Ladder Capital Corp. — FY 2015 Form 10-K
Business context and reporting period. This annual filing, dated March 4, 2016, covers the year ended December 31, 2015, with comparisons primarily to 2014. Ladder is an internally managed commercial real estate finance REIT investing through lending, securities and real estate businesses. It originates conduit loans for CMBS securitization, holds balance-sheet loans and securities, and owns commercial and residential properties. The 2014 comparison includes both predecessor and post-IPO results, so it is not fully like-for-like.
Financial performance and position
| Metric | FY 2015 / Dec. 31, 2015 | FY 2014 / Dec. 31, 2014 | |
|---|---|---|---|
| Interest income | $241.5 million | $187.3 million | |
| Interest expense | $113.3 million | $77.6 million | |
| Net interest income | $128.2 million | $109.8 million | |
| Net interest income after loan-loss provision | $127.6 million | $109.2 million | |
| Total other income | $201.2 million | $189.2 million | |
| Costs and expenses | $168.2 million | $174.1 million | |
| Income before taxes | $160.7 million | $124.2 million | |
| Net income | $146.1 million | $97.6 million | |
| Net income attributable to Class A shareholders | $73.8 million; $1.43 basic EPS, $1.42 diluted | $44.2 million; $0.90 basic EPS, $0.86 diluted | |
| Operating cash flow | $40.6 million | $208.7 million | |
| Total assets / total equity | $5.90 billion / $1.49 billion | $5.81 billion / $1.51 billion | |
| Total debt / debt-to-equity | $4.27 billion / 2.9x | $4.18 billion |
The filing does not provide a single consolidated operating-margin figure. At year-end, weighted-average loan yield was 6.8% versus 2.4% on borrowings secured by mortgage loans; securities yield was 2.8% versus 1.0% on related borrowings. These are asset/funding rates, not consolidated margins.
- Portfolio: $2.31 billion in loans, $2.41 billion in securities and $834.8 million in real estate. Loans grew from $1.94 billion a year earlier; securities declined from $2.82 billion; real estate increased from $769.0 million.
- Debt and liquidity: Debt included $1.86 billion of FHLB advances, $1.26 billion of repurchase financing, $544.7 million of nonrecourse property mortgages and $612.6 million carrying value of senior notes. Ladder reported $109.0 million of unrestricted cash, $644.4 million of unencumbered loans, $5.6 million of unencumbered securities and $1.4 billion of committed undrawn capacity. Some subsidiary capital and cash are restricted.
- Credit and securities: The company recorded a $0.6 million loan-loss provision for 2015; the allowance was $3.7 million. No loans were individually impaired or on non-accrual at year-end. 98.5% of CMBS investments were investment grade, including 87% rated AAA/Aaa.
Material changes versus 2014
- Class A attributable income rose $29.6 million, while total net income rose $48.5 million. The company attributed improvement to higher net interest income, improved derivative results and lower income-tax expense following its REIT election effective for 2015.
- Net interest income increased $18.5 million as average loan and securities balances expanded; interest expense rose $35.7 million, reflecting higher average debt.
- Net income from loan sales fell to $71.1 million from $145.3 million. The company sold $2.6 billion of loans through 10 securitizations versus $3.5 billion in 10 securitizations in 2014; it cited lower conduit lending spreads and increased competition.
- Derivative transactions remained a loss, but improved to a $38.9 million loss from a $94.8 million loss. Realized and unrealized securities and property-sale results contributed to volatile other income.
- Non-GAAP Core Earnings declined to $191.5 million from $219.3 million, principally reflecting lower loan-sale profits, partly offset by increased net interest and lease income. Core Earnings is management-defined and should not be treated as GAAP net income or cash flow.
- Operating cash flow decreased to $40.6 million from $208.7 million. Cash-flow totals are affected by the company’s loan origination, sale and securitization activity.
Outlook, risks and unusual items
- Outlook: Management described commercial real estate values as stable, cited low interest rates and more than $1.7 trillion of expected commercial real estate debt maturities over four years, and said it would shift capital among lending, securities and property as opportunities change. 2015 CMBS issuance was $101.0 billion, up 7.4% year over year. The filing provides no specific company earnings or revenue guidance.
- Funding risk: FHLB advances represented 43.4% of debt at year-end. A January 2016 FHFA rule permits the captive insurer to remain an FHLB member through February 19, 2021, subject to limits on new advances and maturities. Management expects a gradual move to alternative funding but cautions replacement funding could cost more or be harder to secure.
- Refinancing and leverage: Contractual debt maturities included $2.53 billion in 2016, although some facilities have extension options. Repurchase lenders may demand additional collateral or repayment if collateral values fall; facilities also contain covenants and potential cross-default provisions.
- Market and credit risks: Earnings and asset values are sensitive to interest rates, credit spreads, prepayments, real estate values, liquidity and securitization-market conditions. Management reported rapid CMBS spread widening in parts of the market during the second half of 2015. A 100-basis-point rate increase was estimated to raise projected 12-month net income by $9.0 million while reducing portfolio value by $36.0 million; a 100-basis-point decrease had the opposite directional effects.
- Regulatory and REIT risks: CMBS risk-retention rules were scheduled to take effect in December 2016 and may reduce securitization economics. REIT qualification, investment-company exemptions and regulatory access to FHLB financing depend on ongoing compliance and interpretations that may change.
- Dividend and dilution: 2015 declared dividends totaled $2.225 per Class A share, including a $1.45 fourth-quarter distribution intended to satisfy REIT taxable-income and accumulated-earnings requirements. Paid January 21, 2016, it comprised $15.5 million cash and 5.61 million Class A shares valued at $64.1 million; the filing says the accumulated earnings-and-profits calculation remains uncertain.
- Other unusual items: Ladder sold 187 condominium units in 2015, recognizing $23.5 million of gains, and recorded $40.4 million of total real estate sale gains. It also reported negative $36.5 million of other comprehensive income, principally reflecting securities valuation changes. No material litigation was reported. The independent auditor issued an unqualified opinion; management concluded disclosure controls and internal control over financial reporting were effective. Auditor attestation of internal controls was omitted under the company’s emerging-growth-company exemption.
Important facts for investors to verify
- Reconcile GAAP net income of $146.1 million with $73.8 million attributable to Class A shareholders and the $191.5 million non-GAAP Core Earnings measure.
- Review the timing, extension rights and collateral terms of 2016 debt maturities, repurchase facilities and the $1.86 billion FHLB exposure; assess liquidity available outside restricted subsidiaries.
- Track the consequences of the FHLB transition rule, including replacement-funding costs and any changes in advance capacity before 2021.
- Test whether loan yields, securitization volumes and loan-sale margins can offset higher financing costs and weaker CMBS spreads.
- Assess the quality and valuation sensitivity of securities, loan-loss reserves, property-sale gains and the remaining condominium inventory.
- Confirm REIT distribution and accumulated-earnings compliance, the effect of stock-funded dividends on dilution, and any subsequent changes to share count or debt.