Ladder Capital Corp — Q1 2020 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Ladder is a commercial real estate finance REIT focused on mortgage loans, predominantly investment-grade real estate securities, and real estate equity. The quarter was materially affected by COVID-19 disruption and market volatility. Amounts below are in millions except per-share data.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Interest income | $72.6 | $86.5 |
| Operating lease income | $26.3 | $28.9 |
| Net interest income | $21.2 | $35.2 |
| Provision for loan losses | $26.6 | $0.3 |
| Net income (loss) | $(14.1) | $24.5 |
| Net income (loss) attributable to Class A shareholders | $(15.7) | $22.2 |
| EPS, basic and diluted | $(0.15) | $0.21 |
| Core earnings, non-GAAP | $30.9 | $46.9 |
| Dividends declared per Class A share | $0.34 | $0.34 |
Other notable items: total other income was $29.0 million versus $33.1 million. It included a $15.4 million net derivative loss and a $10.5 million gain on real estate sales. Comprehensive loss was $92.1 million, including a $78.0 million other comprehensive loss, principally reflecting lower fair values of available-for-sale securities. The filing does not provide a single overall revenue or operating-margin figure.
Balance sheet, debt and liquidity
- Total assets were $7,331.9 million, up from $6,669.2 million at year-end; total equity was $1,500.8 million, down from $1,639.0 million.
- Net debt obligations were $5,681.0 million, up from $4,859.9 million. Adjusted leverage, a company-defined non-GAAP measure, was 3.8x versus 3.0x at year-end.
- Cash, cash equivalents and restricted cash totaled $622.2 million, including $358.4 million unrestricted and $263.9 million restricted. The company reported $2.7 billion of unencumbered assets in its financing discussion.
- Cash flows were $(41.1) million from operating activities, $(477.5) million from investing activities and $785.0 million from financing activities. Cash, cash equivalents and restricted cash increased by $266.5 million.
- Contractual debt payments include $1.9 billion in the remaining nine months of 2020; the filing notes that these amounts are subject to company-controlled extension options or refinancing in certain cases. Unfunded loan commitments were $303.4 million.
Material changes and management commentary
- Results weakened sharply year over year: net interest income after loan-loss provision fell to a loss of $5.4 million from income of $34.9 million. Management attributed the decline primarily to lower interest income and a $26.3 million increase in loan-loss provision.
- The company adopted CECL on January 1, 2020, recording an initial $11.6 million reserve and a $5.8 million reduction to equity. By March 31, total CECL reserves were $30.2 million; the quarter’s updated assumptions reflected a recessionary scenario. Total loan-loss allowance was $49.5 million.
- Loans on non-accrual status had $142.4 million principal balance, versus $98.7 million at year-end. The company recorded new specific reserves on impaired loans, including loans affected by COVID-19-related market conditions and hotel closures.
- Management said hotels and retail were among the most exposed parts of its portfolio. Hotel and retail loans represented approximately 11% and 7% of the loan portfolio, respectively. Management expected most net-leased properties, largely necessity-based retail, to be relatively resilient, while continuing to monitor other properties and borrowers.
- Market disruption reduced securities liquidity and contributed to approximately $78.2 million of securities market-value decline through quarter-end. The portfolio was described as predominantly AAA-rated and almost entirely investment grade. Ladder reported that it met securities-financing margin calls on time.
Liquidity, covenant matters and outlook
- Ladder was not in compliance at March 31 with a 3.5x maximum leverage covenant with certain lenders, partly because it retained higher cash balances. It cured the breach within the contractual grace period through more than $830 million of debt paydowns by April 28. The filing reports compliance with its other covenants at quarter-end.
- After quarter-end, Ladder completed a private CLO on April 27, generating $310.2 million gross proceeds against $481.3 million of loans on a matched-term, non-mark-to-market and non-recourse basis. On April 30, it entered into a roughly $206.4 million secured, non-recourse facility with Koch Real Estate Investments; the facility bears interest at LIBOR (subject to a floor) plus 10% and includes a minimum interest premium. Koch also received a right, expiring December 31, 2020, to buy up to 4.0 million Class A shares at $8.00 per share.
- As of May 1, management reported approximately $830 million of unrestricted cash and said it had paid down $783 million of secured debt subject to mark-to-market provisions since quarter-end. The company expected its cash resources, operating cash flow and access to financing to support operations for more than one year from the report’s issuance. These are management expectations, not a financial forecast; no specific earnings or dividend guidance is provided.
- Management warned that the pandemic’s duration and effects on revenues, profitability, collateral values and financing access were uncertain. Risks include borrower payment stress, loan forbearance requests, reduced property occupancy and rents, volatile asset values, margin calls, refinancing and near-term maturities, and constrained capital markets. The company also noted that $829.3 million of equity was restricted from dividend payment under debt covenants.
Most important facts for investors to verify
- Whether post-quarter debt paydowns, the CLO and Koch facility provide durable liquidity and reduce exposure to margin calls and refinancing pressure.
- Whether covenant compliance is maintained and whether the company’s reported post-quarter cash and debt-paydown figures are sustained.
- How loan delinquencies, non-accrual balances, forbearance requests and CECL reserves develop as borrower and property cash flows respond to COVID-19.
- Whether securities valuations recover or further losses emerge, particularly given reduced market liquidity and Level 3 valuation inputs.
- Whether the $0.34 quarterly dividend remains supportable given the GAAP loss, liquidity needs, debt restrictions and REIT distribution requirements.