ANNUAL REPORT 2017
Board of Directors
Alan Fishman
Non-Executive Chairman, Retired
Brian Harris
Chief Executive Officer
Mark Alexander
Director
Senior Advisor in the Financial Services Industry
Douglas Durst
Director
Chairman, Durst Organization
Michael Mazzei
Director
Former President, Ladder Capital
Richard O’Toole
Director
General Counsel, The Related Companies
Executive Officers
Brian Harris
Chief Executive Officer
Pamela McCormack
President
Marc Fox
Chief Financial Officer
Thomas Harney
Head of Merchant Banking & Capital Markets
Robert Perelman
Head of Asset Management
Kelly Porcella
General Counsel
Corporate Information
Corporate Headquarters
345 Park Avenue, 8th Floor
New York, NY 10154
Independent Auditor
PricewaterhouseCoopers LLP
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
Investor Relations
investor.relations@laddercapital.com
(917) 369-3207
Stock Listing
Symbol: LADR
New York Stock Exchange
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
Shareholder Services Department
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
www.amstock.com
Annual Report on Form 10-K
Ladder Capital Corp’s Annual Report on Form 10-K
for the year ended December 31, 2017 is included in
this annual report. The exhibits accompanying the
report are filed with the Securities and Exchange
Commission and can be accessed via the Securities
and Exchange Commission’s website, www.sec.gov,
or through Ladder Capital Corp’s website in the
at
“Investor
www.laddercapital.com. We will provide these items
to stockholders upon request. The information
contained on our website is not incorporated by
reference into this Annual Report.
Relations”
section
Certifications
Ladder Capital Corp has filed with the Securities and
Exchange Commission as exhibits to its Form 10-K
for the fiscal year ended December 31, 2017 the
certifications required pursuant to Section 302 of the
Sarbanes-Oxley Act of its Chief Executive Officer
and Chief Financial Officer relating to the quality of
our public disclosure.
Forward Looking Statements
that
report
annual
contains
In accordance with the Private Securities Litigation
Reform Act of 1995, Ladder Capital Corp notes that
this
forward-looking
statements
involve risks and uncertainties,
including those related to Ladder Capital Corp’s
future success and growth. Actual results may differ
materially due to risks and uncertainties as described
in Ladder Capital Corp’s fillings with the Securities
and Exchange Commission. Ladder Capital does not
intend to update these forward-looking statements.
Annual Meeting of Stockholders
Stockholders of Ladder Capital Corp are cordially
invited to attend the 2018 Annual Meeting of
Stockholders on June 5, 2018 via live webcast at
www.virtualshareholdermeeting.com/LADR2018
[This page intentionally left blank]
Dear Fellow Stockholders,
Ladder Capital continued to be a formidable force in commercial real estate finance in 2017.
For the year ended December 31, 2017, Ladder earned $178.8 million of core earnings*, a non-GAAP measure, or
$1.54 of core EPS*, generating a pre-tax core return on average equity* of 12.1% and after-tax core return on
average equity* of 11.5%. We originated $2.9 billion of commercial mortgage loans, composed of $1.5 billion of
mortgage loans held for sale and $1.4 billion of mortgage loans held for investment. We also acquired $236.9
million of real estate equity during the year.
As of December 31, 2017, we had $6.0 billion in total assets and $1.5 billion of total book equity. Our assets
included $3.5 billion of loans, $1.1 billion of securities, and $1.0 billion of real estate equity. Book value per share
at December 31, 2017 was $13.19 per share on a GAAP basis and $14.60 per share on an undepreciated basis*.
We continued to allocate capital to investments that generate recurring income in the form of net interest margin and
net cash flow from real estate equity investments, with 78% of our 2017 earnings attributable to those sources. As a
result, in the fourth quarter of 2017, we increased the quarterly cash dividend rate for the third time in three years to
$0.315/share of Class A common stock to reflect the ongoing growth trends in recurring interest and operating lease
income.
Ladder also contributed $1.5 billion of loans to 7 securitization transactions in 2017, including a Ladder-only multi-
borrower securitization from Ladder’s CMBS shelf in June 2017. The profitable capital recycling as a result of
securitization enhances Ladder’s returns, with $286.9 million of cumulative core gains on securitized loans from
IPO through December 31, 2017.
During the year, Ladder received a credit ratings upgrade from S&P and credit outlook upgrade to “positive” from
Moody’s. Ladder continued to strengthen and diversify its liability structure, with the upsizing of our corporate
revolving credit facility to $241 million and two senior unsecured note offerings totaling $900 million. With these
offerings, we expanded our unsecured corporate bond financing from $564 million at the beginning of the year to
$1.17 billion as of December 31, 2017, and extended maturities substantially with no bonds coming due over the
next three years.
2017 was also a pivotal year for the liquidity of Ladder’s stock. Due to the concentrated ownership of pre-IPO
investors, Ladder’s average daily trading volume for the first 24 months after being public was a mere 148,913
shares. Ladder’s 3-month trailing average daily trading volume was 1.43 million shares as of April 25, 2018, as pre-
IPO investors exited the stock and provided others with opportunities for investment. Management and directors
continue to own in excess of $185 million of Ladder Capital stock (based on LADR’s closing stock price of $13.87
on April 24, 2018), equal to 12.1% of total equity market capitalization.
Looking into 2018, the firm is highly active. I expect Ladder to continue to benefit from our deep commercial real
estate credit expertise, our unique, full-service commercial real estate platform, and our robust origination team.
On behalf of everyone at Ladder, I would like to thank you for investing alongside us. We look forward to you
sharing in our continued success.
* This is a non-GAAP financial measure. Additional information regarding core earnings can be found in the 2017 Annual
Report and additional information regarding core EPS, pre-tax core return on average equity, after-tax core return on average
equity and undepreciated book value per share can be found in the Company’s March 2018 Investor Presentation, available at
ir.laddercapital.com.
Sincerely,
Brian Harris
Chief Executive Officer
Ladder Capital Corp
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
001-36299
Ladder Capital Corp
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
345 Park Avenue, New York
(Address of principal executive offices)
80-0925494
(IRS Employer
Identification No.)
