortization. The filing does not provide a single company-wide operating-margin measure.
- Balance sheet at June 30: Total assets were $6.61 billion; debt obligations, net, were $4.95 billion; total equity was $1.51 billion. At December 31, 2019, these were $6.67 billion, $4.86 billion, and $1.64 billion, respectively.
- Liquidity: Cash and cash equivalents were $826.1 million, with another $47.9 million of restricted cash. Total cash, cash equivalents, and restricted cash rose from $355.7 million at year-end. Management reported more than $750 million of unrestricted cash on July 27.
- Cash flow, six months: Operating cash flow was $43.5 million (versus $132.5 million); investing cash flow was $433.3 million (versus $(49.4) million); financing cash flow was $41.5 million (versus $33.8 million). Cash, cash equivalents, and restricted cash increased $518.3 million. Asset repayments and sales were important sources of cash.
- Credit and portfolio: Held-for-investment loans, net of reserves, were $2.91 billion; real estate securities were $1.51 billion; real estate and related intangibles were $1.04 billion. The loan-loss allowance was $49.1 million, compared with $20.5 million at year-end. Principal on non-accrual loans increased to $185.9 million from $98.7 million.
- Yields and funding costs: At June 30, the weighted-average loan yield was 6.7% versus 7.9% at June 30, 2019; securities yield was 1.6% versus 3.3%. Borrowing costs against loans were 4.8% versus 3.9%, while costs against securities were 2.6% versus 3.0%.
- Leverage and dividends: Adjusted leverage, a company-defined non-GAAP measure, was 3.1x versus 3.0x at year-end. Class A dividends were $0.20 per share in Q2 and $0.54 for the first half, versus $0.34 and $0.68, respectively, in 2019.
Material changes and unusual items
- Results deteriorated sharply year over year: Q2 moved from $36.1 million of net income to a $5.2 million net loss; first-half net income of $60.6 million became a $19.3 million net loss. First-half loan-loss provision rose to $25.9 million, including adoption of CECL and updated recessionary assumptions.
- Management sold loans and securities and repaid mark-to-market borrowings to build liquidity. During Q2 it reported paying down more than $1.0 billion of mark-to-market debt; actions included $646.8 million of FHLB paydowns, $275.8 million of securities-repurchase paydowns, and more than $155.9 million of loan-repurchase paydowns. The FHLB paydown incurred $6.5 million of prepayment penalties.
- Q2 included $19.0 million of gain on extinguishment of unsecured notes. For the first half, Ladder repurchased $163.4 million principal of notes and recorded $19.3 million of aggregate extinguishment gains. Q2 also included COVID-related losses and costs which management adjusted in its presentation of core earnings; the disclosed items totaled $34.5 million before the $19.0 million debt gain and $1.5 million accelerated financing-cost amortization offset.
- In April, Ladder completed a private CLO that generated $310.2 million gross proceeds against $481.3 million of loans, on a matched-term, non-mark-to-market, non-recourse basis. It also entered a secured financing facility of approximately $206.4 million; $188.7 million was outstanding at June 30. The facility carries a high stated rate of 10.75% and includes a minimum interest premium.
- CECL adoption on January 1 reduced equity by $5.8 million. The total loan allowance at June 30 includes $29.4 million of CECL reserves and asset-specific reserves; management cited $20.7 million of asset-specific reserves on five loans.
Outlook, commentary, and risks
- The filing gives no specific earnings or dividend guidance. Management said the pandemic’s duration and ultimate effects on revenue, profitability, and financial position were difficult to assess, but expected cash resources, operating cash flow, and financing access to support operations for more than one year from filing issuance.
- Management reported compliance with all financial covenants at June 30. It disclosed that conservative cash holdings had contributed to a 3.5x leverage covenant breach at March 31; the breach was cured during the contractual cure period through debt paydowns. Management said cash-adjusted leverage was significantly below 3.0x, without providing a precise cash-adjusted ratio.
- COVID-19 risks include borrower payment stress, requests for interest deferral or forbearance, lower property values, reduced refinancing capacity, weaker market liquidity, and repurchase-agreement margin calls. Hotel and retail exposures were identified as particularly vulnerable. Ladder reported collecting 100% of Q2 rent on net-leased properties and approximately 95% on diversified commercial properties.
- Other material risks include reliance on short-term and uncommitted repurchase funding, collateral-value declines and margin calls, higher-cost replacement financing, debt maturities, interest-rate and credit-spread movements, and commercial real estate concentration. The company also has $249.2 million of unfunded loan commitments; pandemic-related construction, capital expenditure, and leasing delays may affect when funding is required.
Important facts for investors to verify
- Whether cash levels and financing availability remain adequate as debt maturities, repurchase facilities, and the February 2021 FHLB reduction requirement approach.
- How non-accrual loans, borrower forbearance or modifications, collateral valuations, and CECL reserves evolve—especially for hotel, retail, and other stressed properties.
- Whether portfolio sales and lower asset balances continue to reduce recurring interest income, and how higher-cost financing affects net interest results.
- The sustainability and board approval of dividends given losses, REIT distribution requirements, contractual restrictions, and the reduced per-share dividend.
- The assumptions and adjustments behind non-GAAP core earnings and adjusted leverage; both are company-defined measures and should be considered alongside GAAP results and cash flows.