Ladder Capital(LADR) - 2018 Q4 - Annual Report

Part I Business Ladder Capital Corp is an internally-managed REIT focused on commercial real estate finance through loans, securities, and real estate investments - Ladder Capital operates as an internally-managed REIT with three core business segments: loans, securities, and real estate investments[19] - Since inception through December 31, 2018, the company originated $22.8 billion in commercial real estate loans and acquired $10.6 billion in securities and $1.7 billion in real estate assets[20] - The company maintains a diversified financing strategy with $1.2 billion in unsecured debt and $3.3 billion in secured debt, with $2.6 billion in total committed, undrawn funding capacity as of year-end 2018[23][24][25] - The company's REIT election requires it to distribute at least 90% of its taxable income to shareholders[28][96] Overview The company's overview highlights key financial metrics as of December 31, 2018, and significant management equity interest Key Financial Metrics as of December 31, 2018 | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $6.3 | | Total Equity | $1.6 | | Debt-to-Equity Ratio | 2.7:1.0 | | Adjusted Leverage (Non-GAAP) | 2.3:1.0 | - The company is a significant non-bank contributor to CMBS, having sold $15.4 billion of $15.5 billion in originated conduit loans into 59 securitizations since inception[21] - As of year-end 2018, management and directors held a significant equity interest, comprising 11.5% of the company's total equity[26] Our Businesses The company's investment portfolio is primarily composed of loans, securities, and real estate, with specific characteristics for each asset class Investment Portfolio Breakdown ($ in thousands) | Category | Dec 31, 2018 | % of Total | Dec 31, 2017 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Total Loans | $3,482,929 | 55.5% | $3,508,642 | 58.2% | | Balance sheet loans | $3,300,490 | 52.6% | $3,278,462 | 54.4% | | Conduit first mortgage loans | $182,439 | 2.9% | $230,180 | 3.8% | | Total Securities | $1,410,126 | 22.5% | $1,106,517 | 18.4% | | CMBS investments | $1,308,331 | 20.8% | $1,066,570 | 17.7% | | Total Real Estate | $998,022 | 15.9% | $1,032,041 | 17.1% | | Total Investments | $5,989,346 | 95.4% | $5,760,556 | 95.6% | - The balance sheet first mortgage loan portfolio comprised 157 loans with an aggregate book value of $3.2 billion and a weighted average loan-to-value ratio of 68.2% at origination[35] - The CMBS investment portfolio totaled $1.3 billion, with 100% of investments rated investment grade, of which 84.4% were AAA/Aaa-rated[42] - The real estate portfolio included 143 single-tenant net leased properties with a book value of $673.4 million, 100% leased with a weighted average remaining lease term of 13.3 years[46] Our Financing Strategies The company employs diverse financing strategies, including committed facilities, CLOs, and unsecured notes, while maintaining a targeted debt-to-equity ratio - The company funds investments through multiple sources, including $1.8 billion in committed term facilities, a $266.4 million revolving credit facility, CLO transactions, FHLB membership, and $1.2 billion in unsecured notes[58][59] - The company generally seeks to maintain a debt-to-equity ratio of approximately 3.0:1.0 or below, which was 2.7:1.0 as of December 31, 2018[62] - Interest rate and credit spread derivative contracts are utilized to mitigate exposure, particularly for assets with durations exceeding five years[61] Regulation The company is subject to various state and federal regulations, including the Dodd-Frank Act, and maintains specific exemptions for its REIT status and subsidiaries - The company's operations are subject to state and federal regulation, with the Dodd-Frank Act's Risk Retention Rule impacting securitization activities since December 2016[99][100] - Subsidiaries are regulated as a registered investment adviser (LCAM), a registered broker-dealer (LCS), and a captive insurance company (Tuebor), each under specific regulatory frameworks[104][108][110] - The company maintains an exemption from Investment Company Act of 1940 registration, primarily via Section 3(c)(5)(C) for real estate-focused subsidiaries, which limits investment activities[111][118] Risk Factors The company faces diverse risks including operational, market, portfolio, financing, and regulatory challenges that could impact its financial performance Risks Related to Our Operations Operational risks include potential changes to investment strategy, volatility in financial results, dependence on key personnel, and cybersecurity threats - The company's business model and investment strategy may change without stockholder consent, with no guarantee of success[127] - Quarterly financial results are subject to significant volatility due to the timing, volume, and pricing of CMBS securitizations[131] - Dependence on attracting and retaining skilled