Ladder Capital Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing covers an internally managed commercial real estate finance REIT that originates senior mortgage loans, owns commercial property, and invests in real estate securities. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $101.1 | $77.4 | $306.7 | $198.8 |
| Interest expense | $62.3 | $48.5 | $184.4 | $138.2 |
| Net interest income | $38.8 | $28.9 | $122.4 | $60.6 |
| Loan-loss provision | $7.5 | $1.5 | $19.1 | $1.4 |
| Net income | $31.2 | $28.7 | $81.5 | $91.1 |
| Net income attributable to Class A shareholders | $31.3 | $28.6 | $81.9 | $82.7 |
| Diluted EPS | $0.25 | $0.23 | $0.66 | $0.66 |
The filing does not present a conventional consolidated revenue line or a net interest margin figure. For Q3, net interest income was $31.4 million after the loan-loss provision. Distributable earnings, a non-GAAP measure, were $39.0 million, versus $41.5 million in Q2 2023; the filing cautions that this measure is not a substitute for GAAP earnings or operating cash flow.
Balance sheet, liquidity and cash flow
- At September 30, total assets were $5.50 billion and total equity was $1.54 billion, compared with $5.95 billion and $1.53 billion at December 31, 2022.
- Loans held for investment had $3.37 billion of carrying value before a $39.6 million allowance. The loan portfolio’s weighted-average yield was 9.77%; 87.7% of its outstanding face amount was floating-rate and linked to Term SOFR.
- Cash and cash equivalents were $798.4 million, with $59.5 million of restricted cash. The cash-flow statement’s $867.8 million total also includes $9.9 million of short-term Treasury securities. Management reported $857.9 million of cash, cash equivalents and restricted cash for liquidity purposes.
- Debt obligations, net, were $3.79 billion, down from $4.25 billion at year-end. The company reported $1.1 billion of CLO debt, $1.6 billion of senior unsecured notes, and no borrowings on its $323.9 million revolving facility. It had $527.0 million of committed loan-repurchase capacity available and $100 million of committed securities-repurchase capacity available.
- Unencumbered assets included $798.4 million of cash, $1.4 billion of loans, $326.0 million of securities and $104.8 million of real estate. The company also reported $3.0 billion of unencumbered assets in its financing discussion.
- For the nine months, operating cash flow was $122.2 million, investing cash flow was $602.7 million, and financing cash outflow was $516.6 million. Cash, cash equivalents and restricted cash increased $208.2 million. Investing cash inflow largely reflected loan and securities repayments; financing outflow included $415.7 million of net debt repayments and $87.7 million of dividends paid.
Changes and notable items
- Year-over-year nine-month net interest income more than doubled, primarily as higher benchmark rates lifted yields on floating-rate loans and securities. Higher funding costs also raised interest expense. The loan portfolio contracted by about $0.5 billion from year-end, reflecting $559.9 million of principal repayments against $61.4 million of originations.
- Nine-month net income fell $9.6 million year over year. Higher net interest income was outweighed by a $53.3 million reduction in real estate sale gains, lower real estate operating income, lower fee income and lower derivative gains. The prior-year period included $62.1 million of property sale gains; 2023 included an $8.8 million gain on one hotel sale.
- The allowance for credit losses on loans rose to $39.6 million from $20.8 million at year-end. Management attributed the increase primarily to adverse macroeconomic conditions affecting commercial real estate. Two modified mortgage loans had a combined $106.6 million amortized cost; they are current, with no principal or interest forgiven, but some interest was deferred until maturity.
- Loans on non-accrual status totaled $58.4 million, compared with $53.8 million at year-end. A New York mixed-use portfolio securing a loan was acquired through foreclosure for $30.4 million in September, with no gain or loss recorded.
- The quarterly Class A dividend was $0.23 per share. The company repurchased 19,000 shares during Q3 and had $44.3 million remaining under its repurchase authorization at quarter-end.
Outlook, risks and contingencies
The filing provides no formal earnings or investment guidance. Management says it is actively managing liquidity and operations amid rising interest rates and potential recessionary conditions. It identifies commercial real estate conditions, collateral values, loan defaults and recoveries, refinancing availability, funding costs, and access to financing as important uncertainties. Repo lenders may require additional collateral or repayment if collateral values fall. A 100-basis-point rate increase is estimated to raise projected 12-month net income by $26.3 million while lowering portfolio value by about $2.0 million; a 100-basis-point decrease is estimated to reduce net income by $26.2 million and raise portfolio value by about $2.0 million.
The company was in compliance with debt covenants at September 30. Its $257.5 million of unfunded loan commitments are off balance sheet and may be funded subject to borrower conditions; some commitments depend on specified leasing or operating milestones. Approximately $838.1 million of a captive insurance subsidiary’s capital was restricted from transfer by dividend without regulatory approval. The filing reports no material litigation, no material change in risk factors, and no additional subsequent event requiring disclosure.
Important facts for investors to verify
- Whether the elevated CECL provision and non-accrual balances change materially, particularly as commercial property values and borrower refinancing conditions evolve.
- Loan maturities, extensions, repayments and new originations, and the resulting effect on portfolio size and interest income.
- Liquidity and collateral headroom under repurchase facilities, covenant compliance, and availability of committed and uncommitted funding.
- The sustainability of cash dividends relative to GAAP earnings, taxable income and distributable earnings, noting that distributable earnings is non-GAAP.
- The distinction between reported cash balances and cash-flow totals, which include restricted cash and, in the cash-flow reconciliation, unsettled Treasury securities.