10154
(Zip Code)
(212) 715-3170
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, $0.001 par value
(Title of Each Class)
New York Stock Exchange
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes
No
The aggregate market value of the Class A common stock held by non-affiliates of the registrant was $1,013,417,516 as of
June 30, 2017, based on the closing price of the registrant’s Class A common stock reported on the New York Stock Exchange
on such date of $13.41 per share. The registrant has no non-voting common stock.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Class A Common Stock, $0.001 par value
Class B Common Stock, $0.001 par value
Outstanding at February 26, 2018
97,967,272
13,317,419
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Company’s 2018 Annual Meeting of Shareholders have been incorporated by
reference into Part III of this Report.
LADDER CAPITAL CORP
FORM 10-K
December 31, 2017
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Item 16.
EXHIBIT INDEX
Form 10-K Summary
SIGNATURES
Page
5
21
65
65
69
69
70
75
76
104
107
223
223
224
224
224
224
224
224
225
225
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Annual
Report, including statements regarding our future results of operations and financial position, strategy and plans, and our
expectations for future operations, are forward-looking statements. The words “anticipate,” “estimate,” “expect,” “project,”
“plan,” “intend,” “believe,” “may,” “might,” “will,” “should,” “can have,” “likely,” “continue,” “design,” and other words and
terms of similar expressions are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and
trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business
operations and objectives and financial needs. Although we believe that the expectations reflected in our forward-looking
statements are reasonable, actual results could differ from those expressed in our forward-looking statements. Our future
financial position and results of operations, as well as any forward-looking statements are subject to change and inherent risks
and uncertainties. You should consider our forward-looking statements in light of a number of factors that may cause actual
results to vary from our forward-looking statements including, but not limited to:
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risks discussed under the heading “Risk Factors” in this Annual Report, as well as our consolidated financial
statements, related notes, and the other financial information appearing elsewhere in this Annual Report and our other
filings with the United States Securities and Exchange Commission (“SEC”);
changes in general economic conditions, in our industry and in the commercial finance and the real estate markets;
changes to our business and investment strategy;
our ability to obtain and maintain financing arrangements;
the financing and advance rates for our assets;
our actual and expected leverage and liquidity;
the adequacy of collateral securing our loan portfolio and a decline in the fair value of our assets;
interest rate mismatches between our assets and our borrowings used to fund such investments;
changes in interest rates and the market value of our assets;
changes in prepayment rates on our mortgages and the loans underlying our mortgage-backed and other asset-backed
securities;
the effects of hedging instruments and the degree to which our hedging strategies may or may not protect us from
interest rate and credit risk volatility;
the increased rate of default or decreased recovery rates on our assets;
the adequacy of our policies, procedures and systems for managing risk effectively;
a potential downgrade in the credit ratings assigned to our investments;
our compliance with, and the impact of and changes in, governmental regulations, tax laws and rates, accounting
guidance and similar matters;
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes
and our ability and the ability of our subsidiaries to operate in compliance with REIT requirements;
our ability and the ability of our subsidiaries to maintain our and their exemptions from registration under the
Investment Company Act of 1940, as amended (the “Investment Company Act”);
potential liability relating to environmental matters that impact the value of properties we may acquire or the
properties underlying our investments;
the inability of insurance covering real estate underlying our loans and investments to cover all losses;
the availability of investment opportunities in mortgage-related and real estate-related instruments and other securities;
fraud by potential borrowers;
the availability of qualified personnel;
the impact of the Tax Cuts and Jobs Act and/or estimates concerning the impact of the Tax Cuts and Jobs Act, which
are subject to change based on further analysis and/or IRS guidance;
the degree and nature of our competition; and
the market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.
2
You should not rely upon forward-looking statements as predictions of future events. In addition, neither we nor any other
person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The forward-
looking statements contained in this Annual Report are made as of the date hereof, and the Company assumes no obligation to
update or supplement any forward-looking statements.
3
REFERENCES TO LADDER CAPITAL CORP
Ladder Capital Corp is a holding company, and its primary assets are a controlling equity interest in Ladder Capital Finance
Holdings LLLP (“LCFH” or the “Operating Partnership”) and in each series thereof, directly or indirectly. Unless the context
suggests otherwise, references in this report to “Ladder,” “Ladder Capital,” the “Company,” “we,” “us” and “our” refer
(1) prior to the February 2014 initial public offering (“IPO”) of the Class A common stock of Ladder Capital Corp and related
transactions, to LCFH (“Predecessor”) and its consolidated subsidiaries and (2) after our IPO and related transactions, to
Ladder Capital Corp and its consolidated subsidiaries.
4
Item 1. Business
Overview
Part I
We are a leading commercial real estate finance company structured as an internally-managed REIT. We conduct our business
through three commercial real estate-related business lines: loans, securities, and real estate investments. We believe that our in-
house origination platform, ability to flexibly allocate capital among complementary product lines, credit-centric underwriting
approach, access to diversified financing sources, and experienced management team position us well to deliver attractive
returns on equity to our shareholders through economic and credit cycles.
Our businesses, including balance sheet lending, conduit lending, securities investments, and real estate investments, provide
for a stable base of net interest and rental income. We have originated $20.0 billion of commercial real estate loans from our
inception through December 31, 2017. During this timeframe, we also acquired $9.8 billion of investment grade-rated securities
secured by first mortgage loans on commercial real estate and $1.6 billion of selected net leased and other real estate assets.
As part of our commercial mortgage lending operations, we originate conduit loans, which are first mortgage loans on
stabilized, income producing commercial real estate properties that we intend to make available for sale in commercial
mortgage-backed securities (“CMBS”) securitizations. From our inception in October 2008 through December 31, 2017, we
originated $14.2 billion of conduit loans, $14.1 billion of which were sold into 50 CMBS securitizations, making us, by
volume, the second largest non-bank contributor of loans to CMBS securitizations in the United States in such period. Our sales
of loans into securitizations are generally, historically accounted for as true sales, not financings, and we generally retain no
ongoing interest in loans which we securitize unless we are required to do so as issuer pursuant to the risk retention
requirements of the Dodd-Frank Act. The securitization of conduit loans enables us to reinvest our equity capital into new loan
originations or allocate it to other investments.
As of December 31, 2017, we had $6.0 billion in total assets and $1.5 billion of total equity. Our assets included $3.5 billion of
loans, $1.1 billion of securities, and $1.0 billion of real estate.
