Ladder Capital Corp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated financial statements. Ladder is an internally managed REIT focused on commercial real estate loans, real estate securities, and owned properties.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $46.2 million | $54.6 million | $123.1 million | $189.3 million |
| Interest expense | $49.3 million | $56.4 million | $140.5 million | $176.2 million |
| Net interest income (expense) | $(3.1) million | $(1.8) million | $(17.4) million | $13.1 million |
| Income before taxes | $18.7 million | $21.4 million | $28.5 million | $(3.0) million |
| Net income | $18.9 million | $21.4 million | $29.8 million | $2.1 million |
| Net income attributable to Class A shareholders | $18.9 million | $17.2 million | $29.4 million | $(2.7) million |
| Diluted EPS | $0.15 | $0.14 | $0.24 | $(0.02) |
| Dividends per share | $0.20 | $0.20 | $0.60 | $0.74 |
Non-GAAP distributable earnings: $17.0 million in Q3 2021 versus $19.7 million in Q3 2020; $33.6 million for the first nine months of 2021 versus $46.4 million a year earlier. Management cautions that this measure is not a substitute for GAAP results or operating cash flow.
Balance sheet at September 30, 2021: Assets were $5.42 billion, including $2.82 billion of loans (net of allowances), $724.7 million of real estate securities, and $914.4 million of real estate. Equity was $1.51 billion. Debt obligations, net, were $3.77 billion, down from $4.21 billion at year-end 2020.
Liquidity and cash flow: Cash, cash equivalents, and restricted cash totaled $843.5 million, including $758.1 million unrestricted; year-end 2020 totals were $1.28 billion and $1.25 billion, respectively. Nine-month operating cash flow was $25.9 million, investing cash flow was $67.3 million, and financing cash flow was $(533.9) million, resulting in a $440.8 million cash decrease. The company reported $266.4 million available under its undrawn revolving credit facility and $1.1 billion of committed but unfunded loan repurchase capacity. It also reported $2.8 billion of unencumbered assets.
Credit and funding indicators: The held-for-investment loan portfolio had a 6.03% weighted-average yield and 1.5-year remaining maturity. Non-accrual loans were $117.0 million, down from $175.0 million at year-end 2020. The loan-loss allowance was $33.6 million; the nine-month provision was a $7.0 million release, attributed primarily to improved macroeconomic assumptions. Adjusted leverage, a non-GAAP measure excluding CLO debt, was 2.1x, compared with 2.5x at year-end 2020. The company stated that it was in compliance with debt covenants.
Material changes versus comparable periods
- Q3 net income declined $2.5 million year over year, mainly due to lower real estate sale gains and weaker net interest results, partly offset by higher loan-sale gains and lower expenses.
- Nine-month net income rose to $29.8 million from $2.1 million. Results benefited from improved securities and derivative results, higher real estate sale gains and loan-sale income, lower expenses, and a loan-loss reserve release. Comparability is affected by $22.2 million of debt-extinguishment gains in the 2020 period, with none in 2021.
- Interest income fell substantially year over year as average loan and securities balances declined. Debt reduction lowered interest expense, but net interest income was negative for the nine-month period. Management reported a 6.0% loan yield versus 6.8% a year earlier and a 3.7% borrowing rate against mortgage loans versus 5.0%.
- The loan portfolio expanded: held-for-investment mortgage loans were $2.81 billion at quarter-end versus $2.35 billion at year-end 2020. Securities declined to $724.7 million from $1.06 billion.
- Cash balances decreased, reflecting net debt repayments, dividends, share repurchases, and investment activity. The company issued $650 million of 4.75% notes due 2029 and redeemed its remaining 2021 and 2022 notes during the first nine months.
Outlook, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management describes continued active liquidity and operational management amid COVID-19 uncertainty and says its ultimate effect on results and financial position remains difficult to assess.
- COVID-19-related disruption may affect commercial real estate occupancy, rent collection, borrowers’ ability to repay, construction and leasing timelines, asset values, and funding markets. Hotel and retail exposure is specifically monitored; management said necessity-based net-leased properties remained relatively stable.
- Funding and liquidity risks include collateral-value declines, margin calls, lender discretion over collateral and advances, refinancing availability, and restrictions on cash transfers from the regulated captive insurer. Approximately $871.4 million of equity was restricted from dividend payment under financing covenants; about $2.2 billion of Tuebor capital was restricted from transfer without regulatory approval.
- Unfunded commitments on mortgage loans were $319.9 million, up from $148.8 million at year-end 2020. These are off balance sheet and subject to borrower conditions; 57% relate to specified “good news” events.
- Other exposures include commercial-real-estate concentration, interest-rate and credit-spread volatility, loan collateral performance, and fair-value estimates that rely partly on Level 3 inputs. A 100-basis-point rate increase was estimated to raise projected 12-month net income by $17.8 million but reduce portfolio value by $3.2 million; a 100-basis-point decrease was estimated to reduce net income by $2.5 million and raise portfolio value by $3.0 million.
- Unusual items included a $37.2 million nine-month gain on real estate sales, a $7.0 million loan-loss reserve release, and a $1.0 million net gain on derivatives. No material litigation was reported; management identified no material change to previously disclosed risk factors other than the added registered-investment-adviser compliance risk.
Most important facts for investors to verify
- Whether reported cash and available committed financing remain accessible and sufficient after considering restricted cash, covenant limits, and collateral requirements.
- The performance, collateral values, and expected resolution or recovery of $117.0 million of non-accrual loans, and the adequacy of the $33.6 million loan allowance.
- Whether loan growth and new originations generate adequate returns given lower portfolio yields, funding costs, and the negative reported net interest income.
- The sustainability of distributable earnings and the $0.20 quarterly dividend, including the distinction between distributable earnings, GAAP income, and REIT taxable income.
- Repayment and refinancing needs, including the $1.65 billion of senior unsecured notes and the maturity and extension terms of secured facilities; also monitor the implications of FHLB membership termination for outstanding advances.
- Potential funding of the $319.9 million in loan commitments and the effects of COVID-19, property-market conditions, and interest-rate or credit-spread changes on assets and liquidity.