Ladder Capital Corp — Q1 2017 Form 10-Q
Business context and period. Internally managed commercial real estate finance REIT; operates across loans, securities and real estate. This unaudited report covers the three months ended March 31, 2017, with balance-sheet comparisons to December 31, 2016 and operating comparisons to Q1 2016.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior balance date |
|---|---|---|
| Net interest income | $26.1 million | $30.1 million in Q1 2016 |
| Net income (loss) | $19.6 million | $(11.4) million in Q1 2016 |
| Net income (loss) attributable to Class A shareholders | $13.5 million; diluted EPS $0.18 | $(5.5) million; diluted EPS $(0.09) |
| Core Earnings (non-GAAP) | $31.6 million | $38.2 million in Q1 2016 |
| Cash flow from operations | $(225.3) million | $182.2 million in Q1 2016 |
| Cash flow from investing / financing | $211.7 million / $41.2 million | $22.7 million / $(230.6) million in Q1 2016 |
| Cash and restricted cash | $117.0 million, including $62.6 million unrestricted | $89.4 million combined at December 31, 2016 |
| Total assets / equity | $5.94 billion / $1.48 billion | $5.58 billion / $1.51 billion at December 31, 2016 |
| Debt obligations, net | $4.38 billion; debt-to-equity 3.0:1 | $3.94 billion at December 31, 2016 |
| Class A dividend | $0.30 per share declared | $0.275 per share in Q1 2016 |
The filing does not present a single consolidated revenue or operating-margin figure that is directly comparable across the business lines. Reported interest income was $57.5 million, operating lease income $19.6 million, and total other income $30.4 million. Total costs and expenses were $38.3 million.
Material changes versus Q1 2016
- Net income attributable to Class A shareholders improved by $19.0 million, chiefly as derivative results improved by $48.9 million year over year. Derivatives still generated a $2.0 million loss in Q1 2017, versus a $50.9 million loss in Q1 2016.
- Net interest income fell $4.0 million, reflecting lower average securities balances and yields and higher interest expense. Interest income declined to $57.5 million from $59.6 million; interest expense rose to $31.4 million from $29.5 million.
- Core Earnings declined $6.6 million. Loan-sale results fell to a $1.0 million loss from $7.8 million of income; there were no securitizations in Q1 2017, compared with two in Q1 2016.
- The company originated $529.7 million of commercial mortgage loans versus $119.1 million in Q1 2016. Securities declined by about $399 million during the quarter, following $361.3 million of sales; loans grew to $2.82 billion from $2.35 billion at year-end.
- Debt increased $435.5 million from year-end, including issuance of $500 million of 5.25% senior notes due 2022. The $291.5 million of remaining 2017 Notes was repaid April 3, 2017, after quarter-end.
Outlook, risks and unusual items
- No specific earnings or operating guidance was provided. Management described a strategy of allocating capital among loans, securities and real estate, and generally targeting debt-to-equity at approximately 3.0:1 or below.
- Management reported $1.8 billion of committed undrawn funding capacity and compliance with debt covenants at March 31, 2017. However, lenders may make margin calls or require additional collateral if collateral values fall; access to financing and market liquidity are key risks.
- The captive insurance subsidiary’s FHLB membership is permitted through February 19, 2021 under a transition rule. FHLB borrowings represented 33.7% of debt; future access and replacement funding terms are not assured. About $324.3 million of the subsidiary’s capital was restricted from transfer without regulatory approval.
- Two related loans with a $26.9 million carrying value were in default and the borrower was in bankruptcy. The company recorded no impairment, continued to accrue interest, and cited collateral coverage; accrued unpaid interest was $1.9 million, including $1.8 million of default interest.
- Interest-rate sensitivity analysis estimated that a 100-basis-point LIBOR increase would raise projected 12-month net income by $8.3 million but reduce portfolio value by $28.8 million; a 100-basis-point decrease would reduce projected net income by $5.3 million and raise portfolio value by $29.4 million. These estimates include hedging effects and are subject to floors.
- Q1 included a $0.8 million out-of-period reduction in depreciation expense relating to prior periods; management deemed it immaterial. No loan-loss provision was recorded in Q1 2017; the existing reserve was $4.0 million.
- Unfunded first-mortgage loan commitments were $123.7 million. Management cited real estate concentration, credit and collateral values, interest rates, refinancing, REIT qualification, regulatory requirements and funding availability as risks. No material litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan originations, securitization or whole-loan sales, and resulting loan-sale gains can recover after no Q1 securitizations and negative loan-sale results.
- The composition, maturity profile and refinancing of debt, including the post-quarter repayment of the 2017 Notes and the terms and use of proceeds from the 2022 Notes.
- Availability and cost of committed financing, exposure to repurchase-agreement margin calls, and the company’s ability to transition from FHLB funding before 2021.
- Credit performance and collateral coverage for the two defaulted loans, and whether accrued default interest will be collected.
- How sustainable reported GAAP earnings are relative to declining Core Earnings, given the large year-over-year swing in derivative results.
- Whether the $0.30 quarterly dividend is supported by recurring earnings and liquidity, considering REIT distribution requirements and restrictions on subsidiary capital transfers.