We have a diversified and flexible financing strategy supporting our business operations, including unsecured debt and
significant committed term financing from leading financial institutions. As of December 31, 2017, we had $266.2 million in
aggregate principal amount of 5.875% senior notes due 2021 (the “2021 Notes”), $500.0 million in aggregate principal amount
of 5.25% senior notes due 2022 (the “2022 Notes”) and $400.0 million in aggregate principal amount of 5.25% senior notes due
2025 (the “2025 Notes,” collectively with the 2021 Notes and the 2022 Notes, the “Notes”). In addition, as of December 31,
2017, we had $4.4 billion of debt financing outstanding. This financing was comprised of $1.4 billion of financing from the
Federal Home Loan Bank (the “FHLB”), $398.7 million committed secured term repurchase agreement financing, $74.8
million of other securities financing, $692.7 million of third-party, non-recourse mortgage debt and $688.5 million of
collateralized loan obligation (“CLO”) debt. There were no borrowings outstanding under our Revolving Credit Facility and
$3.1 million of participation financing - mortgage loan receivable. As of December 31, 2017, we had $2.5 billion of committed,
undrawn funding capacity available, consisting of $241.4 million of availability under our $241.4 million Revolving Credit
Facility, $630.0 million of undrawn committed FHLB financing and $1.7 billion of other undrawn committed financings. As of
December 31, 2017, our debt-to-equity ratio was 2.9:1.0, as we employ leverage prudently to maximize financial flexibility.
Our adjusted leverage, a non-GAAP financial measure, was 2.5:1.0 as of December 31, 2017. See “—Reconciliation of Non-
GAAP Financial Measures” for our definition of adjusted leverage and a reconciliation to debt obligations, net.
Ladder was founded in October 2008 and we completed our IPO in February 2014. We are led by a disciplined and highly
aligned management team. As of December 31, 2017, our management team and directors held interests in our Company
comprising 12.1% of our total equity. On average, our management team members have 28 years of experience in the industry.
Our management team includes Brian Harris, Chief Executive Officer; Pamela McCormack, President; Marc Fox, Chief
Financial Officer; Thomas Harney, Head of Merchant Banking & Capital Markets; and Robert Perelman, Head of Asset
Management. Additional officers of Ladder include Kelly Porcella, General Counsel and Secretary, and Kevin Moclair, Chief
Accounting Officer. We employ 72 full-time industry professionals.
We are organized and conduct our operations to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
“Code”). As such, we will generally not be subject to U.S. federal income tax on that portion of our net income that is
distributed to shareholders if we distribute at least 90% of our taxable income and comply with certain other requirements.
5
Our Businesses
We invest primarily in loans, securities and other interests in U.S. commercial real estate, with a focus on senior secured
assets. Our complementary business segments are designed to provide us with the flexibility to opportunistically allocate capital
in order to generate attractive risk-adjusted returns under varying market conditions. The following table summarizes the value
of our investment portfolio as reported in our consolidated financial statements as of the dates indicated below ($ in thousands):
December 31, 2017
December 31, 2016
Loans
Balance sheet loans:
Balance sheet first mortgage loans
Other commercial real estate-related loans
Provision for loan losses
Total balance sheet loans
Conduit first mortgage loans
Total loans
Securities
CMBS investments
U.S. Agency Securities investments
Total securities
Real Estate
Real estate and related lease intangibles, net
Total real estate
Other Investments
Investments in unconsolidated joint ventures
FHLB stock
Total other investments
Total investments
Cash, cash equivalents and restricted cash
Other assets
Total assets
We invest in the following types of assets:
Loans
3,123,268
51.9 %
1,832,626
32.9 %
159,194
(4,000)
3,278,462
230,180
2.6 %
(0.1)%
54.4 %
3.8 %
167,469
(4,000)
1,996,095
357,882
3.0 %
(0.1)%
35.8 %
6.4 %
3,508,642
58.2 %
2,353,977
42.2 %
1,066,570
17.7 %
2,043,566
36.6 %
39,947
0.7 %
57,381
1.1 %
1,106,517
18.4 %
2,100,947
37.7 %
1,032,041
1,032,041
17.1 %
17.1 %
822,338
822,338
14.7 %
14.7 %
35,441
77,915
113,356
0.6 %
1.3 %
1.9 %
34,025
77,915
111,940
0.6 %
1.4 %
2.0 %
5,760,556
95.6 %
5,389,202
96.6 %
182,683
3.0 %
82,376
6,025,615
1.4 %
100.0 % $
64,017
1.1 %
125,118
5,578,337
2.3 %
100.0 %
$
Balance Sheet First Mortgage Loans. We originate and invest in balance sheet first mortgage loans secured by commercial real
estate properties that are undergoing transition, including lease-up, sell-out, and renovation or repositioning. These mortgage
loans are structured to fit the needs and business plans of the property owners, and generally have LIBOR based floating rates
and terms (including extension options) ranging from one to five years. Our loans are directly originated by an internal team
that has longstanding and strong relationships with borrowers and mortgage brokers throughout the United States. We follow a
rigorous investment process, which begins with an initial due diligence review; continues through a comprehensive legal and
underwriting process incorporating multiple internal and external checks and balances; and culminates in approval or
disapproval of each prospective investment by our Investment Committee. Balance sheet first mortgage loans in excess of
$50.0 million also require the approval of our board of directors’ Risk and Underwriting Committee.
We generally seek to hold our balance sheet first mortgage loans for investment although we also maintain the flexibility to
contribute such loans into a CLO or similar structure, sell participation interests or “b-notes” in our mortgage loans or sell such
mortgage loans as whole loans. These investments have been typically repaid at or prior to maturity (including by being
refinanced by us into a new conduit first mortgage loan upon property stabilization). As of December 31, 2017, we held a
portfolio of 151 balance sheet first mortgage loans with an aggregate book value of $3.1 billion. Based on the loan balances and
the “as-is” third-party FIRREA appraised values at origination, the weighted average loan-to-value ratio of this portfolio was
66.7% at December 31, 2017.
6
Other Commercial Real Estate-Related Loans. We selectively invest in note purchase financings, subordinated debt, mezzanine
debt and other structured finance products related to commercial real estate that are generally held for investment. As of
December 31, 2017, we held a portfolio of 33 other commercial real estate-related loans with an aggregate book value of
$159.2 million. Based on the loan balance and the “as-is” third-party FIRREA appraised values at origination, the weighted
average loan-to-value ratio of the portfolio was 69.6% at December 31, 2017.
Conduit First Mortgage Loans. We also originate conduit loans, which are first mortgage loans that are secured by cash-
flowing commercial real estate and are available for sale to securitizations. These first mortgage loans are typically structured
with fixed interest rates and generally have five- to ten-year terms. Conduit first mortgage loans are originated, underwritten,
approved and funded using the same comprehensive legal and underwriting approach, process and personnel used to originate
our balance sheet first mortgage loans. Conduit first mortgage loans in excess of $50.0 million also require approval of our
board of directors’ Risk and Underwriting Committee.
