Ladder Capital Corp — Q2 2016 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2016. Ladder is an internally managed commercial real estate finance REIT operating across loans, securities and real estate. It reported $6.0 billion of assets and $1.5 billion of equity at quarter-end.
Key financial results
Amounts below are in millions, except per-share data. “Q2” means the three months ended June 30; “H1” means the six months ended June 30.
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Interest income | $55.8 | $59.2 | $115.4 | $115.6 |
| Net interest income | $27.4 | $31.8 | $57.4 | $61.3 |
| Net interest income after loan-loss provision | $27.2 | $31.6 | $57.1 | $61.0 |
| Total other income (loss) | $11.8 | $86.5 | $4.8 | $121.5 |
| Consolidated net income (loss) | $3.9 | $68.7 | $(7.5) | $86.7 |
| Net income (loss) attributable to Class A shareholders | $2.8 | $34.2 | $(2.7) | $43.4 |
| Basic and diluted EPS | $0.05 | $0.68 / $0.67 | $(0.05) | $0.86 / $0.85 |
| Class A dividends per share | $0.275 | $0.25 | $0.55 | $0.50 |
- Profit drivers and comparability: Q2 Class A earnings fell $31.4 million year over year, chiefly reflecting a $51.4 million adverse swing in derivative results, lower loan-sale income and lower securities gains. H1 Class A earnings fell $46.1 million; the $63.1 million adverse derivative swing and reduced loan-sale and securities gains were major factors. The filing attributes much of the change to transaction timing, market movements and lower loan/securitization activity.
- Non-GAAP Core Earnings: $30.9 million in Q2 versus $52.1 million a year earlier; $69.1 million in H1 versus $100.1 million. This measure excludes specified items, including some derivative results, and is not a substitute for GAAP income or operating cash flow.
- Margins and funding costs: Management reported a 6.6% weighted-average yield on mortgage loans at June 30, down from 7.0% a year earlier; associated borrowing rates were 2.0%, versus 1.9%. Securities yielded 2.9%, while related borrowing rates were 1.1%, versus 0.9% a year earlier. Non-GAAP cost of funds was $35.6 million in Q2 and $72.5 million in H1, up from $34.0 million and $68.2 million, respectively.
- Cash flow: H1 operating cash flow was $(14.3) million, investing cash flow $(54.4) million and financing cash flow $41.1 million. Cash declined $27.5 million to $81.4 million. Cash flow reflects substantial loan origination, repayment and sale activity.
- Balance sheet and leverage: Debt obligations were $4.395 billion, up from $4.275 billion at December 31, 2015; total equity was $1.486 billion, slightly below $1.491 billion. Management reported debt-to-equity of 3.0:1. Assets included $2.127 billion of loans, $2.700 billion of securities and $808.8 million of real estate.
- Liquidity: Ladder reported $1.3 billion of committed undrawn financing capacity, $81.4 million of unrestricted cash, $582.4 million of unencumbered loans and $40.7 million of unencumbered securities. Cash collateral held by brokers was $50.5 million and is restricted. Approximately $1.649 billion of contractual debt maturities fell in the last six months of 2016; some facilities have extension options.
Material changes, outlook and risks
- Securities grew to $2.700 billion from $2.407 billion at year-end, while loans declined to $2.127 billion from $2.310 billion. Real estate fell to $808.8 million from $834.8 million. H1 originations were $572.7 million, compared with $1.8 billion in H1 2015; the company completed two securitizations in H1 2016 versus four in H1 2015. No securitization occurred in Q2 2016.
- Derivative transactions produced a $24.6 million Q2 loss and a $75.5 million H1 loss, compared with a $26.8 million Q2 gain and a $12.4 million H1 loss in 2015. These instruments are used to manage interest-rate and credit-spread exposure, but their reported fair-value and realized results can be volatile.
- The company recognized a $5.4 million H1 gain on extinguishment of debt, principally from repurchasing $33.8 million principal of 2021 Notes below par. It also recorded $0.3 million of loan-loss provision in H1. Two loans from one transaction, carrying at $26.9 million, were in default; management reported no individual impairment and continued accruing interest because collateral value was considered sufficient. No loans were on non-accrual status.
- Management described the commercial real estate market as supported by stable property values, loan maturities and low interest rates, but noted CMBS spread volatility, macroeconomic uncertainty, competition and pending Dodd-Frank rules expected to take effect in December 2016. New CMBS issuance fell 43.6% year over year in H1 2016, according to the filing.
- Funding and market risks include potential repo margin calls, refinancing and liquidity constraints, interest-rate and credit-spread movements, real estate collateral declines, and concentration in real estate. FHLB advances represented 46.6% of debt. The captive insurer may remain an FHLB member through February 19, 2021 under a transition rule, but continued access is not assured; $489.7 million of its capital was restricted from transfer to the parent without regulatory approval.
- REIT status requires distribution of at least 90% of taxable income, limiting retained capital. The company said it intended to elect REIT treatment for 2015 on a return expected to be filed in September 2016. Future dividends remain subject to board approval, liquidity, covenants and operating results; no earnings guidance was provided.
- Unfunded loan commitments were $84.9 million at June 30, subject to borrower conditions. The filing reported no material litigation or material changes to the prior annual report’s risk factors. It disclosed first-quarter out-of-period adjustments for prior-period financing-cost amortization, taxes and joint-venture return, which management considered immaterial.
Most important facts for investors to verify
- Whether derivative losses and hedge timing continue to materially affect GAAP earnings, Core Earnings and cash generation.
- Liquidity against the sizable near-term debt maturities, including extension conditions, collateral and possible repo margin calls.
- The performance and collateral coverage of the two defaulted loans, and any subsequent change in impairment or accrual status.
- Ongoing access to FHLB funding and the impact of its transition limits, as well as progress diversifying funding sources.
- Loan origination, securitization volumes and economics amid lower issuance, competition and changing CMBS market conditions.
- REIT election and distribution compliance, and the effect of dividends, restricted subsidiary capital and unfunded commitments on available liquidity.