Ladder Capital Corp. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Ladder is an internally managed REIT focused on commercial real estate loans, securities and property investments. At quarter-end, it reported $6.2 billion in assets and $1.5 billion in equity.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Interest income | $78.2 million | $57.5 million |
| Interest expense | $44.7 million | $31.4 million |
| Net interest income | $33.5 million | $26.1 million |
| Provision for loan losses | $3.0 million | None |
| Income before taxes | $71.7 million | $18.3 million |
| Net income | $67.8 million | $19.6 million |
| Net income attributable to Class A shareholders | $50.9 million | $13.5 million |
| Diluted EPS | $0.53 | $0.18 |
| Class A dividend per share | $0.315 | $0.300 |
Results included $31.0 million of net gains on real estate sales and $15.0 million of derivative gains. Core Earnings, a non-GAAP measure, were $63.8 million versus $31.6 million. The filing does not provide a clear consolidated profit-margin measure.
- Portfolio and liquidity: Loans totaled $3.8 billion, securities $1.1 billion and real estate $981 million. Cash and cash equivalents were $68.4 million; restricted cash was $44.8 million. Management reported $2.2 billion of committed undrawn funding capacity.
- Debt and leverage: Debt obligations, net, were $4.62 billion, up from $4.38 billion at December 31, 2017. Debt-to-equity was 3.1:1; adjusted leverage, a non-GAAP measure excluding CLO debt, was 2.6:1. Total equity was $1.50 billion.
- Cash flow: Operating activities used $65.1 million, investing activities used $182.1 million, and financing activities provided $177.7 million. Cash, cash equivalents and restricted cash ended the quarter at $113.2 million, down from $182.7 million at year-end.
- Loan yields and funding costs: The weighted average yield on mortgage loans was 7.2%; weighted average borrowing cost against those loans was 3.3%. Non-GAAP cost of funds was $47.6 million, compared with $35.1 million.
Material changes versus the prior period
- Class A shareholder income rose to $50.9 million from $13.5 million. The increase reflected higher real estate sale gains, derivative results, loan-sale income and lease income; it was partly offset by lower securities gains, higher expenses and higher tax expense.
- Net interest income increased by $7.4 million, with higher average loan balances contributing to interest income growth. Interest expense also rose, reflecting higher average debt, increased LIBOR and a shift toward higher-cost funding.
- Net real estate sale gains were $31.0 million versus $2.3 million, including $29.4 million from sales of two diversified properties. Derivative results improved to a $15.0 million gain from a $2.0 million loss.
- The loan-loss allowance increased from $4.0 million to $7.0 million. Two defaulted loans backed by the same retail property had a $26.9 million carrying value; Ladder recorded a $2.7 million specific provision during the quarter.
- Mortgage loan receivables held for investment increased to $3.53 billion from $3.28 billion. Securities declined slightly to $1.10 billion from $1.11 billion, while real estate and related lease intangibles decreased to $981 million from $1.03 billion.
Outlook, commentary and risks
- Management described commercial real estate financing demand and property values as generally strong and stable, and noted increased CMBS issuance in early 2018. It expects to remain active in conduit securitizations and transitional-property lending. No formal earnings or financial guidance was provided.
- The company cited interest-rate, credit-spread, real estate valuation, credit, liquidity and financing availability risks. Repurchase lenders can require additional collateral or repayment if collateral values fall; the company reported covenant compliance at quarter-end.
- FHLB advances were $1.35 billion, or 29.1% of outstanding debt. The captive insurance subsidiary’s eligibility to remain an FHLB member is subject to a transition period ending February 19, 2021; future funding alternatives could carry higher costs or different advance rates. Approximately $1.3 billion of the subsidiary’s capital could not be transferred by dividend without regulatory approval.
- Unfunded commitments to fund mortgage loans were $213.6 million, up from $157.0 million at year-end, subject to borrower conditions. About $780 million of equity was restricted from dividends under debt covenants. REIT status requires annual distribution of at least 90% of taxable income.
- A $1.1 million tenant real estate tax recovery relating to prior periods was recorded in Q1 2018; management deemed the out-of-period adjustment immaterial. The company adopted new revenue guidance with no cumulative adjustment. No material litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of the quarter’s earnings and Core Earnings is repeatable, given the property-sale and derivative gains?
- What is the outlook for the two defaulted retail-property loans, the bankruptcy proceedings and recovery of the $26.9 million carrying value?
- Can Ladder maintain funding access and liquidity amid rising rates, repurchase-facility collateral requirements and the approaching FHLB transition deadline?
- How will the $213.6 million unfunded loan commitments, debt maturities and REIT distribution requirements affect available capital?
- Confirm the April 2018 extension of a repurchase facility: the filing says its capacity was reduced from $450 million to $350 million, with definitive documentation still pending.