Although our primary intent is to sell our conduit first mortgage loans to CMBS trusts, we generally seek to maintain the
flexibility to keep them on our balance sheet, sell participation interests or “b-notes” in our conduit first mortgage loans or sell
conduit first mortgage loans as whole loans. From our inception in 2008 through December 31, 2017, we have originated and
funded $14.2 billion of conduit first mortgage loans and securitized $14.1 billion of such mortgage loans in 50 separate
transactions, including two securitizations in 2010, three securitizations in 2011, six securitizations in 2012, six securitizations
in 2013, 10 securitizations in 2014, 10 securitizations in 2015, six securitizations in 2016 and seven securitizations in 2017. We
generally securitize our loans together with certain financial institutions, which to date have included affiliates of Deutsche
Bank Securities Inc., J.P. Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities, LLC. We have also
completed three single-asset securitizations, executed a Ladder-only multi-borrower securitization from Ladder’s CMBS shelf
in June 2017 and completed our first contributions of shorter-term loans into CLO transactions in the fourth quarter of 2017. As
of December 31, 2017, we held 15 first mortgage loans that were substantially available for contribution into a securitization
with an aggregate book value of $230.2 million. Based on the loan balances and the “as-is” third-party Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) appraised values at origination, the weighted average loan- to-
value ratio of this portfolio was 62.9% at December 31, 2017. The Company holds these conduit loans in its taxable REIT
subsidiary (“TRS”).
7
The following charts set forth our total outstanding balance sheet first mortgage loans, other commercial real estate-related
loans, mortgage loans transferred but not considered sold and conduit first mortgage loans as of December 31, 2017 and a
breakdown of our loan portfolio by loan size and geographic location and asset type of the underlying real estate.
8
Securities
CMBS Investments. We invest in CMBS secured by first mortgage loans on commercial real estate and own predominantly
AAA-rated securities. These investments provide a stable and attractive base of net interest income and help us manage our
liquidity. We have significant in-house expertise in the evaluation and trading of CMBS, due in part to our experience in
originating and underwriting mortgage loans that comprise assets within CMBS trusts, as well as our experience in structuring
CMBS transactions. AAA-rated CMBS investments in excess of $50.0 million and all other investment grade securities
positions in excess of $26.0 million require the approval of our board of directors’ Risk and Underwriting Committee. The Risk
and Underwriting Committee also must approve the lesser of (x) $21,000,000 and (y) 10% of the total net asset value of the
respective Ladder investment company for non-rated or sub-investment grade securities. As of December 31, 2017, the
estimated fair value of our portfolio of CMBS investments totaled $1.1 billion in 121 CUSIPs ($8.8 million average investment
per CUSIP). As of December 31, 2017, included in the $1.1 billion of CMBS securities are $12.7 million of CMBS securities
designated as risk retention securities under the Dodd-Frank Act which are subject to transfer restrictions over the term of the
securitization trust. As of that date, 100% of our CMBS investments were rated investment grade by Standard & Poor’s Ratings
Group, Moody’s Investors Service, Inc. or Fitch Ratings Inc., consisting of 78.3% AAA/Aaa-rated securities and 21.6% of other
investment grade-rated securities, including 17.5% rated AA/Aa, 2.1% rated A/A and 2% rated BBB/Baa. In the future, we may
invest in CMBS securities or other securities that are unrated. As of December 31, 2017, our CMBS investments had a weighted
average duration of 2.9 years. The commercial real estate collateral underlying our CMBS investment portfolio is located
throughout the United States. As of December 31, 2017, by property count and market value, respectively, 58% and 79.2% of
the collateral underlying our CMBS investment portfolio was distributed throughout the top 25 metropolitan statistical areas
(“MSAs”) in the United States, with 2.2% and 38.8%, by property count and market value, respectively, of the collateral located
in the New York-Newark-Edison MSA, and the concentrations in each of the remaining top 24 MSAs ranging from 0.1% to
13% by property count and 0% to 20.9% by market value.
U.S. Agency Securities Investments. Our U.S. Agency Securities portfolio consists of securities for which the principal and
interest payments are guaranteed by a U.S. government agency, such as the Government National Mortgage Association
(“GNMA”), or by a government-sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie
Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). In addition, these securities are secured by first
mortgage loans on commercial real estate. Investments in U.S. Agency Securities are subject to the same Risk and Underwriting
Committee approval requirements as CMBS investments, as described above. As of December 31, 2017, the estimated fair
value of our portfolio of U.S. Agency Securities was $39.9 million in 21 CUSIPs ($1.9 million average investment per CUSIP),
with a weighted average duration of 5.5 years. The commercial real estate collateral underlying our U.S. Agency Securities
portfolio is located throughout the United States. As of December 31, 2017, by market value, 77.1% and 17.3% of the collateral
underlying our U.S. Agency Securities, excluding the collateral underlying our Agency interest-only securities, was located in
New York and California, respectively, with no other state having a concentration greater than 10.0%. By property count,
California represented 77.8% and New York represented 3.7% of such collateral. While the specific geographic concentration of
our Agency interest-only securities portfolio as of December 31, 2017 is not obtainable, risk relating to any such possible
concentration is mitigated by the interest payments of these securities being guaranteed by a U.S. government agency or a GSE.
Real Estate
Commercial Real Estate Properties. As of December 31, 2017, we owned 132 single tenant net leased properties with an
aggregate book value of $683.3 million. These properties are fully leased on a net basis where the tenant is generally
responsible for payment of real estate taxes, property, building and general liability insurance and property and building
maintenance expenses. As of December 31, 2017, our net leased properties comprised a total of 5.1 million square feet, 100%
leased with an average age since construction of 13.5 years and a weighted average remaining lease term of 14.3 years.
Commercial real estate investments in excess of $20.0 million require the approval of our board of directors’ Risk and
Underwriting Committee.
