Ladder Capital Corp — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Ladder is a commercial real estate finance company focused on mortgage lending, commercial real estate securities, and selected real estate investments. Its February 2014 IPO and reorganization changed its corporate and tax structure; 2014 results include predecessor operations before February 11 and the public company thereafter, so comparisons with 2013 and shareholder-attributable results require care.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $45.1 million | $30.2 million | $81.9 million | $61.4 million |
| Net interest income | $28.4 million | $18.2 million | $50.3 million | $38.3 million |
| Net interest income after loan-loss provision | $28.2 million | $18.1 million | $50.0 million | $38.0 million |
| Other income | $55.5 million | $70.3 million | $95.9 million | $170.0 million |
| Income before taxes | $38.4 million | $61.4 million | $62.1 million | $151.5 million |
| Net income | $30.2 million | $59.8 million | $48.6 million | $147.8 million |
| Core Earnings, non-GAAP | $62.3 million | $40.9 million | $119.1 million | $135.3 million |
- Q2 net income attributable to Class A shareholders was $12.5 million; basic and diluted EPS were $0.26 and $0.22. For the six-month period, reported Class A-attributable income was $25.2 million and EPS was $0.51 basic/$0.46 diluted; per-share data applies from the February 11 IPO onward.
- Net revenues, as defined by the company as net interest income after provision plus other income, were approximately $83.7 million in Q2 and $146.0 million for the first half. The filing does not provide a clear GAAP operating-margin measure.
- Q2 derivative results were a $25.3 million loss, versus a $20.7 million gain a year earlier; first-half results were a $51.6 million loss versus a $22.9 million gain. Management attributed the 2014 losses mainly to falling interest rates reducing the fair value of hedges against fixed-rate assets. The results include realized and unrealized amounts.
- At June 30, total assets were $3.82 billion and total equity was $1.47 billion. Assets included $1.13 billion of loans, $1.83 billion of securities and $561.2 million of real estate.
- Debt was $2.23 billion, versus $2.21 billion at year-end 2013; management reported debt-to-equity of 1.5:1. Debt included $903 million of FHLB borrowings, $685.7 million of repurchase agreements, $314.6 million of long-term financing and $325 million of 7.375% senior notes due 2017.
- Cash and cash equivalents were $85.0 million, with another $38.0 million held as broker collateral. The company also reported $419.9 million of unencumbered loans and $223.0 million of unencumbered securities. Management cited more than $1.7 billion of committed undrawn funding capacity.
- First-half operating cash flow was $415.7 million, investing cash outflow was $617.4 million, and financing cash inflow was $207.9 million. Cash increased $6.2 million to $85.0 million. Operating cash flow is affected by the high-volume origination and sale of loans held for sale.
- The loan-loss provision was $0.3 million for the first half and the reserve was $2.8 million at June 30. The company reported no individually impaired originated loans, but had one acquired, credit-impaired loan on non-accrual with amortized cost of $4.62 million.
Material changes versus comparable periods
- Q2 income before taxes declined $23.0 million year over year, chiefly reflecting the swing in derivative results and higher salaries and benefits ($26.5 million versus $13.9 million). Core Earnings rose $21.4 million, a non-GAAP measure that excludes specified items including certain hedge results, real estate depreciation and stock compensation.
- First-half income before taxes fell $89.4 million. Loan-sale income declined to $86.7 million from $118.8 million, derivative results swung from a $22.9 million gain to a $51.6 million loss, and salaries and benefits increased to $46.5 million from $33.6 million. Core Earnings fell to $119.1 million from $135.3 million.
- Loan-sale income was higher in Q2 ($45.4 million versus $35.8 million), with three securitizations and $886.0 million face value of loans sold, compared with one securitization and $356.4 million in Q2 2013. For the first half, however, loan-sale income fell despite higher securitization volume: five securitizations and $1.66 billion face value sold versus three and $1.15 billion in 2013.
- The portfolio expanded and shifted toward securities and loans: securities increased to $1.83 billion from $1.66 billion at year-end 2013, while held-for-investment loans rose to $1.03 billion from $539.1 million and held-for-sale loans declined to $103.7 million from $440.5 million.
- IPO-related corporate taxation contributed to first-half tax expense of $13.5 million, versus $3.7 million a year earlier. The effective tax rate for the first half was 21.77%; management noted the taxable share may rise as continuing limited partners exchange units for Class A shares.
Outlook, risks and unusual items
- Management described commercial real estate finance as offering substantial origination opportunities, citing stabilizing property values, low interest rates, financing demand and scheduled commercial real estate debt maturities. It expects to allocate capital flexibly among lending, securities and real estate. The filing provides no numerical earnings or revenue guidance.
- Interest-rate sensitivity analysis estimated that a 100-basis-point LIBOR increase would raise 12-month net income by $7.8 million but reduce portfolio value by $32.2 million; a 100-basis-point decrease would reduce net income by $3.6 million and increase portfolio value by $32.6 million. These are modeled estimates, not forecasts.
- Key risks include funding and liquidity availability, repurchase-agreement margin calls and collateral valuation, interest-rate and credit-spread movements, real estate credit and geographic concentration, and covenant or regulatory restrictions. The company reported compliance with financing covenants at June 30.
- Approximately $240.7 million of captive-insurance subsidiary capital was restricted from transfer to its parent without regulatory approval. Unfunded loan commitments were $155.3 million; additional GN construction-security commitments included $23.2 million remaining to be funded.
- Subsequent to quarter-end, on August 1, 2014, the company issued $300 million of 5.875% senior notes due 2021, with approximately $295 million net proceeds. A July 17 amendment modified certain leverage covenants and reporting requirements in a committed loan repurchase facility.
- Four retail properties were classified as held for sale, with $19.0 million carrying value; management expected their sale by December 31, 2014. No material litigation was reported. A prior-period accounting error had been revised: first-half 2013 net income was reduced by $2.4 million, which the company had judged immaterial to prior periods.
Most important facts for investors to verify
- Reconcile reported GAAP earnings with Core Earnings and review the substantial realized and unrealized derivative losses.
- Assess the sensitivity of funding costs, asset values and liquidity to interest-rate changes, repo margin calls and collateral haircuts.
- Review the maturity profile and refinancing needs, including $683.7 million of scheduled borrowings in the second half of 2014 and the post-quarter $300 million notes issuance.
- Evaluate loan credit quality, the non-accrual acquired loan, reserve adequacy and the $155.3 million of unfunded loan commitments.
- Account for IPO-related taxes, noncontrolling interests and potential one-for-one exchanges of operating partnership units into Class A shares when assessing per-share results and dilution.