Ladder Capital Corp. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. Unless stated otherwise, amounts are U.S. dollars.
Business context
Ladder is an internally managed REIT focused on U.S. commercial real estate finance. Its principal businesses are commercial mortgage loans, real estate securities, and real estate ownership. At year-end, it reported $6.27 billion of assets and $1.64 billion of total equity.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $344.8 million | $263.7 million |
| Interest expense | $194.3 million | $146.1 million |
| Net interest income | $150.5 million | $117.5 million |
| Loan-loss provision | $13.9 million | None |
| Total other income | $250.3 million | $186.5 million |
| Net income attributable to Class A shareholders | $180.0 million | $95.3 million |
| Basic / diluted EPS | $1.85 / $1.84 | $1.16 / $1.13 |
| Core earnings (non-GAAP) | $230.1 million | $178.8 million |
| Operating cash flow | $200.4 million | $12.0 million |
- Net income attributable to Class A shareholders rose about 89%. Management cited higher net interest income, stronger real estate sale gains, improved derivative results, and lower expenses. Realized real estate sale gains were $95.9 million, versus $11.4 million in 2017.
- Interest expense rose 33%, reflecting higher average debt, higher LIBOR, and a shift toward more costly loan repurchase financing and unsecured notes. Weighted average loan yield was 7.7% versus 7.0% a year earlier; borrowing costs against those loans were 4.1% versus 3.1%.
- The $13.9 million provision included $12.7 million of specific reserves and $1.2 million of general reserves. The year-end allowance was $17.9 million. Loans on non-accrual totaled $36.9 million, compared with $26.9 million in 2017.
- Cash, cash equivalents and restricted cash totaled $98.5 million, down from $182.7 million; unrestricted cash was $67.9 million. Operating cash flow benefited substantially from loan origination and sale activity and should not be treated as a direct proxy for recurring earnings.
- Debt obligations, net, were $4.45 billion, versus $4.38 billion; debt-to-equity was 2.7:1 and adjusted leverage (non-GAAP) was 2.3:1. Committed undrawn funding capacity was approximately $2.6 billion. The company reported compliance with debt covenants.
- Total assets included $3.48 billion of mortgage loans, $1.41 billion of securities, and $998 million of real estate. CMBS investments were reported as investment grade; 84.4% were AAA/Aaa-rated.
- Cash dividends declared were $1.535 per Class A share for 2018, up from $1.215 in 2017. The $0.57 fourth-quarter dividend was paid in a combination of cash and stock.
Fourth-quarter results
In Q4 2018, net income attributable to Class A shareholders was $24.1 million, or $0.24 per basic and diluted share, compared with $36.1 million, or $0.41 basic and $0.40 diluted, in Q4 2017. Q4 2018 net interest income after loan-loss provision was $41.0 million and other income was $23.4 million; corresponding Q4 2017 amounts were $31.8 million and $69.4 million. The filing does not provide a clear single quarterly “margin” figure.
Material changes, outlook and risks
- Loan originations and funding were $2.8 billion in 2018, compared with $2.9 billion in 2017. Loan sales were $1.3 billion; nine securitizations included 103 loans. Securities holdings increased by $303.6 million net, while the company acquired $122.7 million of real estate and received $218.7 million from real estate sales.
- Six diversified properties were sold in 2018, generating $90.4 million of net gains. Management noted that condominium inventory sales and related gains are expected to diminish as remaining units are sold.
- Three loans had specific reserves. Two loans secured by the same property remained in default and non-accrual. A separate $45 million loan was placed on non-accrual and modified in a troubled debt restructuring: it was split into a $35 million A-note and $10 million B-note, with a 19% equity interest that may increase to 25% under specified conditions.
- Management described commercial real estate financing demand as solid and expected to remain active in both conduit lending and transitional-property lending. It noted that the U.S. CMBS market issued $77.0 billion in 2018, down 12.3% from 2017, and identified a flattening yield curve as a possible sign of slower growth. No numerical company earnings or dividend guidance is provided.
- Key exposures include real estate credit and property values, loan defaults and refinancing risk, interest rates and credit spreads, market liquidity, leverage and margin calls, securitization-market access, and dependence on financing counterparties. A notable funding transition is the planned end of captive insurer Tuebor’s FHLB membership by February 19, 2021; FHLB advances represented 28.9% of debt at year-end. The company expects to transition gradually to other funding sources.
- Other notable items: the company recorded a $1.1 million out-of-period increase in tenant tax recoveries, deemed immaterial by management; a New York tax settlement was recorded in January 2019 with $2.5 million expected to be recovered from indemnity counterparties. A lease prepayment and related mortgage payoff after year-end produced a $1.1 million defeasance loss. The revolving credit facility was extended to February 2020, and a loan repurchase facility was extended in February 2019.
- PwC gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing reports no material litigation and no unresolved SEC staff comments.
Most important facts for investors to verify
- Underlying credit quality and recovery prospects for the non-accrual loans, including the $45 million restructured loan, and whether further provisions are needed.
- Whether elevated 2018 earnings are repeatable without the unusually large real estate sale gains and favorable derivative results; compare GAAP earnings with non-GAAP core earnings.
- Cash availability and funding resilience, including the $2.6 billion of committed undrawn capacity, collateral and covenant terms, and the plan to replace FHLB financing before 2021.
- Dividend coverage and the extent to which future REIT distributions may be paid in stock rather than cash.
- Performance, occupancy, refinancing needs, and sale plans for owned properties and joint ventures, including the 24 Second Avenue development and the remaining condominium units.