Ladder Capital Corp annual report, FY2019

Ladder Capital Corp — 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 27, 2020. Ladder is an internally managed REIT focused on commercial real estate finance, investing primarily in senior-secured loans, commercial mortgage-backed securities (CMBS), and commercial real estate.

Financial performance and position

Metric20192018
Interest income$330.2 million$344.8 million
Interest expense$204.4 million$194.3 million
Net interest income$125.9 million$150.5 million
Provision for loan losses$2.6 million$13.9 million
Total other income$174.7 million$250.3 million
Net income$137.0 million$221.7 million
Net income attributable to Class A shareholders$122.6 million$180.0 million
Diluted EPS$1.15$1.84
Core earnings (non-GAAP)$190.6 million$230.1 million
Cash flow from operations$183.2 million$200.4 million

Net interest income after loan-loss provision was $123.3 million, down from $136.6 million. The filing does not present a single company-wide operating margin as a key performance measure.

  • Fourth quarter: Net income was $45.5 million, diluted EPS was $0.37, and income before taxes was $47.6 million. Class A shareholders’ net income was $40.7 million. The quarterly dividend was $0.34 per share.
  • Year-end assets and equity: Total assets were $6.67 billion and total equity was $1.64 billion. Portfolio balances included $3.36 billion of mortgage loans, $1.72 billion of real estate securities, and $1.05 billion of real estate and related lease intangibles.
  • Cash and liquidity: Cash, cash equivalents and restricted cash totaled $355.7 million, including $58.2 million of unrestricted cash and $297.6 million of restricted cash. Committed undrawn funding capacity was approximately $2.5 billion.
  • Debt and leverage: Debt obligations, net, were $4.86 billion, compared with $4.45 billion at year-end 2018. The reported debt-to-equity ratio was 3.0x; adjusted leverage was 3.0x versus 2.3x in 2018. The revolving credit facility had no balance outstanding.
  • Portfolio yields: At year-end, the weighted-average yield on mortgage loan receivables was 6.8%, down from 7.7%; the yield on real estate securities was 3.1%, versus 3.2%.
  • Credit: The loan-loss allowance was $20.5 million at year-end. Principal balance of loans on non-accrual status was $98.7 million. The company recorded a $2.6 million loan-loss provision in 2019, including a $2.0 million specific reserve on a land-secured loan.

Material changes versus 2018

  • Net income declined by $84.7 million. Lower net interest income reduced results by $24.6 million; total other income fell by $75.7 million, partly offset by lower loan-loss provisions and changes in loan and securities sale gains.
  • Real estate sale gains fell to $1.4 million from $95.9 million, principally because 2018 included substantial gains on commercial property sales.
  • Derivative results shifted from a $15.9 million gain in 2018 to a $30.0 million loss in 2019, a negative year-over-year change of $45.9 million.
  • Loan-sale income rose to $54.8 million from $16.5 million. Net of related hedging, loan-sale income was $38.0 million, compared with $29.7 million.
  • Real estate securities increased to $1.72 billion from $1.41 billion, while mortgage loan receivables decreased to $3.36 billion from $3.48 billion. Total assets increased to $6.67 billion from $6.27 billion.
  • All outstanding debt related to two Ladder-sponsored CLOs was redeemed in October 2019; no CLO debt remained at year-end, compared with $601.5 million at year-end 2018.
  • Annual dividends per Class A share were $1.36, down from $1.535 in 2018.

Outlook, risks and notable items

  • Outlook: Management described commercial real estate financing demand and the 2019 CMBS issuance market as active, and expected to continue originating transitional-property loans and contributing stabilized-property loans to securitizations. The filing provides no quantitative earnings or return guidance.
  • Financing developments after year-end: On January 30, 2020, the company issued $750 million of 4.25% senior notes due 2027; proceeds were used to repay secured debt. In February 2020, two committed loan repurchase facilities were amended, including capacity reductions from $600 million to $500 million and from $350 million to $250 million; the latter facility was extended, with options through February 2024.
  • FHLB funding: Federal rules were expected to end the captive insurer Tuebor’s FHLB membership by February 19, 2021. FHLB advances represented 22.1% of debt at year-end. Management expected to shift gradually to other financing sources, which could carry different advance rates and higher funding or operating costs.
  • Credit accounting: Ladder planned to adopt the expected-credit-loss (CECL) standard on January 1, 2020. Its estimated reserve was $11.6 million, excluding three loans with existing specific reserves; the estimated adoption adjustment would reduce equity by approximately $5.8 million, or about $0.05 per share. This is an estimate, not the reported 2019 provision.
  • Other material exposures: The company cited leverage, secured financing and margin-call risk; commercial real estate and borrower concentration; loan defaults and collateral valuation uncertainty; interest-rate and credit-spread movements; and transition from LIBOR. About $2.5 billion of investment loans and $1.3 billion of securities, as well as $2.4 billion of debt, were LIBOR-linked at year-end.
  • Commitments: Unfunded loan commitments were $286.5 million, down from $379.8 million. The filing reported no material litigation and stated that the company was in compliance with its debt covenants at year-end.
  • Audit and controls: PwC issued an unqualified opinion on the financial statements and internal control over financial reporting. Critical audit matters included valuation of asset-specific loan-loss provisions and assets acquired through foreclosure.

Important facts for investors to verify

  • How the $98.7 million of non-accrual loan principal, the $20.5 million allowance, and subsequent recoveries or collateral valuations develop.
  • Whether reported cash and committed capacity are available to Ladder after accounting for restrictions, collateral requirements, margin calls and subsidiary-level limits.
  • The effect of repaying secured debt with the 2027 notes on funding costs, leverage, covenants and secured borrowing capacity.
  • Tuebor’s transition away from FHLB funding and the replacement financing available as membership limits take effect.
  • The realized impact of CECL adoption compared with the estimated $5.8 million equity reduction, and any subsequent reserve changes.
  • Performance of loan-sale and securitization activity, which management notes can make quarterly results volatile, and the sustainability of the $0.34 quarterly dividend.