Ladder Capital Corp — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Ladder is an internally managed REIT focused on commercial real estate loans, securities, and property investments. Financial statements are unaudited and consolidated.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $72.8 million | $60.3 million | $196.4 million | $175.7 million |
| Interest expense | $42.6 million | $30.7 million | $109.6 million | $88.6 million |
| Net interest income | $30.2 million | $29.6 million | $86.8 million | $87.0 million |
| Net income | $30.5 million | $49.6 million | $63.5 million | $42.1 million |
| Net income attributable to Class A shareholders | $24.0 million | $27.6 million | $48.2 million | $24.9 million |
| Diluted EPS | $0.28 | $0.44 | $0.59 | $0.40 |
| Class A dividend per share | $0.30 | $0.275 | $0.90 | $0.825 |
- Q3 net interest income was nearly flat year over year: higher loan balances and interest income were largely offset by higher funding costs and lower securities income.
- Q3 total other income fell to $39.1 million from $69.3 million, including lower loan-sale income and derivative results. Class A earnings declined despite modestly higher net interest income.
- For the nine months, Class A earnings rose to $48.2 million, but net interest income was essentially unchanged. The improvement reflected, among other things, a smaller derivative loss and higher realized securities gains.
- Management-reported non-GAAP Core Earnings were $35.6 million for Q3, down from $44.5 million, and $118.4 million for nine months, up from $113.6 million. Core Earnings include adjustments that differ from GAAP; the company cautions they are not a substitute for GAAP earnings or operating cash flow.
Balance sheet, cash flow, and financing
- Total assets were $6.41 billion and total equity was $1.47 billion at September 30, versus $5.58 billion and $1.51 billion, respectively, at year-end 2016.
- Loans totaled $3.96 billion, including $598.5 million of transferred loans that remain on the balance sheet; real estate securities were $1.10 billion, down from $2.10 billion at year-end; real estate and related lease intangibles were $1.04 billion, up from $822.3 million.
- Total debt obligations were $4.83 billion, including $631.5 million of liabilities for loan transfers not accounted for as sales. Secured and unsecured debt excluding that liability was $4.20 billion. Debt-to-equity was 3.3:1 including the transfer liability; management also reported 2.9:1 excluding that liability and including related obligations as described in the filing.
- Cash and cash equivalents were $48.9 million; restricted cash was $48.5 million. The company reported $1.9 billion in committed undrawn financing capacity and stated it was in compliance with debt covenants.
- Nine-month operating cash flow was negative $785.3 million, compared with negative $140.0 million a year earlier, mainly reflecting loan originations held for sale and timing of loan sales. Investing cash flow was positive $54.5 million; financing cash flow was positive $738.8 million. Cash, cash equivalents, and restricted cash increased $7.9 million to $97.4 million.
- During 2017, the company issued $500 million of 5.25% notes due 2022 and $400 million of 5.25% notes due 2025, and repaid the remaining $297.7 million of 2017 notes. Weighted-average yields at quarter-end were 6.7% on mortgage loans excluding transfers not considered sales and 2.8% on securities.
Material changes, outlook, and risks
- The portfolio shifted toward lending: nine-month loan originations were $1.8 billion; securities sales were about $995.9 million, and securities carrying value declined by roughly $1.0 billion from year-end. The company invested $230.7 million in real estate during the period.
- The June securitization of $625.7 million of loan interests did not qualify for sale accounting because of risk-retention-related transfer restrictions. The loans remain recognized, with a related non-recourse financing liability. Management included a $28.5 million economic gain from the transaction in nine-month Core Earnings, although it was not recognized as a GAAP loan-sale gain.
- Two loans with a combined carrying value of $26.9 million were in default and on non-accrual from July 1. Management reported no impairment based on collateral liquidation value; accrued unpaid interest was $4.8 million, including $3.5 million of default interest. The loan-loss reserve remained $4.0 million.
- Unfunded first-mortgage loan commitments were $145.8 million. Hurricanes Harvey, Irma, and Maria affected properties owned or securing loans with reported carrying amounts totaling approximately $332.5 million; management said property damage was not significant and expected owned-property repair costs above deductibles to be insured.
- Management provided no specific earnings or revenue guidance. It cited interest-rate and funding-cost changes, collateral values, credit losses, hedging results, liquidity, and financing availability as important uncertainties. The company relies in part on FHLB funding; its captive insurer may remain eligible through February 19, 2021 under the transition rule, but continued access is not assured. About $336.2 million of that subsidiary’s capital was restricted from transfer without regulatory approval.
- The company expected to cease qualifying as an emerging growth company on December 31, 2017, increasing reporting and compliance requirements, including auditor attestation over internal controls. A first-quarter 2017 out-of-period adjustment reduced depreciation expense by $0.8 million; management said it was not material.
- Subsequent to quarter-end, a subsidiary completed a $456.9 million CLO on October 17, with an affiliate retaining approximately 18.5%; the revolving credit facility’s maximum borrowing amount was increased to $241.4 million on October 27.
Investor verification points
- Review the defaulted loans’ collateral, recovery prospects, non-accrual treatment, and any change to the $4.0 million reserve.
- Assess the effect of risk-retention rules and financing rather than sale accounting on reported earnings, balance-sheet leverage, and securitization economics.
- Verify debt maturities, extension conditions, collateral haircuts, covenant headroom, liquidity availability, and the company’s dependence on FHLB funding.
- Compare GAAP results and cash generation with Core Earnings, including the treatment of the securitization economic gain and derivative adjustments.
- Monitor portfolio concentrations, property occupancy, hurricane-related claims, unfunded commitments, and the potential cost of new public-company compliance requirements.