9
In addition, as of December 31, 2017, we owned 34 other properties with an aggregate book value of $331.1 million. Through
separate joint ventures, we owned a portfolio of 13 office buildings in Richmond, VA with a book value of $90.6 million with
an 88.1% occupancy rate, a mobile home community in El Monte, CA with a book value of $52.9 million with a 66.5%
occupancy rate, a portfolio of four single-tenant office buildings in St. Paul, MN with a book value of $50.6 million, an
apartment complex in Miami, FL with a book value of $37.0 million and an occupancy rate of 94.1%, a portfolio of seven
office buildings in Richmond, VA with a book value of $16.1 million and an 87.1% occupancy rate, a 13-story office building in
Oakland County, MI with a book value of $11.5 million and a 86.9% occupancy rate, a two-story office building in Grand
Rapids, MI with a book value of $8.8 million and a 100.0% occupancy rate, and a single-tenant warehouse in Grand Rapids, MI
with a book value of $5.5 million. We also own a single-tenant office building in Ewing, NJ with a book value of $29.5 million,
a single-tenant office building in Crum Lynne, PA with a book value of $10.5 million, a single-tenant two-story office building
in Wayne, NJ with a book value of $8.6 million, a shopping center in Carmel, NY with a book value of $6.6 million and a
42.5% occupancy rate, and an office building in Peoria, IL with a book value of $3.0 million and a 48.9% occupancy rate.
For further details regarding our portfolio of commercial real estate properties, including state of operation, see “Properties.”
Residential Real Estate. We sold 46 condominium units at Veer Towers in Las Vegas, NV, during the year ended December 31,
2017, generating aggregate gains on sale of $9.3 million. As of December 31, 2017, we owned 13 residential condominium
units at Veer Towers in Las Vegas, NV with a book value of $4.9 million through a joint venture, and we expect to substantially
complete the sale of these remaining units in 2018. As of December 31, 2017, three condominium units were under contract for
sale with a book value of $0.8 million. As of December 31, 2017, none of the remaining condominium units we hold were
rented and occupied. During the year ended December 31, 2017, the Company recorded $0.2 million of rental income from the
condominium units.
We sold 40 condominium units at Terrazas River Park Village in Miami, FL, during the year ended December 31, 2017,
generating aggregate gains on sale of $2.3 million. As of December 31, 2017, we owned 48 residential condominium units at
Terrazas River Park Village in Miami, FL with a book value of $12.8 million, and we intend to sell these remaining units in less
than 18 months. As of December 31, 2017, seven condominium units were under contract for sale with a book value of $1.6
million. As of December 31, 2017, the remaining condominium units we hold were 81.3% rented and occupied. During the year
ended December 31, 2017, the Company recorded $1.4 million of rental income from the condominium units.
The Company holds these residential condominium units in its TRS.
Other Investments
Unconsolidated Joint Venture. In connection with the origination of a loan in April 2012, we received a 25% equity kicker with
the right to convert upon a capital event. On March 22, 2013, we refinanced the loan, and we converted our equity kicker
interest into a 19% limited liability company membership interest in Grace Lake JV, LLC (“Grace Lake LLC”). As of
December 31, 2017, Grace Lake LLC owned an office building campus with a carrying value of $62.0 million, which is net of
accumulated depreciation of $22.0 million, that is financed by $69.1 million of long-term debt. Debt of Grace Lake LLC is non-
recourse to the limited liability company members, except for customary non-recourse carve-outs for certain actions and
environmental liability. As of December 31, 2017, the book value of our investment in Grace Lake LLC was $4.9 million.
Unconsolidated Joint Venture. On August 7, 2015, the Company entered into a joint venture, 24 Second Avenue Holdings LLC
(“24 Second Avenue”), with an operating partner to invest in a ground-up condominium construction and development project
located at 24 Second Avenue, New York, NY. The Company contributed $31.1 million for a 73.8% interest, with the operating
partner holding the remaining 26.2% interest. The Company is entitled to income allocations and distributions based upon its
membership interest of 73.8% until the Company achieves a 1.70x profit multiple, after which, income is allocated and
distributed 50% to the Company and 50% to the operating partner. As of December 31, 2016, the previously existing building
had been demolished and the site was cleared with all supportive excavation work completed, and we are anticipating
completion of the new construction in 2018. 24 Second Avenue consists of 31 residential condominium units and one
commercial condominium unit. As of December 31, 2017, 11 residential condominium units were under contract for sale for
$30.0 million in sales proceeds. As of December 31, 2017, the Company is holding a 10.0% deposit on each sales contract. Our
operating partner entered into a construction loan with The Bank of the Ozarks in the amount of $50.5 million to fund the
completion of the project. As of December 31, 2017, draws of $36.5 million have been taken against the construction loan. The
Company has no remaining capital commitment to our operating partner. As of December 31, 2017, the book value of our
investment in 24 Second Avenue was $30.5 million.
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FHLB Stock. Tuebor Captive Insurance Company LLC (“Tuebor”) is a member of the FHLB. Each member of the FHLB must
purchase and hold FHLB stock as a condition of initial and continuing membership, in proportion to their borrowings from the
FHLB and levels of certain assets. Members may need to purchase additional stock to comply with these capital requirements
from time to time. FHLB stock is redeemable by Tuebor upon five years’ prior written notice, subject to certain restrictions and
limitations. Under certain conditions, the FHLB may also, at its sole discretion, repurchase FHLB stock from its members. As
of December 31, 2017, the book value of our investment in FHLB Stock was $77.9 million.
Our Financing Strategies
Our financing strategies are critical to the success and growth of our business. We manage our financing to complement our
asset composition and to diversify our exposure across multiple capital markets and counterparties.
We fund our investments in commercial real estate loans and securities through multiple sources, including the $611.6 million
of gross cash proceeds we raised in our initial equity private placement beginning in October 2008, the $257.4 million of gross
cash proceeds we raised in our follow-on equity private placement in the third quarter of 2011, proceeds from the issuance of
$325.0 million of 2017 Notes in 2012, the $238.5 million of net proceeds from the issuance of Class A common stock in 2014,
proceeds from the issuance of $300.0 million of 2021 Notes in 2014, proceeds from the issuance of $500.0 million of 2022
Notes and $400.0 million of 2025 Notes in 2017, current and future earnings and cash flow from operations, existing debt
facilities, and other borrowing programs in which we participate.
We finance our portfolio of commercial real estate loans using committed term facilities provided by multiple financial
institutions, with total commitments of $1.7 billion at December 31, 2017, a $241.4 million Revolving Credit Facility, CLO
transactions and through our FHLB membership. As of December 31, 2017, there was $398.7 million outstanding under the
committed term facilities. We finance our securities portfolio, including CMBS and U.S. Agency Securities, through our FHLB
membership, a $400.0 million committed term master repurchase agreement from a leading domestic financial institution and
uncommitted master repurchase agreements with numerous counterparties. As of December 31, 2017, we had total outstanding
balances of $74.8 million under all securities master repurchase agreements. We finance our real estate investments with non-
recourse first mortgage loans. As of December 31, 2017, we had outstanding balances of $692.7 million on these non-recourse
mortgage loans.