loan originators and maintaining relationships with key loan brokers is critical for business generation[128] - Cybersecurity threats and security breaches pose significant risks, potentially compromising sensitive information and harming reputation and business operations[147][148] Market Risks Related to Real Estate Loans and Securities Market risks include high concentration in commercial real estate, intense competition, interest rate fluctuations, and shifts in consumer patterns - The company's high concentration in the commercial real estate sector increases exposure to economic downturns in this specific area[150] - The highly competitive lending and investment market may limit desirable asset acquisition at attractive prices and could decrease yields[153] - Changes in prevailing interest rates can negatively impact earnings due to misalignment of asset yields and borrowing costs, with four Federal Reserve rate hikes in 2018 potentially reducing mortgage demand[160][161] - Shifts in consumer patterns and technology, such as online retail and remote work, may adversely affect the value of underlying retail and office properties[154][155] Risks Related to Our Portfolio Portfolio risks include the non-recourse nature of loans, illiquidity of balance sheet assets, subordinate debt exposure, and securitization-related obligations - The vast majority of mortgage loans are non-recourse, limiting recovery in default to underlying collateral, which may be insufficient to cover the full loan amount[170] - Balance sheet loans for transitional properties are often more illiquid and carry a greater risk of loss than long-term mortgages on stabilized properties[176] - Investments in subordinate loans and CMBS tranches rank junior to senior debt, increasing loss risk in borrower default or bankruptcy[183][184] - Participation in CMBS and CLO securitizations exposes the company to risks including repurchase obligations for breached representations and warranties, and potential losses on retained junior securities[199][207] Risks Related to Our Indebtedness Indebtedness risks include high leverage, subordination of unsecured notes, and uncertainty from the transition away from LIBOR - The highly leveraged business can magnify losses, with repurchase agreements and other financing facilities requiring additional collateral if pledged asset market value declines[239] - The company's unsecured notes are effectively subordinated to its $3.3 billion of secured indebtedness, granting secured debt holders priority claims on collateral in bankruptcy[243] - The transition away from LIBOR after 2021 creates uncertainty, potentially increasing financing costs or causing asset-liability interest rate mismatches[257][259][261] Risks Related to Our Taxation as a REIT REIT taxation risks include loss of REIT status, distribution requirements, limitations on Taxable REIT Subsidiaries, and built-in gains tax - Failure to qualify as a REIT would subject the company to corporate income tax, substantially reducing cash available for shareholder distribution[349][350] - REIT distribution requirements, mandating at least 90% of taxable income distribution, could adversely affect business plan execution by limiting retained earnings for growth[355] - The company's ownership of Taxable REIT Subsidiaries (TRSs) is limited to 20% of total assets, requiring arm's-length transactions to avoid a 100% excise tax[353] - The company is subject to a built-in gains tax on appreciated assets held before its REIT election (January 1, 2015) if sold within a five-year period[365] Unresolved Staff Comments The company reports no unresolved staff comments - The company reports no unresolved staff comments[388] Properties As of December 31, 2018, the company's real estate portfolio comprised commercial properties, including single-tenant net leased and diversified assets, and residential condominium units Owned Property Summary as of December 31, 2018 | Property Type | Number of Properties/Units | Aggregate Book Value ($M) | Key Metrics | | :--- | :--- | :--- | :--- | | Commercial Real Estate | | | | | Single Tenant Net Leased | 143 | $673.4 | 100% leased, 13.3-year avg. remaining lease term | | Diversified Commercial | 69 | $318.1 | Includes student housing, office, industrial | | Residential Real Estate | | | | | Veer Towers, Las Vegas | 1 unit | $0.4 | Held through a joint venture | | Terrazas, Miami | 22 units | $6.1 | 62.5% rented and occupied | - The company leases its corporate headquarters in New York, NY, and maintains month-to-month regional offices in California and South Carolina[389] Legal Proceedings The company is not currently a party to any material legal proceedings - The company reports that it is not presently a party to any material litigation or enforcement proceedings[402] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[403] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ladder Capital's