Ladder Capital Corp — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results. Amounts below are in U.S. dollars; financial statement figures are converted to millions unless stated otherwise.
Business context
Ladder is an internally managed REIT focused on commercial real estate loans, securities and property investments. At quarter-end, assets totaled $6.43 billion, comprising $4.16 billion of loans, $978 million of securities and $1.00 billion of real estate and related lease intangibles.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $38.9m | $29.3m | $109.2m | $85.8m |
| Provision for loan losses | $10.3m | — | $13.6m | — |
| Net interest income after provision | $28.6m | $29.3m | $95.6m | $85.8m |
| Total other income | $96.2m | $39.1m | $226.9m | $117.0m |
| Net income | $83.5m | $29.8m | $194.8m | $80.5m |
| Net income attributable to Class A shareholders | $66.6m | $23.6m | $155.9m | $59.2m |
| Diluted EPS | $0.67 | $0.28 | $1.61 | $0.74 |
- Q3 other income included a $63.7m gain on real estate sales, $7.1m net derivative gains, and a $4.3m loss on debt extinguishment/defeasance. The real estate gain included $62.9m from selling four diversified properties.
- Loan portfolio weighted-average yield was 7.5%, versus 3.8% weighted-average borrowing cost against mortgage loans. Securities yield and associated borrowing cost were 3.1% and 2.5%, respectively; real estate mortgage borrowing cost was 5.1%. The filing does not provide a single consolidated net interest margin figure.
- Operating cash flow was negative $51.3m for the nine months, compared with negative $316.4m in 2017. Investing cash flow was negative $320.0m and financing cash flow positive $273.6m. Cash, cash equivalents and restricted cash fell to $84.9m from $182.7m at year-end 2017; unrestricted cash was $49.6m.
- Debt obligations, net were $4.76bn, up from $4.38bn at December 31, 2017. Total equity was $1.55bn. Reported debt-to-equity was 3.1:1 and management’s non-GAAP adjusted leverage was 2.6:1.
- Management reported $2.2bn of committed undrawn capacity, including $266.4m on the revolver, $721.5m of FHLB financing and approximately $1.2bn of other committed facilities. The revolver had no outstanding borrowings. The company reported compliance with debt covenants.
- Class A dividends declared were $0.325 per share for Q3. A $0.570 per-share Q4 dividend was approved November 1, after quarter-end, payable as cash and/or stock subject to shareholder elections.
Changes versus prior comparable periods
- Q3 net income attributable to Class A shareholders rose $43.0m year over year; nine-month attributable income increased $96.7m. Gains on property sales and improved derivative results were major contributors, so reported earnings benefited materially from transaction-related and market-sensitive items.
- Net interest income grew, reflecting higher average loan balances and a shift toward loans from securities. Higher debt balances and LIBOR also increased interest expense; net interest income after loan-loss provision declined slightly in Q3 but rose for the nine-month period.
- The loan-loss provision increased to $13.6m year to date from none in 2017. Non-accrual loan principal was $71.9m at September 30, versus $26.9m at year-end 2017.
- Loans increased to $4.16bn from $3.51bn at year-end; securities declined to $978m from $1.11bn, and real estate declined to $1.00bn from $1.03bn. Total debt rose while total cash and restricted cash decreased.
- The 2017 comparative results reflect the company’s retrospective change to treat certain risk-retention securitization transfers as sales rather than financings.
Outlook, risks and unusual items
- Management described demand for commercial mortgage financing as solid and property values as stable in most U.S. markets. It cited maturities, acquisitions, refinancing and property improvements as lending demand drivers, while noting a flattening yield curve and possible slower economic growth. No numerical earnings or revenue guidance was provided.
- Credit developments include two related loans with $26.9m carrying value in default and a $2.7m reserve, and a separate $45.0m loan placed on non-accrual with a $10.0m reserve. The latter was not in default at September 30, but subsequently experienced a maturity default and was restructured as a TDR on October 17 into a $35m A-Note, $10m B-Note and 19% equity interest; the B-Note may be forgiven or reduced under certain conditions.
- Unfunded first-mortgage loan commitments were $386.0m, up from $157.0m at year-end 2017. Funding depends on borrower conditions and other circumstances.
- FHLB advances were $1.21bn. The captive insurer’s FHLB membership is permitted through February 19, 2021 under a transition period; future access or replacement funding terms are not assured. About $1.7bn of the subsidiary’s capital was restricted from transfer by dividend without regulatory approval.
- Key exposures include interest-rate and spread movements, collateral valuation and credit losses, repo margin calls and refinancing availability, real estate market and occupancy conditions, covenant compliance, and REIT distribution requirements. A 100-basis-point rate increase was estimated to raise projected 12-month net income by $17.8m but reduce portfolio value by $16.1m; a 100-basis-point decrease was estimated to reduce net income by $15.4m and increase portfolio value by $16.3m.
- Management reported effective disclosure controls, no material litigation, no material changes to the previously disclosed risk factors, and no material subsequent-event disclosure beyond the loan restructuring described above.
Important facts for investors to verify
- Whether the $45m restructured loan performs under its amended terms, and the ultimate recovery on the other defaulted loans and related collateral.
- How much of earnings is repeatable without the large real estate sale gains and favorable derivative results.
- Availability and cost of refinancing, repurchase funding and alternative financing as rates rise, including the transition away from FHLB access by 2021.
- Liquidity after dividends, loan commitments and debt maturities, and the extent to which restricted cash and subsidiary capital are unavailable for general use.
- Future loan-loss reserves, portfolio concentrations, and the implications of $386m in unfunded commitments and increased non-accrual balances.