Ladder Capital Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Ladder is an internally managed REIT focused on commercial real estate finance, including senior mortgage lending, commercial real estate ownership and investment-grade real estate securities. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $101.8 | $65.3 | $205.6 | $121.5 |
| Interest expense | $61.3 | $42.7 | $122.1 | $89.7 |
| Net interest income | $40.5 | $22.6 | $83.5 | $31.7 |
| Provision for (release of) loan losses | $6.9 | ($1.0) | $11.6 | ($0.1) |
| Net income | $28.1 | $43.2 | $50.3 | $62.4 |
| Net income attributable to Class A shareholders | $28.2 | $35.0 | $50.6 | $54.1 |
| Diluted EPS | $0.23 | $0.28 | $0.41 | $0.43 |
| Real estate operating income | $25.9 | $28.6 | $49.1 | $55.0 |
The filing does not provide a single consolidated revenue or profit-margin measure that is directly comparable to a conventional operating company; it reports interest income, net interest income and real estate operating income separately.
Financial position, cash flow and liquidity
- At June 30, 2023, total assets were $5.63 billion, total equity $1.53 billion and debt obligations, net, $3.96 billion. Compared with December 31, 2022, assets declined from $5.95 billion and debt from $4.25 billion; equity was broadly unchanged.
- Cash and cash equivalents were $777.1 million, with another $96.9 million of restricted cash. The company reported $2.9 billion of unencumbered assets, including $1.5 billion of unencumbered loans.
- For the six months, operating cash flow was $44.1 million, investing cash flow was $523.3 million and financing cash flow was negative $353.0 million. Cash, cash equivalents and restricted cash increased by $214.3 million.
- Debt included $1.57 billion of senior unsecured notes, $1.06 billion of CLO debt, $684.9 million of repurchase borrowings, $469.1 million of mortgage financing and $175.0 million of FHLB borrowings. The $323.9 million revolving facility was undrawn at quarter-end.
- Committed loan repurchase facilities had $563.2 million of additional availability. The company also reported $100 million of unused committed securities financing. It said it was in compliance with debt covenants at June 30.
- Quarterly dividends declared were $0.23 per share; the first-half total was $0.46 per share. Cash dividends paid in the first half were $59.0 million.
Portfolio and material changes
- Loans were $3.50 billion at carrying value, down from $3.89 billion at year-end. The held-for-investment portfolio had a 9.56% weighted-average yield; 87.3% of its outstanding face amount was floating-rate and linked to SOFR, and all such floating-rate loans had interest-rate floors.
- Loans on non-accrual status rose to $88.9 million from $53.8 million at year-end. The loan allowance increased to $32.2 million from $20.8 million; the company attributed the reserve increase principally to adverse macroeconomic conditions affecting commercial real estate.
- Securities declined to $458.2 million from $587.5 million. Real estate, net, was $686.7 million, compared with $700.1 million at year-end.
- Q2 net interest income increased year over year, reflecting higher benchmark rates, while interest expense also rose. For the first half, net interest income increased to $83.5 million from $31.7 million, but the loan-loss provision changed from a small release in 2022 to an $11.6 million expense in 2023.
- First-half 2023 net income was lower than in 2022, when results included $57.7 million of gains on real estate sales; Ladder reported no real estate sales in the first half of 2023. First-half 2023 results also included a $9.7 million gain from repurchasing debt below par.
- During the first half, loan originations were $44.2 million and principal repayments were $440.5 million. The company made no conduit-loan sales. It repurchased $61.9 million principal amount of senior notes and recognized $9.7 million of extinguishment gains.
Outlook, risks and unusual items
- The filing gives no specific earnings, dividend or portfolio guidance. Management said it was actively managing liquidity and operations amid rising interest rates and potential recessionary conditions.
- Key exposures include commercial real estate credit and collateral values, borrower refinancing capacity, higher funding costs, interest-rate and credit-spread movements, market liquidity, repo margin calls and continued access to financing. Management cautioned that market disruption could make assets harder to value or sell and financing less available or more costly.
- Of $272.2 million in unfunded loan commitments, 58% related to specified future “good news” events; commitments remain subject to borrower conditions and may not all be funded. The company also noted that about $855 million of capital at its captive insurance subsidiary was restricted from transfer by dividend without regulatory approval.
- Subsequent to quarter-end, Ladder exercised an extension option on its revolving facility, extending its maturity to July 27, 2024. All reported covenants were met at quarter-end. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Unusual or judgment-sensitive items include the increase in credit-loss reserves, loan non-accruals, debt-extinguishment gains and Level 3 fair-value estimates. The filing reported no material litigation and no material change in risk factors during the quarter.
Important facts for investors to verify
- Whether the increase in non-accrual loans and credit-loss allowances signals further deterioration in borrowers, collateral values or expected recoveries.
- How higher rates affect asset yields versus financing costs, loan repayments, borrower refinancing and Ladder’s net interest income.
- Available liquidity after restricted cash, subsidiary dividend restrictions, potential repo margin calls and unfunded commitments are considered.
- The timing and amount of debt maturities, facility extensions and refinancing needs, including the revolving facility’s post-quarter extension.
- How much reported earnings and dividend capacity depend on nonrecurring debt gains, derivative results and non-GAAP distributable earnings adjustments.