In addition to the amounts outstanding on our other facilities, we had $1.4 billion of borrowings from the FHLB outstanding at
December 31, 2017. As of December 31, 2017, we also had a $241.4 million Revolving Credit Facility, with no borrowings
outstanding, and $1.2 billion of Notes issued and outstanding. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources” and Note 8, Debt Obligations, Net in our consolidated
financial statements included elsewhere in this Annual Report for more information about our financing arrangements.
We enter into interest rate and credit spread derivative contracts to mitigate our exposure to changes in interest rates and credit
spreads. We generally seek to hedge the interest rate risk on the financing of assets that have a duration longer than five years,
including newly-originated conduit first mortgage loans, securities in our CMBS portfolio if long enough in duration, and most
of our U.S. Agency Securities portfolio. We monitor our asset profile and our hedge positions to manage our interest rate and
credit spread exposures, and we seek to match fund our assets according to the liquidity characteristics and expected holding
periods of our assets.
We generally seek to maintain a debt-to-equity ratio of approximately 3.0:1.0 or below. We expect this ratio to fluctuate during
the course of a fiscal year due to the normal course of business in our conduit lending operations, in which we generally
securitize our inventory of conduit loans at intervals, and also because of changes in our asset mix, due in part to such
securitizations. As of December 31, 2017, our debt-to-equity ratio was 2.9:1.0. Our adjusted leverage, a non-GAAP financial
measure, was 2.5:1.0 as of December 31, 2017. See “—Reconciliation of Non-GAAP Financial Measures” for our definition of
adjusted leverage and a reconciliation to debt obligations, net. We believe that our predominantly senior secured assets and our
moderate leverage provide financial flexibility to be able to capitalize on attractive market opportunities as they arise.
From time to time, we may add financing counterparties that we believe will complement our business, although the
agreements governing our indebtedness may limit our ability and the ability of our present and future subsidiaries to incur
additional indebtedness. Our amended and restated charter and by-laws do not impose any threshold limits on our ability to use
leverage.
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Business Outlook
We believe the commercial real estate finance market is currently characterized by strong demand for fixed and floating rate
mortgage financing supported by stable property values in most parts of the U.S. The demand is driven by acquisitions and
refinancings of existing properties, the need to fund expenditures to renovate or otherwise improve buildings, and new real
estate development. After an extended period of low and stable interest rates in the US, concerns regarding the potential for
near term interest rate increases has also contributed to demand for long term fixed rate mortgage financing. More than $1.8
trillion of commercial real estate debt is scheduled to mature over the next five years (according to Trepp), providing a
substantial foundation of demand for mortgage financing services going forward.
From our perspective as a commercial mortgage lender that finances its customers’ real estate investments nationwide, the
trends observed in the commercial mortgage backed securities market are often informative and somewhat predictive. In 2017,
new U.S. CMBS issuance volume increased 22.7% to $93.3 billion in comparison to 2016, a year in which swings in credit
spreads created uncertainty for lenders and borrowers thereby suppressing transaction activity. The return to positive annual
growth in U.S. CMBS issuance volume in 2017 was, at least in part, due to more stable credit spread environment that was also
favorable. The tightening of CMBS credit spreads that generally prevailed during 2017 is seen as reflective of the potential for
the healthy and stable conditions to continue to prevail in the commercial real estate lending market in 2018.
We believe the CMBS market will continue to play an important role in the financing of commercial real estate that is expected
to produce substantial streams of stabilized income over multiple years and we expect to continue to participate in this market
as a loan originator and a contributor of loans to securitization transactions in which CMBS are issued. We also expect to
continue to be active as a lender to owners of properties that are in transition and are expected to start generating substantial
streams of stabilized income after the financed property’s transition plan has been executed. Our ability to offer borrowers
mortgage loan financing on transitional properties enables us to remain an active lender even when the CMBS market
experiences disruptions or periods of slower activity that impair the origination of new loans for securitization.
Reflected in all of these lending and financing capabilities that Ladder applies in its daily operations is its ability to apply
superior credit skills in the underwriting of commercial real estate debt and equity investments while maintaining the ability to
efficiently shift capital among mortgage loans, securities, and real estate investments, Underwriting commercial real estate
credit risk is Ladder’s core strength - and Ladder expresses its view of the commercial real estate market and of specific
investment opportunities within it by making loans, investing in debt securities, and acquiring real estate - constantly fine-
tuning that mix of investments in an ongoing effort to optimize risk adjusted returns on equity.
Factors impacting operating results
There are a number of factors that influence our operating results in a meaningful way. The most significant factors include:
(1) our competition; (2) market and economic conditions; (3) loan origination volume; (4) profitability of securitizations;
(5) avoidance of credit losses; (6) availability of debt and equity funding and the costs of that funding; (7) the net interest
margin on our investments; (8) effectiveness of our hedging and other risk management practices; (9) real estate transactions
volumes; (10) occupancy rates; and (11) expense management.
Investment Process
Origination
Our team of originators is responsible for sourcing and directly originating new commercial first mortgage loans from the
brokerage community and directly from real estate owners, operators, developers and investors. The extensive industry
experience of our management team and origination team has enabled us to build a strong network of mortgage brokers and
direct borrowers throughout the commercial real estate community in the United States.
Credit and Underwriting
Our underwriting and credit process commences upon receipt of a potential borrower’s executed loan application and non-
refundable deposit.
Our underwriters conduct a thorough due diligence process for each prospective investment. The team coordinates in-house and
third-party due diligence for each prospective loan as part of a checklist-based process that is designed to ensure that each loan
receives a systematic evaluation. Elements of the underwriting process generally include:
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Cash Flow Analysis. We create an estimated cash flow analysis and underwriting model for each prospective investment.
Creation of the cash flow analysis generally draws on an assessment of current and historical data related to the property’s rent
roll, operating expenses, net operating income, leasing cost, and capital expenditures. Underwriting evaluates and factors in
assumptions regarding current market rents, vacancy rates, operating expenses, tenant improvements, leasing commissions,
replacement reserves, renewal probabilities and concession packages based on observable conditions in the subject property’s
sub-market at the time of underwriting. The cash flow analysis may also rely upon third-party environmental and engineering
reports to estimate the cost to repair or remediate any identified environmental and/or property-level deficiencies. The final
underwritten cash flow analysis is used to estimate the property’s overall value and its ability to produce cash flow to service
the proposed loan.
