Ladder Capital Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; filed November 7, 2019. Ladder is an internally managed REIT focused on commercial real estate loans, real estate securities and property investments. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $82.3 | $90.4 | $254.0 | $253.8 |
| Interest expense | $51.4 | $51.5 | $155.0 | $144.6 |
| Net interest income | $30.9 | $38.9 | $99.0 | $109.2 |
| Net interest income after loan-loss provision | $30.9 | $28.6 | $98.4 | $95.6 |
| Net income | $30.9 | $83.5 | $91.6 | $194.8 |
| Net income attributable to Class A shareholders | $27.6 | $66.6 | $82.0 | $155.9 |
| Diluted earnings per share | $0.26 | $0.67 | $0.77 | $1.61 |
Other notable income: Q3 operating lease income was $24.4 million, loan-sale gains $11.2 million, realized securities gains $3.4 million, real estate-sale gains $2.1 million and derivative losses $9.5 million. For the first nine months, these were $81.1 million, $38.6 million, $10.7 million, $1.0 million and a $36.0 million derivative loss, respectively. Core earnings, a company-defined non-GAAP measure, were $44.1 million in Q3 and $142.0 million year to date, versus $63.4 million and $177.6 million in 2018.
Cash flow: For the nine months, operating cash flow was $64.2 million, investing cash outflow was $285.8 million and financing cash inflow was $244.8 million. Cash, cash equivalents and restricted cash rose $23.3 million to $121.8 million, including $83.1 million unrestricted cash.
Balance sheet at September 30: Total assets were $6.62 billion; total equity was $1.64 billion. Debt obligations, net, were $4.86 billion, up from $4.45 billion at year-end 2018. Reported debt-to-equity was 3.0x and adjusted leverage was 2.9x. The portfolio included $3.39 billion of loans, $1.91 billion of securities and $981 million of real estate. The loan-loss allowance was $18.5 million.
Liquidity and distributions: Ladder reported $2.4 billion of committed, undrawn funding capacity: $266.4 million on its revolver, $869.3 million from the FHLB and approximately $1.3 billion from other committed facilities. It declared $0.34 per Class A share for Q3 and $1.02 per share for the first nine months. Unfunded loan commitments were $257.7 million.
Margins: The filing reports net interest income and asset/funding yields, but does not provide a conventional consolidated profit-margin measure. At September 30, the weighted average yield was 7.2% on mortgage loans and 3.2% on real estate securities; corresponding borrowing rates were 3.6% and 2.7%.
Material changes versus comparable periods
- Class A shareholder income fell to $27.6 million in Q3 from $66.6 million, and to $82.0 million for nine months from $155.9 million. A major factor was much lower real estate-sale gains: $2.1 million versus $63.7 million in Q3, and $1.0 million versus $96.3 million year to date.
- Derivative results swung from a $7.1 million Q3 gain and $29.2 million nine-month gain in 2018 to losses of $9.5 million and $36.0 million in 2019. Management attributed the 2019 losses primarily to interest-rate movements.
- Nine-month net interest income declined $10.2 million as interest expense rose $10.4 million while interest income was nearly flat. The securities portfolio expanded to $1.91 billion from $1.41 billion at year-end 2018, while total loans decreased to $3.39 billion from $3.48 billion.
- Loan-sale gains and realized securities gains improved year over year; the nine-month provision for loan losses declined to $0.6 million from $13.6 million.
- Debt rose alongside higher repurchase financing; the CLO debt balance fell to $117.8 million from $601.5 million at year-end. Management said all outstanding debt on the two CLO transactions was redeemed in October 2019.
Outlook, risks and unusual items
- Management described demand for commercial mortgage financing and property values as generally stable, while noting a flattening yield curve and the possibility of slower economic growth. It expected to continue originating transitional-property loans and participating in CMBS securitizations; no numerical earnings or dividend guidance was provided.
- Credit exposures include three impaired/non-accrual loans. Two defaulted loans from one transaction had a $26.9 million carrying value. A separate $45.0 million loan was restructured into A- and B-notes plus an equity interest; it was extended in October and again on November 6, 2019, to February 6, 2020.
- Key financing risks include collateral valuation and margin calls under repurchase agreements, refinancing and maturity concentration, covenant compliance, and dependence on diverse funding markets. The company reported covenant compliance at quarter-end. Approximately $1.9 billion of Tuebor capital could not be transferred by dividend without insurance-regulator approval.
- Tuebor’s FHLB membership transition period runs through February 19, 2021. Management expected to shift gradually toward alternative funding, but warned that alternative sources could carry higher costs or lower advance rates; continued FHLB access is not assured.
- Interest-rate sensitivity estimates for a 100-basis-point move showed a projected 12-month net-income change of negative $3.7 million for a rate decrease and positive $13.3 million for an increase, with projected portfolio-value changes of positive $15.8 million and negative $15.6 million, respectively.
- Unusual items included a $1.4 million real estate impairment and a $1.1 million debt-extinguishment loss related to a property whose lease had been prepaid and which was subsequently sold. The filing reported no material litigation, no material quarterly risk-factor changes, and effective disclosure controls.
Important facts for investors to verify
- Whether the three troubled loans’ collateral values, restructurings and repayment prospects support the reported allowance and non-accrual treatment.
- Whether the October 2019 CLO redemption was completed as described and how it affects funding costs, liquidity and leverage.
- Near-term secured-debt maturities, extension conditions, collateral haircuts and potential margin calls; reported repurchase-agreement borrowings were $1.79 billion at quarter-end.
- How Ladder will replace or manage FHLB funding as the 2021 transition deadline approaches, including the effect of restricted subsidiary capital.
- The sustainability of earnings and dividends given the volatility in property-sale gains and derivative results, the REIT distribution requirement, and $257.7 million of unfunded loan commitments.