KEY RATING DRIVERS
IDRS AND SENIOR DEBT
The affirmations reflect Ladder's established platform as a commercial real estate (CRE) lender and investor; conservative underwriting culture; relatively stable core earnings as a result of reduced reliance on gain on sale income; a granular portfolio; continued adherence to a leverage target commensurate with the risk profile of its assets; and access to multiple sources of capital. Rating constraints include its less diversified business model focused on the CRE sector; a high proportion of secured, wholesale funding; reduced capital retention stemming from the parent company's REIT tax election effective
Triangle Business Model Intact
Fitch has a favorable view of Ladder's track record of originating conduit and balance sheet mortgage loans, purchasing investment grade CMBS,
Ladder was founded in
Diverse Access to Capital
Ladder remains reliant on wholesale funding sources, although there is growing diversity amongst Ladder's sources of capital. As of
During 2016, Ladder upsized its
Fitch notes the expected loss of FHLB membership by Ladder's captive insurance subsidiary effective
In the interim, Ladder has continued to take advantage of the low-cost funding afforded to FHLB borrowers, albeit only with maturities inside the 2021 expiration date. Interest rates on Ladder's captive insurance subsidiary's FHLB borrowings ranged from 0.38% to 2.74% as of
Leverage Increase Due to Increased Securities Exposure
Ladder varies its leverage depending on the risk profiles of and allocation levels to the various CRE asset classes in which it invests. Following the volatility in the credit markets in the first quarter of 2016, Ladder increased its exposure to '
Lower Reliance on Gain-on-Sale Income
Core earnings totalled
Core earnings to average equity was 9.3% in 1H16, down from 12.8% in 2015 and 16.3% in 2014; the decline was partially driven by a reduction in loan sale proceeds, including securitization profits.
Notably, the quality of Ladder's earnings has improved from a credit standpoint as net interest income after provisions represented 92.3% of net revenues in 1H16, up from 38.8% in 2015 and 36.6% in 2014. This meaningful increase was the result of a material decline in loan sale proceeds and gains on securities in 1H16 as well as net results from derivative transactions. Greater revenue diversity with reduced reliance on gain on sale income over a longer term period would be viewed favorably by Fitch.
Predominantly Secured Borrower, Adequate Liquidity
Ladder's secured debt represented 87.3% of total debt and 64.1% of total assets as of
Ladder's liquidity position remains constrained by its REIT tax election. Ladder is expected to retain a lower portion of core earnings when compared to the approximately 60% of core earnings retained prior to the REIT conversion. All else being equal, the REIT conversion increased after-tax core earnings because of a lower effective tax rate as a REIT, but this was somewhat offset by an increase in the company's annual cash dividend to
Key Man Risk
Key man risk is not unusual for mortgage REITs or similar finance companies. In Fitch's view, key man risk continues to reside with the Chief Executive Officer of Ladder. However, the company has a deep bench, and the six executive officers of the company average 27 years of CRE finance experience. The company elevated its former Chief Strategy Officer and General Counsel to Chief Operating Officer and its former Associate General Counsel to General Counsel in
IDRS AND SENIOR DEBT
The following factors may have a positive impact on Ladder's ratings and/or Outlook:
--Greater revenue diversity with a sustained reduction in reliance on gain on sale income;
--Sustained profitability and asset quality performance through multiple market environments, while maintaining conservative leverage at the lower end of the 2.0x-3.0x target and strong liquidity levels;
--Increased economic access to long-term unsecured debt funding.
The following factors may have a negative impact on Ladder's ratings and/or Outlook:
--A material reduction in long-term economic sources of funding;
--Material increase in exposure to more aggressively underwritten balance sheet loans or real estate equity investments without adequate reserves and commensurate decrease in leverage;
--A sustained increase in leverage beyond the company's articulated target;
--Sustained reduction in liquidity levels and/or unencumbered assets relative to outstanding unsecured debt;
--Sustained operating losses or material weakening of asset quality.
Fitch has affirmed the following ratings of
--Long-Term IDRs at 'BB';
--Senior unsecured notes at 'BB'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub.
Dodd-Frank Rating Information Disclosure Form
Source: Fitch Ratings