Borrower Analysis. Careful attention is also paid to the proposed borrower, including an analysis based on available
information of its credit history, financial standing, existing portfolio and sponsor exposure to leverage and contingent
liabilities, capacity and capability to manage and lease the collateral, depth of organization, knowledge of the local market, and
understanding of the proposed product type. We also generally commission and review a third-party background check of our
prospective borrower and sponsor.
Site Inspection. A Ladder underwriter typically conducts a physical site inspection of each property. The site inspection gives
the underwriter insights into the local market and the property’s positioning within it, confirms that tenants are in-place, and
generally helps to ensure that the property has the characteristics, qualities, and potential value represented by the borrower.
Legal Due Diligence. Our in-house transaction management team, comprised of experienced attorneys, manages, negotiates,
structures and closes all transactions and completes legal due diligence on each property, borrower, and sponsor, including the
evaluation of documents such as leases, title, title insurance, opinion letters, tenant estoppels, organizational documents, and
other agreements and documents related to the property or the loan.
Third-party Appraisal. We generally commission an appraisal from a member of the Appraisal Institute to provide an
independent opinion of value as well as additional supporting property and market data. Appraisals generally include detailed
data on recent property sales, local rents, vacancy rates, supply, absorption, demographics and employment, as well as a
detailed projected cash flow and valuation analysis. We typically use the independent appraiser’s valuation to calculate ratios
such as loan-to-value and loan-to-stabilized-value ratio, as well as to serve as an independent source to which the in-house cash
flow and valuation model can be compared.
Third-party Engineering Report. We generally engage an approved licensed engineer to complete property condition/
engineering reports and a seismic report for applicable properties. The engineering report is intended to identify any issues with
respect to the safety and soundness of a property that may warrant further investigation, and provide estimates of ongoing
replacement reserves, overall replacement cost, and the cost to bring a property into good repair.
Third-party Environmental Report. We also generally engage an approved environmental consulting firm to complete a Phase I
Environmental Assessment to identify and evaluate potential environmental issues at the property and may also order and
review Phase II Environmental Assessments and/or Operations & Maintenance plans if applicable. Environmental reports and
supporting documentation are typically reviewed in-house as well as by our dedicated outside environmental counsel who
prepares a summary report on each property.
Third-party Insurance Review. A third-party insurance specialist reviews each prospective borrower’s existing insurance
program to analyze the specific risk exposure of each property and to ensure that coverage is in compliance with our standard
insurance requirements. Our transaction management team oversees this third-party review and makes the conclusions of their
analysis available to the underwriting team.
A credit memorandum is prepared to summarize the results of the underwriting and due diligence process for the consideration
of the Investment Committee. We thoroughly document the due diligence process up to and including the credit memorandum
and maintain an organized digital archive of our work.
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Transaction Management
The transaction management team is generally responsible for coordinating and managing outside counsel, working directly
with originators, underwriters and borrowers to manage, structure, negotiate and close all transactions, including the
securitization of our loans. The transaction management team plays an integral role in the legal underwriting of each property,
consults with outside counsel on significant business, credit and/or legal issues, and facilitates the funding and closing of all
investments and dispositions. The transaction management team also supports asset management and investment realization
activities, including coordination of post-closing issues and assistance with loan sales, financings, refinancing and repayments.
Investment Committee Approval
All investments require approval from our Investment Committee, comprised of Brian Harris, CEO; Pamela McCormack,
President; and Michael Scarola, Chief Credit Officer. The Investment Committee generally requires each investment to be fully
described in a comprehensive Investment Committee memorandum that identifies the investment, the due diligence conducted
and the findings, as well as all identified related risks and mitigants. The Investment Committee meets regularly to ensure that
all investments are fully vetted prior to issuance of Investment Committee approval.
In addition to Investment Committee approval, the Risk and Underwriting Committee of our board of directors approves all
investments above certain thresholds, which are currently set at $50.0 million for loans and AAA-rated securities, and lower
levels for all other types of investments.
Financing
Prior to securitization or other disposition, or in the case of balance sheet loans, maturity, we finance most of the loans we
originate using our multiple committed term facilities from leading financial institutions and our membership in the FHLB. Our
finance team endeavors to match the characteristics and expected holding periods of the assets being financed with the
characteristics of the financing options available and our short and long term cash needs in determining the appropriate
financing approaches to be applied. The approaches we apply to financing our assets are a key component of our asset/liability
risk management strategy with respect to managing liquidity risk. These approaches, supplemented by the use of hedging
primarily via the use of standard derivative instruments, facilitate the prudent management of our interest rate and credit spread
exposures.
Asset Management
The asset management team, together with our third-party servicers, monitors the credit performance of our investment
portfolio, working closely with borrowers and/or their partners to monitor performance of our collateral assets and overseeing
our real estate portfolio. Asset management focuses on careful asset specific and market surveillance, active enforcement of
loan and security rights, and regular review of potential disposition strategies. Loan modifications, asset recapitalizations and
other necessary variations to a borrower’s or partner’s business plan or budget will generally be vetted through the asset
management team with a recommended course of action presented to the Investment Committee for approval.
Specific responsibilities of the asset management team include:
•
coordinating cash processing and cash management for collections and distributions through lock box accounts that are
set up to trap all cash flow from a property;
• monitoring tax and insurance administration to ensure timely payments to appropriate authorities and maintenance or
placement of applicable insurance coverages;
assisting with escrow analysis to maintain appropriate balances in required accounts;
•
• monitoring UCC administration for continued compliance with lien laws in various jurisdictions;
•
assisting with reserve and draw management from pre-funded accounts including monitoring draw requests for
legitimacy and budget accuracy;
coordinating and conducting site inspections and surveillance activities including periodic analysis of financial
statements;
reviewing rent rolls and operating statements;
reviewing available information for any material variances; and
completing and updating asset summary reviews and providing active portfolio management reporting to ensure that
borrowers remain compliant with the terms of their loans and remain on target for established budgets and business
plans.
