Ladder Capital Corp — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Dollar amounts below are in millions unless stated otherwise. Ladder is an internally managed REIT focused on commercial real estate loans, securities, and property investments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $85.2 | $66.0 | $163.4 | $123.5 |
| Interest expense | $48.4 | $35.7 | $93.1 | $67.1 |
| Net interest income | $36.8 | $30.3 | $70.3 | $56.4 |
| Provision for loan losses | $0.3 | — | $3.3 | — |
| Income before taxes | $44.1 | $37.7 | $115.8 | $55.9 |
| Net income | $43.6 | $31.1 | $111.4 | $50.7 |
| Net income attributable to Class A shareholders | $38.4 | $22.1 | $89.3 | $35.6 |
| Class A diluted EPS | $0.40 | $0.26 | $0.93 | $0.45 |
| Class A dividend per share | $0.325 | $0.300 | $0.640 | $0.600 |
Q2 other income was $46.4 million, including $7.1 million of derivative gains, $6.1 million of net loan-sale income, a $1.2 million securities loss, and $1.6 million of real estate sale gains. Operating lease income was $24.3 million. For the first half, real estate sale gains were $32.6 million and derivative gains were $22.0 million; net loan-sale income was $11.0 million and securities losses were $2.3 million.
Management’s non-GAAP core earnings were $50.4 million in Q2 versus $51.2 million a year earlier, and $114.2 million for the first half versus $82.7 million. Core earnings exclude or adjust for certain items and should not be treated as GAAP net income or operating cash flow.
Balance sheet, cash flow, debt, and liquidity
- At June 30, total assets were $6.39 billion and total equity was $1.51 billion. The investment portfolio included $3.86 billion of loans, $1.11 billion of securities, and $1.06 billion of real estate and related lease intangibles.
- Debt obligations, net, were $4.70 billion, up from $4.38 billion at year-end 2017. Debt-to-equity was 3.1:1; management’s adjusted leverage measure was 2.7:1, versus 2.5:1 at year-end.
- Cash and cash equivalents were $51.9 million; restricted cash was $42.8 million. Combined cash and restricted cash fell to $94.7 million from $182.7 million at December 31, 2017.
- Management reported $2.3 billion of committed, undrawn funding capacity, including $241.4 million on the revolving credit facility, $663.5 million of FHLB capacity, and approximately $1.4 billion of other committed financing. No revolving-credit borrowings were outstanding.
- For the six months, operating cash flow was $173.6 million, investing cash flow was negative $480.5 million, and financing cash flow was positive $218.9 million. Cash flow included substantial loan originations, sales, and repayments; operating cash flow improved from negative $23.3 million in the prior-year period.
- Unfunded loan commitments were $243.4 million, up from $157.0 million at year-end. They are contingent on borrower conditions and are not recorded as balance-sheet liabilities.
Changes and management commentary
- Q2 Class A shareholder earnings rose to $38.4 million from $22.1 million. Higher net interest income and improved derivative results helped, while loan-sale income and securities gains were lower than in Q2 2017. The prior-year comparison also includes a retrospective accounting change for a 2017 securitization, which treated qualifying transfers as sales rather than financings.
- First-half shareholder earnings increased to $89.3 million from $35.6 million. Major contributors included higher derivative gains and $28.1 million more in real estate sale gains; loan-sale income and realized securities gains declined.
- Higher loan balances supported interest income, but interest expense also rose with increased debt, higher LIBOR, and greater use of higher-cost financing. The company reported a 7.6% weighted-average yield on mortgage loans and 3.0% on securities at June 30.
- Management described demand for commercial mortgage financing as strong and property values as stable in most U.S. markets. It cited a flattening yield curve as a potential signal of slower growth and noted that CMBS spreads had widened back toward year-end 2017 levels. No numerical earnings or revenue guidance was provided.
- A July 20, 2018 amendment extended a committed loan repurchase facility’s maximum term to July 2021 and reduced its interest-rate spreads by 25 basis points.
Risks, contingencies, and unusual items
- Two loans secured by the same retail property, with a combined carrying value of $26.9 million, were in default and on non-accrual. The borrowers are in bankruptcy. Ladder recorded a $2.7 million provision in Q1 after revising collateral valuation assumptions; no additional provision was recorded in Q2. The total loan-loss allowance was $7.3 million at June 30.
- FHLB borrowings were $1.27 billion, or 27% of debt. The captive insurance subsidiary’s FHLB membership is permitted through February 19, 2021 under a transition period; the filing cautions that future alternative funding could cost more or be less available. Approximately $1.3 billion of the subsidiary’s capital was restricted from dividend transfer without regulatory approval.
- Repurchase financing exposes Ladder to collateral revaluation, margin calls, and lender decisions about collateral eligibility. The company reported compliance with financing covenants at June 30. It also disclosed that approximately $780 million of equity was restricted from dividends under debt-facility terms.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase in LIBOR would raise projected 12-month net income by $17.3 million but reduce portfolio value by $15.2 million; a 100-basis-point decrease would reduce projected net income by $14.9 million and increase portfolio value by $15.4 million. These are modeled estimates, not forecasts.
- Six-month results included $32.6 million of real estate sale gains, principally from two commercial property sales. Condominium sales and gains are expected to decline as remaining units are sold. Two 2018 out-of-period tenant-recovery adjustments totaling $1.1 million were recorded in Q1 and deemed immaterial by management.
- The filing reported no material litigation, no defaults upon senior securities, and no material changes to the risk factors in the 2017 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth and net interest income continue to outpace higher funding costs as rates and financing mix change.
- Progress and recoveries on the two defaulted retail-property loans, including bankruptcy outcomes and collateral values.
- Availability and cost of committed funding, repurchase-facility collateral terms, and the transition away from FHLB funding before 2021.
- Sustainability of earnings excluding derivative volatility and property-sale gains; reconcile GAAP results with management’s non-GAAP core earnings.
- Capacity to fund $243.4 million of loan commitments, meet debt maturities, and maintain dividends while cash balances and leverage change.