Class A common stock trades on the NYSE, with a stock repurchase program in place and a cumulative total return of 27.9% since its 2014 IPO - The company's Class A common stock trades on the New York Stock Exchange under the ticker symbol "LADR"[406] - A stock repurchase program is in place, with $41.8 million available for repurchases as of year-end 2018, and no shares were repurchased during the year[407] - During 2018, 4,549,832 partnership units and Class B shares were exchanged for an equal number of Class A shares in a non-cash transaction[408] Cumulative Total Shareholder Return (IPO through 12/31/2018) | Index | 12/31/2018 Value of $100 Invested at IPO | | :--- | :--- | | Ladder Capital Corp (LADR) | $127.90 | | Commercial Mortgage REIT Index | $120.33 | | S&P 500 Index | $141.36 | Selected Financial Data Selected financial data for 2014-2018 shows significant growth, with net income increasing to $180.0 million in 2018 and consistent dividends since 2015 Selected Financial Data (2014-2018, $ in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $150,525 | $117,549 | $115,545 | $128,236 | $109,751 | | Net Income (to Class A shareholders) | $180,015 | $95,276 | $66,727 | $73,821 | $44,187 | | Diluted EPS | $1.84 | $1.13 | $1.06 | $1.42 | $0.86 | | Total Assets | $6,272,872 | $6,025,615 | $5,578,337 | $5,895,212 | $5,814,235 | | Total Debt Outstanding | $4,452,574 | $4,379,826 | $3,942,138 | $4,274,723 | $4,182,954 | | Total Equity | $1,643,635 | $1,488,146 | $1,509,554 | $1,491,408 | $1,505,207 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights significant net income growth in 2018 driven by increased net interest income and real estate sales, supported by strong liquidity and risk management Results of Operations Results of operations show a significant increase in net income for 2018, primarily driven by higher net interest income and gains from real estate sales Comparison of Results of Operations (Years ended Dec 31, $ in millions) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Net Income (to Class A shareholders) | $180.0 | $95.3 | +$84.7 | | Net Interest Income | $150.5 | $117.5 | +$33.0 | | Total Other Income | $250.3 | $186.5 | +$63.8 | | Total Costs and Expenses | $158.6 | $170.4 | -$11.8 | | Core Earnings (Non-GAAP) | $230.1 | $178.8 | +$51.3 | - The $84.7 million increase in net income for 2018 was primarily driven by a $33.0 million increase in net interest income and a $63.8 million increase in total other income, including an $84.5 million increase in real estate sales profits[429] - Loan origination activity remained robust, with $2.8 billion in new loans funded in 2018, compared to $2.9 billion in 2017[427][428] - Income from loan sales decreased by $37.5 million in 2018 compared to 2017, primarily due to lower securitization volume and credit spreads[446] Liquidity and Capital Resources The company maintains strong liquidity through diverse funding sources and a significant portfolio of unencumbered assets, though FHLB access will change - The company maintains diverse liquidity sources including cash from operations, repurchase agreements, CLOs, a revolving credit facility, unsecured notes, and FHLB borrowings[505] Debt Obligations Summary ($ in thousands) | Debt Type | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Repurchase facilities | $663,685 | $473,410 | | Mortgage loan financing | $743,902 | $692,696 | | CLO debt | $601,543 | $688,479 | | Borrowings from the FHLB | $1,286,000 | $1,370,000 | | Senior unsecured notes | $1,154,991 | $1,152,134 | | Total Debt Obligations, Net | $4,452,574 | $4,379,826 | - As of December 31, 2018, the company had $1.4 billion of unencumbered loans, $212.6 million of unencumbered securities, and $58.6 million of unencumbered real estate[513] - The FHFA's revised FHLB membership regulation will prevent the company's captive insurance subsidiary from obtaining new advances after February 19, 2021[277][546] Critical Accounting Policies Critical accounting policies involve significant management estimates and judgments, particularly for loan loss reserves, financial instrument valuation, and VIE consolidation - Significant management estimates and judgments are required for several accounting policies, including the reserve for loan losses, valuation of financial instruments, and impairment of long-lived assets[579][581] - The reserve for loan losses includes general and asset-specific components; for 2018, the provision was $13.9 million, with $12.7 million in asset-specific reserves[580][586] - The company evaluates investments for Variable Interest Entity (VIE) status and consolidation requirements, involving significant judgment regarding control and economic performance[593] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks, primarily interest rate, market value, and credit risks, which are managed through hedging and asset management strategies - The company's primary market risk is interest