Ladder Capital Corp — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, filed February 24, 2017. Ladder is an internally managed REIT focused on U.S. commercial real estate finance, with loans, securities and real estate as its reportable segments. It originates conduit loans for securitization, holds balance-sheet loans, invests primarily in investment-grade CMBS, and owns commercial and residential properties.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total interest income | $236.4 million | $241.5 million |
| Net interest income | $115.5 million | $128.2 million |
| Net interest income after loan-loss provision | $115.2 million | $127.6 million |
| Total other income | $163.3 million | $201.2 million |
| Income before taxes | $120.0 million | $160.7 million |
| Net income | $113.7 million | $146.1 million |
| Net income attributable to Class A shareholders | $66.7 million | $73.8 million |
| Basic / diluted EPS | $1.08 / $1.06 | $1.43 / $1.42 |
| Operating cash flow | $409.1 million | $40.6 million |
- Fourth quarter: Class A attributable income was $41.9 million and diluted EPS was $0.63, versus $27.1 million and $0.50 in Q4 2015. Q4 2016 pretax income was $72.4 million; the quarter included $89.2 million of other income.
- Other performance measures: Management’s non-GAAP Core Earnings were $158.2 million, down from $191.5 million. Net Revenues, another non-GAAP measure, declined to $278.6 million from $328.9 million. These measures are not substitutes for GAAP earnings or operating cash flow.
- Balance sheet at year-end: Total assets were $5.58 billion, total equity $1.51 billion and debt obligations $3.94 billion. Debt-to-equity was 2.6:1. Loans were $2.35 billion, securities $2.10 billion and real estate $822.3 million.
- Liquidity and funding: Unrestricted cash was $44.6 million, down from $109.0 million; cash collateral held by brokers was a further $19.4 million. The company reported $1.7 billion of committed undrawn capacity and $692.4 million of unencumbered loans and $21.2 million of unencumbered securities. Operating cash flow rose sharply, largely reflecting conduit-loan originations and sales; investing used $25.4 million and financing used $448.1 million.
- Debt: Funding included $1.66 billion of FHLB advances, $1.11 billion of repurchase financing, $590.1 million of nonrecourse property mortgages, $25.0 million drawn on the revolving facility and $559.8 million carrying value of senior notes. The 2017 Notes bore 7.375%; $297.7 million principal remained at year-end, falling to $291.5 million after subsequent repurchases through February 24, 2017. The 2021 Notes bore 5.875%, with $266.2 million principal outstanding.
- Portfolio yields: Weighted average yield was 6.7% on mortgage loans and 2.9% on real estate securities at year-end. The weighted average borrowing rate on mortgage-loan financing was 2.3%; securities financing was 1.3%. The filing does not provide a single consolidated net interest margin figure.
Material changes versus the prior comparable period
- Class A attributable income declined $7.1 million. Lower loan-sale income, securities gains, real-estate-sale gains and net interest income outweighed improved derivative results, lower operating costs and reduced tax expense.
- Loan-sale income fell to $26.0 million from $71.1 million. Ladder completed six securitizations, selling 104 loans with $1.3 billion of principal, compared with ten securitizations and $2.6 billion in 2015. Loan originations declined to $2.1 billion from $3.6 billion.
- Net interest income declined $12.7 million as loan yields and portfolio mix softened while interest expense increased $7.5 million, partly reflecting rising LIBOR. Floating-rate debt increased to 38.0% of total debt from 31.4%.
- Realized securities gains declined to $7.7 million from $24.0 million; net real-estate-sale gains declined to $20.6 million from $40.4 million. Derivative loss improved to $1.4 million from $38.9 million.
- Total debt fell $332.6 million year over year. Cash dividends declared were $1.285 per Class A share versus $2.225 in 2015; the prior-year amount included a one-time accumulated-earnings distribution. The 2016 fourth-quarter dividend of $0.46 was paid partly in stock and partly in cash.
Outlook, risks and unusual items
- Management described commercial property values and loan demand as broadly stable, while noting transaction volume and CMBS issuance weakened in 2016. It cited rising-rate expectations, market volatility and new CMBS risk-retention requirements effective December 24, 2016 as headwinds. No specific earnings or dividend guidance was provided.
- Management intended to address the 2017 Notes with a combination of cash, revolving capacity, securities sales, secured borrowings, capital-markets transactions and operating cash flows, and stated it believed obligations could be met. About $1.5 billion of 2017 contractual debt maturities related to facilities with company-controlled extension options or potential refinancing; extensions and refinancing are not assured.
- FHLB advances represented 42.1% of debt. Regulatory changes require Ladder’s captive insurer to exit FHLB membership by February 19, 2021, subject to a transition period. Management expected to shift gradually to alternative funding; replacement funding could cost more or be less available.
- Two loans from one transaction, carrying value $26.9 million, were in default and the borrower was in bankruptcy. Ladder reported no impairment, citing collateral liquidation value, and continued accruing interest; accrued unpaid interest was $3.5 million, including $2.2 million of default interest.
- Loan-loss provision was $0.3 million in 2016; the ending allowance was $4.0 million. The company reported no individually impaired loans, but estimates and collateral values remain uncertain.
- 2016 included a $5.4 million gain on extinguishment of debt, mainly from repurchasing 2021 Notes below par. A $3.3 million state-tax settlement expense was offset by a $3.3 million indemnity receivable; the indemnifying parties paid the full amount by January 31, 2017. Out-of-period adjustments were recorded in 2016 and management said they were not material to any period; these included prior-period financing-cost, tax, joint-venture-income and depreciation corrections.
- Key risks include leverage and margin calls, interest-rate and credit-spread movements, securitization-market access and volatility, commercial-property values and borrower defaults, refinancing risk, fair-value estimation, REIT qualification and the Investment Company Act exemptions. The company reported no material litigation and stated it complied with debt covenants at year-end.
Important facts for investors to verify
- How the $291.5 million of remaining 2017 Notes was refinanced or repaid, and the resulting cost and maturity profile.
- Actual availability and terms of committed financing, particularly FHLB access and the transition away from FHLB membership by 2021.
- Performance, collateral coverage, bankruptcy progress and interest collectability for the $26.9 million defaulted loan exposure.
- Whether earnings and dividends are supported by recurring interest and rental income, given the substantial year-over-year declines in securitization and asset-sale gains.
- Credit quality, fair-value assumptions and liquidity of the securities portfolio, as well as the effects of interest-rate and spread changes on collateral values and financing.
- REIT distribution capacity, including stock-funded dividends, and any further developments concerning the pre-REIT accumulated-earnings distribution and Tax Receivable Agreement.