Ladder Capital Corp — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual 10-K, not a standalone fourth-quarter filing; quarterly figures are included. Ladder is an internally managed commercial real estate finance REIT with loan, securities and real estate businesses.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Interest income | $263.7 million | $236.4 million |
| Interest expense | $146.1 million | $120.8 million |
| Net interest income after loan-loss provision | $117.5 million | $115.2 million |
| Total other income | $186.5 million | $163.3 million |
| Income before taxes | $133.6 million | $120.0 million |
| Net income | $125.9 million | $113.7 million |
| Net income attributable to Class A shareholders | $95.3 million | $66.7 million |
| Basic / diluted EPS | $1.16 / $1.13 | $1.08 / $1.06 |
| Operating / investing / financing cash flow | $12.0 / $(306.6) / $387.9 million | $338.4 / $36.3 / $(448.1) million |
At year-end, assets were $6.03 billion, including $3.51 billion of loans, $1.11 billion of securities and $1.03 billion of real estate. Total equity was $1.49 billion. Debt obligations were $4.38 billion; reported debt-to-equity was 2.9x and adjusted leverage, a non-GAAP measure excluding CLO debt, was 2.5x. Cash and restricted cash totaled $182.7 million, of which $76.7 million was unrestricted. The company reported $2.5 billion of committed undrawn funding capacity. No conventional profit-margin figure is clearly reported in the filing.
Loan portfolio yield was 7.0% at year-end versus borrowing cost of 3.1%; securities yield was 2.9% versus related borrowing cost of 1.7%. Annual dividends declared were $1.215 per Class A share.
Changes versus 2016
- Class A-attributable net income rose $28.6 million. Higher loan-sale income, lease income and realized securities gains contributed; higher expenses, derivative losses and lower real estate sale gains partly offset the increase.
- Loans grew to $3.51 billion from $2.35 billion, while securities fell to $1.11 billion from $2.10 billion. Real estate increased to $1.03 billion from $822.3 million.
- Interest expense increased $25.3 million, reflecting greater average debt, higher LIBOR and a shift toward higher-cost loan financing and unsecured notes. Net interest income increased only $2.0 million.
- Operating cash flow fell to $12.0 million from $338.4 million, principally due to the timing and volume of loans originated and sold. The filing also adopted cash-flow presentation changes, including reclassification of certain interest-only security receipts.
- Debt increased by $437.7 million. Ladder issued $500 million of 5.25% notes due 2022 and $400 million of 5.25% notes due 2025, and redeemed the remaining $297.7 million of 7.375% notes due 2017.
Outlook, notable items and risks
- Outlook: Management described U.S. commercial real estate lending demand and property values as generally stable, citing more than $1.8 trillion of commercial real estate debt maturities expected over five years and 22.7% growth in 2017 U.S. CMBS issuance. It expected to continue lending to stabilized and transitional properties and participate in securitizations. No quantified company earnings or revenue guidance is provided.
- Securitizations and accounting: Ladder completed seven securitizations in 2017, selling or transferring loans with $1.5 billion aggregate principal. Its first Ladder-only multi-borrower securitization generated a $26.1 million gain. In the fourth quarter, it changed its accounting for certain risk-retention transfers from financing to sale treatment and retrospectively adjusted 2017 interim periods.
- CLOs: Two inaugural CLOs were completed in 2017. At year-end, $688.5 million of CLO debt was outstanding against $880.4 million of mortgage loans; Ladder retained subordinate interests and consolidated the CLOs.
- Credit: Two loans from one transaction, with $26.9 million carrying value, were in default and the borrower was in bankruptcy. They were on non-accrual from July 1, 2017; management recorded no impairment based on collateral liquidation value. The portfolio loan-loss allowance remained $4.0 million.
- Funding and rate exposure: FHLB advances were $1.37 billion, or 31.3% of debt. Regulatory rules require the captive subsidiary’s FHLB membership to end by February 19, 2021, with advance limits scheduled to decline in 2020–21; replacement funding could cost more. LIBOR’s expected discontinuation after 2021 creates uncertainty for floating-rate assets and borrowings. A 100-basis-point rate increase was estimated to raise 12-month net income by $17.0 million but reduce portfolio value by $22.8 million, after hedging.
- Other risks and unusual items: Key exposures include leverage, collateral values and borrower defaults, refinancing and securitization-market access, interest-rate and credit-spread movements, liquidity and margin calls, REIT qualification, and Investment Company Act exemptions. The Tax Cuts and Jobs Act reduced the tax rate applicable to TRS activities and led to deferred-tax adjustments. Management reported no material litigation and said hurricane damage to affected properties was not significant. PwC gave an unqualified opinion on the financial statements and internal controls; a change in accounting principle was noted.
Key facts for investors to verify
- Review the defaulted $26.9 million loan exposure, bankruptcy status, non-accrual treatment and collateral valuation supporting the no-impairment conclusion.
- Assess the sustainability of earnings and dividends against securitization-dependent loan-sale gains, portfolio growth, higher funding costs and only $12.0 million of operating cash flow.
- Confirm the availability, covenants, maturities and extension conditions for committed facilities, and the plan to replace FHLB funding ahead of the 2021 membership deadline.
- Examine CLO retained interests, risk-retention obligations and the retrospective accounting change’s effect on reported earnings and comparability.
- Monitor REIT and Investment Company Act compliance, tax effects and the potentially higher cost of funding after the FHLB transition.