Ladder Capital Corp quarterly report, Q2 FY2015

Full document

Ladder Capital Corp — Q2 2015 Form 10-Q

Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2015. Ladder is an internally managed commercial real estate finance REIT, operating through commercial mortgage lending, real estate securities, and real estate investments. Its REIT election is effective beginning January 1, 2015. The 2014 comparative period includes predecessor operations before the February 2014 IPO, so some comparisons are not fully like-for-like.

Financial performance and position

  • Q2 earnings: Net income was $68.7 million, versus $30.2 million in Q2 2014. Net income attributable to Class A shareholders was $34.2 million, versus $12.5 million; basic and diluted EPS were $0.68 and $0.67, compared with $0.26 and $0.22.
  • First-half earnings: Net income was $86.7 million, versus $48.6 million. Class A attributable income was $43.4 million, versus $25.2 million; basic and diluted EPS were $0.86 and $0.85, versus $0.51 and $0.46.
  • Net interest: Q2 net interest income after loan-loss provision increased to $31.6 million from $28.2 million; first-half amount rose to $61.0 million from $50.0 million. Growth in average loan and securities balances was partly offset by higher financing costs and lower yields on newer investments.
  • Other income and net revenues: Q2 total other income was $86.5 million, versus $55.5 million. Company-defined net revenues were $118.1 million, versus $83.7 million. First-half other income was $121.5 million and net revenues were $182.5 million, compared with $95.9 million and $146.0 million, respectively. These results include significant gains and losses from derivatives, securities, loan sales, and property sales.
  • Cash flow: Operating activities provided only $0.1 million in the first half, compared with $432.3 million in 2014. Investing activities provided $190.7 million, versus $633.9 million used in 2014; financing activities used $164.1 million, versus $207.9 million provided. Cash and cash equivalents ended at $102.9 million, up from $76.2 million at year-end.
  • Assets, equity and liquidity: Total assets were $5.72 billion and total equity was $1.51 billion at June 30. Cash collateral held by brokers was $44.5 million. Management reported $1.5 billion of committed, undrawn financing capacity, $645.4 million of unencumbered loans and $20.2 million of unencumbered securities. Some subsidiary capital and equity are restricted from transfer or dividends.
  • Debt and leverage: Debt obligations were $3.48 billion, plus $611.4 million of senior unsecured notes, for total financing of about $4.09 billion. The reported debt-to-equity ratio was 2.7:1, within management’s stated target of 3.0:1 or below. Contractual borrowings due in the remainder of 2015 were $1.45 billion, some subject to extension options. The company reported compliance with financing covenants.
  • Portfolio and credit: Loans totaled $2.25 billion, securities $2.30 billion, and real estate $846.3 million, including property held for sale. The loan-loss reserve was $3.4 million; management reported no individually impaired loans, but disclosed one acquired, credit-impaired non-accrual loan with $4.6 million amortized cost.

Material changes versus comparable periods

  • Q2 Class A income rose by $21.7 million. Management attributed the increase chiefly to a $52.1 million favorable year-over-year change in derivative results, higher lease income and increased net interest income, partly offset by lower loan-sale income.
  • Q2 loan-sale income fell to $14.5 million from $45.4 million. In the first half, it fell to $44.6 million from $86.7 million; management cited lower aggregate principal sold, increased competition and lower conduit lending spreads.
  • Derivative results swung to a Q2 gain of $26.8 million from a loss of $25.3 million. For the first half they remained a loss, at $12.4 million, but improved from a $51.6 million loss in 2014. Results vary with interest rates and include realized and unrealized amounts.
  • Q2 operating lease income rose to $20.4 million from $12.8 million, reflecting property acquisitions and fuller periods of ownership. First-half real estate purchases totaled $140.2 million; real estate carrying value, including held-for-sale property, increased from year-end.
  • Available-for-sale securities declined to $2.30 billion from $2.82 billion at year-end. Q2 other comprehensive loss was $38.6 million, primarily reflecting unrealized securities valuation changes and reclassification of realized gains.
  • First-half operating cash flow was markedly lower than in 2014, while the company sold substantially more securities and had less cash proceeds from conduit loan sales. Operating cash flow should be interpreted in light of the business’s loan origination and sale cycle.

Outlook, risks and unusual items

  • Management described commercial real estate finance as presenting origination opportunities, citing debt maturities, demand for financing and constrained traditional lender capacity. It also noted that first-half 2015 CMBS issuance was $54.5 billion. No specific earnings or revenue guidance was provided.
  • Management expects REIT status to reduce corporate-level taxation on qualifying income, while taxable REIT subsidiary income and certain state and local taxes remain subject to tax. REIT qualification depends on satisfying ownership, asset, income and distribution rules; the company expects distributions sufficient to maintain REIT status, which may limit retained capital.
  • Interest-rate and market-value risk are material: a 100-basis-point LIBOR increase was estimated to reduce portfolio value by $44.9 million but increase projected 12-month net income by $11.6 million; a 100-basis-point decrease was estimated to increase portfolio value by $42.8 million but reduce projected net income by $8.0 million. These are sensitivity estimates, not forecasts.
  • Funding risks include reliance on secured and repurchase financing, lender discretion over collateral and margin calls, covenant requirements, refinancing needs and reliance on FHLB funding. Proposed FHLB membership rules could affect the captive insurer’s future access to advances if adopted as described; no borrowing change had occurred by June 30.
  • Other stated risks include commercial real estate credit and valuation exposure, geographic and property concentration, liquidity and credit-spread volatility, hedging effectiveness, regulatory requirements, and REIT and investment-company compliance. About $378.8 million of captive-insurer capital was restricted from transfer without regulatory approval.
  • Contingencies include $126.0 million of unfunded loan commitments and $4.9 million remaining under commitments to purchase GN construction securities. The filing reports no material litigation and no material subsequent event requiring disclosure.
  • Management revised prior-period cash-flow presentation for unsettled broker transactions, concluding the effect was not material. It also revised historical Core Earnings calculations for identified tracking and noncontrolling-interest adjustments, which it likewise considered immaterial. Core Earnings is a non-GAAP measure and should not be treated as a substitute for GAAP income or cash flow.

Investor verification priorities

  1. Assess how much reported earnings depends on volatile derivative and securities gains, property sales, and loan-sale timing; compare GAAP results with the company’s non-GAAP Core Earnings.
  2. Review the $1.45 billion of borrowings contractually due in the remainder of 2015, extension conditions, committed availability, collateral and potential margin-call exposure.
  3. Track conduit loan production, securitization volumes and profit margins, given the year-over-year decline in loan-sale income and management’s comments on competition and spreads.
  4. Evaluate declining loan and securities yields against rising funding costs, leverage, and the sensitivity of asset values and income to interest-rate changes.
  5. Monitor operating cash flow, required REIT distributions, restricted subsidiary capital, and the company’s ability to maintain liquidity while funding investments and debt service.
  6. Verify continued REIT qualification, tax effects and Tax Receivable Agreement obligations, including the expected timing and amount of payments.