rate risk, impacting floating-rate debt and fixed-rate asset market value, managed through hedging instruments like interest rate swaps and futures[616] Interest Rate Sensitivity Analysis (as of Dec 31, 2018) | Change in LIBOR | Projected Change in Net Income (12-months) | Projected Change in Portfolio Value | | :--- | :--- | :--- | | +1.00% | +$19,014 thousand | -$20,512 thousand | | -1.00% | -$15,932 thousand | +$18,935 thousand | - The company is subject to credit risk, managed through deep credit analysis and ongoing asset management, and credit spread risk, impacting fixed-rate commercial mortgages and CMBS value[621][622] - The portfolio's concentration in the real estate sector subjects it to more rapid value changes than a diversified portfolio[626] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2016-2018, including balance sheets, income statements, and comprehensive notes, with an unqualified audit opinion Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of the company's assets, liabilities, and equity as of December 31, 2018 and 2017 Consolidated Balance Sheet Summary ($ in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Assets | $6,272,872 | $6,025,615 | | Cash, cash equivalents and restricted cash | $98,450 | $182,683 | | Mortgage loan receivables (net) | $3,482,929 | $3,508,642 | | Real estate securities | $1,410,126 | $1,106,517 | | Real estate and related lease intangibles, net | $998,022 | $1,032,041 | | Total Liabilities | $4,629,237 | $4,537,469 | | Debt obligations, net | $4,452,574 | $4,379,826 | | Total Equity | $1,643,635 | $1,488,146 | Consolidated Statements of Income The consolidated statements of income detail the company's financial performance, including net interest income and net income, for 2016-2018 Consolidated Income Statement Summary ($ in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net interest income after provision | $136,625 | $117,549 | $115,245 | | Total other income | $250,320 | $186,470 | $163,312 | | Total costs and expenses | $158,626 | $170,428 | $158,517 | | Net income (loss) | $221,676 | $125,879 | $113,720 | | Net income (loss) attributable to Class A common shareholders | $180,015 | $95,276 | $66,727 | Notes to Consolidated Financial Statements Notes to financial statements detail accounting policies, REIT election, VIE consolidation, off-balance sheet arrangements, and segment reporting - The company elected REIT taxation effective January 1, 2015, operating through LCFH and subsidiaries segregated into Series REIT and Series TRS for asset and income management[672][673] - The company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, including the Operating Partnership and two CLO VIEs[681][789] - As of December 31, 2018, the company had $379.8 million in unfunded loan commitments, representing off-balance sheet arrangements[1104] - The company has three reportable segments: loans, securities, and real estate; for 2018, profits were $273.1 million for loans, $27.8 million for securities, and $94.9 million for real estate[1106][1107] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - The company reports no changes in or disagreements with its accountants on accounting and financial disclosure[1140] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes during the fourth quarter - As of December 31, 2018, the CEO and CFO concluded the company's disclosure controls and procedures are effective at a reasonable assurance level[1143] - Management concluded the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[1145] - No material changes occurred in internal control over financial reporting during the fourth quarter of 2018[1147] Other Information The company reports no other information for this item - The company reports no other information for this item[1150] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2019 proxy statement[1152] Executive Compensation Information on executive compensation is incorporated by reference from the 2019 proxy statement - Information regarding executive compensation is incorporated by reference from the forthcoming 2019 proxy statement[1153] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2019 proxy statement - Information regarding security ownership is incorporated by reference from the forthcoming 2019 proxy statement[1154] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the forthcoming 2019 proxy statement[1156] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2019 proxy statement - Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2019 proxy statement[1157] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, financial statement schedules, and exhibits filed as part of the Annual Report - This section lists the consolidated financial statements, financial statement schedules, and exhibits filed with the Form 10-K[1159] Form 10-K Summary The company has not provided a summary for this item - The company has not provided a summary for this item[1162]