Ladder Capital Corp. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The filing was signed November 6, 2015. Ladder is an internally managed commercial real estate finance company and REIT; its activities span commercial mortgage lending, real estate securities and real estate ownership. Comparisons with 2014 include predecessor and post-IPO periods, so they are not fully like-for-like.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $33.5 million | $28.5 million | $94.8 million | $78.9 million |
| Net interest income after loan-loss provision | $33.3 million | $28.4 million | $94.3 million | $78.4 million |
| Net income | $2.8 million | $37.2 million | $89.5 million | $85.8 million |
| Net income attributable to Class A shareholders | $3.3 million | $14.7 million | $46.7 million | $39.8 million |
| Basic / diluted EPS | $0.06 / $0.06 | $0.30 / $0.28 | $0.91 / $0.91 | $0.81 / $0.74 |
| Dividends per Class A share | $0.275 | — | $0.775 | — |
| Net revenues (company-defined, non-GAAP) | $40.9 million | $89.7 million | $223.4 million | $235.7 million |
| Core Earnings (company-defined, non-GAAP) | $41.2 million | $49.2 million | $141.3 million | $166.4 million |
Balance sheet at September 30, 2015: Total assets were $5.83 billion, including $2.13 billion of loans, $2.42 billion of securities and $840.6 million of real estate. Total equity was $1.50 billion. Unrestricted cash and cash equivalents were $181.5 million; restricted cash and broker collateral totaled $78.5 million. Mortgage loan receivables held for investment had a reported weighted-average yield of 7.61%; securities had a reported weighted-average yield of 3.56%.
Debt and liquidity: Debt obligations were $3.60 billion and senior unsecured notes were $612.0 million, for total financing of about $4.22 billion. Management reported debt-to-equity of 2.8:1 and a target of 3.0:1 or below. Committed undrawn funding capacity was approximately $1.5 billion. Debt maturities included $685.2 million in the final three months of 2015 and $1.75 billion in 2016; some facilities have extension options. About $900.3 million of equity was restricted from dividend payment by financing terms, and $414.2 million of captive-insurer capital was restricted from transfer without regulatory approval.
Cash flow, nine months: Operating activities provided $206.1 million, investing activities used $39.9 million and financing activities used $60.9 million. Cash increased by $105.3 million to $181.5 million. Cash paid for interest was $90.6 million.
Material changes versus the prior comparable period
- Q3 Class A earnings fell to $3.3 million from $14.7 million. Net interest income improved by $4.9 million, but other income declined by $53.8 million, chiefly because derivative results swung to a $42.2 million loss from a $1.1 million gain and realized securities gains were lower. A $4.2 million income-tax benefit, versus $10.3 million expense, partly offset the decline.
- For the first nine months, Class A earnings rose to $46.7 million from $39.8 million, despite non-GAAP Core Earnings falling to $141.3 million from $166.4 million. Higher net interest income and rental income were offset by lower loan-sale income and weaker derivative results; lower taxes supported reported earnings.
- Net interest income increased as average loan and securities balances expanded, while interest expense rose with higher average debt. Management also cited lower yields on newer loans and securities. Securities holdings declined to $2.42 billion from $2.82 billion at year-end 2014, while loans increased to $2.13 billion from $1.94 billion.
- Operating lease income increased to $20.7 million in Q3 and $60.2 million year to date, reflecting property acquisitions and full-period contributions from earlier acquisitions. Real estate purchases totaled $166.8 million in the first nine months.
- The company declared $0.775 per share of Class A dividends in the first nine months of 2015. It began operating under its intended REIT structure effective January 1, 2015 and stated it intends to make the REIT tax election on its 2015 return.
Outlook, risks and notable items
- Outlook: No numerical earnings or dividend guidance was provided. Management described commercial real estate finance as offering origination opportunities amid property-value stabilization, low interest rates and financing demand, and emphasized its ability to shift capital among lending, securities and real estate.
- Rate and market risk: Management’s modeled 100-basis-point LIBOR increase projected a $12.4 million rise in 12-month net income but a $44.4 million decline in portfolio value; a 100-basis-point decrease projected an $8.5 million fall in net income and a $45.1 million increase in portfolio value. Actual results may differ.
- Funding and collateral risk: Repurchase lenders may change collateral values, demand additional collateral or repayment, or reduce availability. The company relies on secured funding and its FHLB subsidiary; liquidity, market-value declines, refinancing access and covenant compliance are material risks. Management said it was in compliance with debt covenants at quarter-end.
- FHLB regulatory exposure: A proposed rule could affect captive insurers’ FHLB membership and advances. The filing said no change to Tuebor’s borrowing ability had occurred by quarter-end; adoption as proposed could impose limits and a membership sunset.
- Credit, valuation and concentration: The portfolio is concentrated in commercial real estate. Fair values for substantial securities holdings rely on models and significant unobservable inputs. The loan-loss reserve was $3.55 million; one acquired, credit-impaired loan with $5.9 million amortized cost was on non-accrual. Management reported no individually impaired loans.
- REIT and distributions: REIT qualification requires compliance with tax, ownership and distribution rules and may limit retained capital. The company expects to distribute required amounts and noted that some distributions may be made primarily in stock, subject to cash/stock elections. Tax Receivable Agreement payments and future tax benefits depend on taxable income and other factors.
- Unusual and subsequent items: The $42.2 million Q3 derivative loss was the most significant quarterly earnings item; it included realized and unrealized losses and management attributed much of the move to falling interest rates. A Minneapolis office building classified as held for sale at $49.0 million was sold on November 3, 2015, at a gain; the filing text does not provide a clear amount for that gain. A new $35 million committed loan repurchase facility was entered into October 25, 2015.
- Controls and legal matters: Management concluded disclosure controls were effective and reported no material changes in internal control during the quarter. The company reported no material pending litigation or regulatory enforcement proceeding and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether the sharp Q3 derivative loss reflects temporary hedge-accounting timing and market movements, and how hedge results and underlying asset values evolve in subsequent quarters.
- Loan and securities yields, funding costs, leverage, collateral haircuts, covenant headroom and the schedule and availability of committed financing—especially the 2015–2016 maturities.
- Conduit origination and securitization profitability: loan-sale income fell year over year, and management cited competition and lower lending credit spreads.
- REIT election and qualification, required distributions, the potential use of stock distributions, and resulting effects on cash retention and capital.
- The final economics of the November 2015 Minneapolis property sale, loan credit performance and reserves, and developments in the proposed FHLB rules.
- Core Earnings and net revenues are non-GAAP measures; review the filing’s reconciliations and limitations alongside GAAP earnings and cash flow.