Ladder Capital Corp. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Dollar amounts are in millions unless otherwise stated. Ladder is an internally managed commercial real estate finance REIT investing in loans, securities and real estate.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $66.1 | $55.8 | $123.6 | $115.4 |
| Interest expense | $35.6 | $28.4 | $67.0 | $57.9 |
| Net interest income | $30.5 | $27.4 | $56.6 | $57.4 |
| Net income (loss) | $13.4 | $3.9 | $33.1 | $(7.5) |
| Net income (loss) attributable to Class A shareholders | $10.7 | $2.8 | $24.1 | $(2.7) |
| Diluted EPS | $0.13 | $0.05 | $0.31 | $(0.05) |
| Class A dividends per share | $0.30 | $0.275 | $0.60 | $0.55 |
- Q2 net interest income increased as loan balances grew, but higher funding costs and rising LIBOR contributed to interest expense increasing faster than interest income. For the first half, net interest income edged down.
- Q2 total costs and expenses were $40.1 million, versus $37.4 million. First-half expenses were $78.4 million, versus $72.6 million.
- Q2 results included a $16.0 million net derivative loss, partly offset by $7.1 million of realized securities gains. First-half derivative losses were $18.0 million, substantially lower than $75.5 million in the prior-year period; realized securities gains were $12.5 million, versus $2.4 million.
- Management’s non-GAAP Core Earnings were $51.2 million for Q2 and $82.7 million for the first half, compared with $30.9 million and $69.1 million, respectively. The first-half figure included a $28.5 million economic securitization gain not recognized under GAAP; Core Earnings should not be treated as a substitute for GAAP income or operating cash flow.
Balance sheet, debt and liquidity
- At June 30, total assets were $6.22 billion and total equity was $1.47 billion. The portfolio included $3.42 billion of loans, $1.41 billion of securities and $1.01 billion of real estate.
- Debt obligations were $4.63 billion, including $632.1 million of liabilities for transfers not accounted for as sales. The company reported debt-to-equity of 3.2x, or 2.8x excluding the specified non-recourse transfer liabilities and related debt.
- Available committed undrawn financing was approximately $1.8 billion. Unrestricted cash was $58.2 million; restricted cash was $97.3 million. Total cash, cash equivalents and restricted cash were $155.5 million.
- First-half operating cash flow was negative $503.5 million, compared with positive $2.7 million a year earlier, primarily reflecting loan originations held for sale. Investing cash flow was negative $4.2 million and financing cash flow was positive $573.7 million. Cash, cash equivalents and restricted cash increased $66.1 million.
- In March, Ladder issued $500 million of 5.25% senior notes due 2022 and redeemed the remaining $297.7 million of 7.375% notes due 2017 in April. FHLB borrowings were $1.40 billion; $599.5 million of additional FHLB financing was committed but undrawn.
Material changes and operating activity
- Compared with December 31, 2016, loans rose from $2.35 billion to $3.42 billion, real estate increased from $822.3 million to $1.01 billion, and securities declined from $2.10 billion to $1.41 billion. Ladder originated $1.1 billion of commercial mortgage loans in the first half and sold $669.8 million of securities.
- Real estate acquisitions totaled $182.0 million in the first half, compared with $16.0 million in 2016. Operating lease income increased to $41.8 million from $38.4 million. Real estate sale gains fell to $4.6 million from $11.0 million.
- On June 29, Ladder transferred $625.7 million of loan interests into its LCCM 2017-LC26 securitization. Risk-retention transfer restrictions prevented sale accounting, so the loans remained on the balance sheet and related proceeds were recorded as financing. The company retained a restricted vertical interest and purchased additional securities.
Outlook, risks and unusual items
- The filing provides no specific earnings or investment guidance. Management described diversified funding and predominantly senior-secured assets as supporting flexibility, while noting results depend on loan originations, securitization economics, funding availability and cost, interest rates, credit performance and real estate conditions.
- Two loans with a $26.9 million carrying value were in default, and the borrower was in bankruptcy. Ladder reported $6.0 million of accrued unpaid interest, including $3.5 million of default interest; it recorded no impairment and continued accruing interest, citing collateral value. No loans were on non-accrual status.
- Interest-rate, credit-spread and liquidity risks include potential collateral calls or forced asset sales if collateral values fall. FHLB access through the captive insurer is permitted during a transition period ending February 19, 2021, but continuation beyond that period is uncertain. Approximately $331.6 million of the insurer’s capital was restricted from transfer without regulatory approval.
- Unfunded first-mortgage loan commitments were $130.0 million. The company reported covenant compliance at quarter-end. It also noted REIT distribution requirements constrain retained earnings.
- Ladder expected to lose emerging-growth-company status at December 31, 2017, increasing reporting and compliance requirements and costs, including auditor attestation requirements for internal controls.
- A first-quarter out-of-period adjustment reduced depreciation expense by $0.8 million; management said it was not material to the quarter or prior periods. Subsequent to quarter-end, Ladder made a $21.0 million first-mortgage loan to a borrower affiliated with Related Companies.
Investor verification priorities
- Reconcile the securitization’s accounting treatment, $632.1 million reported transfer liability, risk-retention interests and $28.5 million Core Earnings adjustment.
- Assess the defaulted $26.9 million loans, bankruptcy proceedings, collateral valuation and continued interest accrual.
- Evaluate liquidity after separating unrestricted from restricted cash, and review near-term maturities, extension conditions, borrowing capacity and collateral-call exposure.
- Review the effect of higher borrowing costs, derivative results and interest-rate sensitivity on recurring earnings and funding spreads.
- Check the assumptions behind real estate valuations, loan-loss reserves, securities fair values and management’s non-GAAP Core Earnings measure.
- Monitor FHLB membership and transition-period funding plans, REIT distribution requirements, and the costs and controls associated with the coming filer-status change.