•
•
•
•
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Disposition and Distribution
Our securitization team works with our transaction management and underwriting teams to realize our disposition strategy of
selling certain first mortgage loans into CMBS securitization trusts. We typically partner with other leading financial
institutions to contribute loans to multi-asset securitizations. We have also led single asset securitizations on single loans we
have originated.
From time to time, our registered broker-dealer subsidiary, Ladder Capital Securities LLC (“LCS”), may act as a co-manager
for the underwriting syndicate of public and private CMBS securitizations where an affiliate of LCS is contributing collateral to
the CMBS deal as a loan seller. In such instances, LCS, as a co-manager, will participate in the underwriting syndicate, on a
best efforts basis, to structure and arrange the bond issuance and participate in the associated investor meetings and road shows.
LCS generally does not receive any allocation of securities in these offerings for distribution to investor accounts and, as such,
has not participated in the direct sale of any CMBS to institutional and/or retail investors. During the year ended December 31,
2017, LCS recorded $4.7 million in fee income resulting from a securitization transaction, which was eliminated upon
consolidation.
In addition, Ladder has from time to time purchased predominantly AAA-rated CMBS from securitizations into which we have
sold conduit first mortgage loans, generally as one of several loan contributors. In such instances, however, we have not
participated as a co-manager in the underwriting syndicates. As of December 31, 2017, we owned $72.5 million of such CMBS,
representing less than 1.3% of the $5.5 billion of CMBS issued by the related securitization trusts. As with our other CMBS
investments, we purchased these securities in both primary and secondary market transactions over time.
In June 2016, our subsidiary, Ladder Capital Commercial Mortgage Securities LLC, successfully had its shelf registration
statement declared effective with the SEC which permits us to act as an issuer in a public securitization of first mortgage loans
contributed by us (and/or a third-party loan contributor). In June 2017, we executed a Ladder-only multi-borrower securitization
from this shelf registration and, in the fourth quarter of 2017, we completed our first contributions of shorter-term loans into
CLO transactions from this shelf registration. We may, in the future, contribute first mortgage loans to a securitization utilizing
this shelf registration statement.
In addition to contributing first mortgage loans into CMBS securitization trusts, we also maintain the flexibility to keep such
loans on our balance sheet, contribute loans into a collateralized loan obligation (CLO) or similar structure, sell participation
interests or “b-notes” in our first mortgage loans or sell first mortgage loans as whole loans. Balance sheet loans that are
refinanced by us into a new conduit first mortgage loan upon property stabilization and intended for securitization are re-
underwritten and structured by our origination, underwriting and transaction management teams.
Our asset management team also manages sales of our real property and works with our trading and finance teams on sales of
securities.
Competition
The commercial real estate finance markets are highly competitive. We face competition for lending and investment
opportunities from a variety of institutional lenders and investors and many other market participants, including specialty
finance companies, other REITs, commercial banks and thrift institutions, investment banks, insurance companies, hedge funds
and other financial institutions. Many of these competitors enjoy competitive advantages over us, including greater name
recognition, established lending relationships with customers, financial resources, and access to capital.
We compete on the basis of relationships, product offering, loan structure, terms, pricing and customer service. Our success
depends on our ability to maintain and capitalize on relationships with borrowers and brokers, offer attractive loan products,
remain competitive in pricing and terms, and provide superior service.
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Taxation
We have elected to be subject to tax as a REIT under Sections 856 through 860 of the Code, commencing with the taxable year
ending December 31, 2015, and certain of our subsidiaries have also elected to be subject to tax as a REIT. To qualify as REITs,
we must make qualifying distributions to shareholders and satisfy, on a continuing basis, through actual investment and
operating results, certain asset, income, organizational, distribution, stock ownership and other REIT requirements. If we fail to
qualify as REITs, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local
income taxes and may be precluded from qualifying as REITs for the subsequent four taxable years following the year in which
we lost our REIT qualification. The failure to qualify as REITs could have a material adverse impact on our results of
operations and amounts available for distribution to shareholders.
We utilize TRSs to reduce the impact of the prohibited transaction tax and to avoid penalty for the holding of assets not
qualifying as real estate assets for purposes of the REIT asset tests. Any income associated with a TRS is fully taxable because
a TRS is subject to federal and state income taxes as a domestic C corporation based upon its net income. See “Risk factors—
Risks related to our taxation as a REIT.”
Regulation
Our operations are subject, in certain instances, to supervision and regulation by state and U.S. federal governmental authorities
and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions. In
addition, certain of our subsidiaries’ businesses may rely on exemptions from various requirements of the Securities Act, the
Exchange Act, the Investment Company Act, and the U.S. Employee Retirement Income Security Act of 1974, as amended
(“ERISA”). These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third-
parties who we do not control.
Regulatory Reform
The Dodd-Frank Act, which went into effect on July 21, 2010, is intended to make significant structural reforms to the financial
services industry. For example, pursuant to the Dodd-Frank Act, various federal agencies have promulgated, or are in the
process of promulgating, regulations and rules with respect to various issues that affect securitizations, including: (a) a rule that
took effect December 24, 2016 (the “Risk Retention Rule”) requiring that either (i) a securitization’s sponsor retain, until the
unpaid balance of the bonds or the loans is reduced by a certain amount, a 5% vertical interest in each class of securities issued,
(ii) the sponsor or certain third-party purchasers (each, a “Third Party Purchaser”) retain, until the unpaid balance of the bonds
or the loans is reduced by a certain amount (or for third-party purchasers, for at least five years), securities in an amount equal
to 5% of the credit risk associated with the issued securities in the form of the subordinate tranches or (iii) a combination of (i)
and (ii); (b) requirements for additional disclosure; (c) requirements for additional review and reporting (including revisions to
Regulation AB); (d) for public securitizations, requirements that the chief executive officer (“CEO”) of an issuer file with the
SEC an individual certificate attesting to certain matters, as described below; and (e) certain restrictions designed to prohibit
conflicts of interest. Other regulations have been and may ultimately be adopted.
The Risk Retention Rule and other rules and regulations that have been adopted or may be adopted under the Dodd-Frank Act
could alter the structure of securitizations in the future and could pose additional risks to or reduce or eliminate the economic
benefits of our participation in future securitizations. In addition, such rules and regulations could reduce or eliminate the
economic benefits of securitization in general or discourage traditional issuers, underwriters, b-piece buyers or other
participants from participating in future securitizations and affect the availability of securitization platforms into which we can
contribute mortgage loans, which may require that we take on additional roles and risks in connection with effectuating
securitizations of mortgage loans. Refer to Note 4 to our consolidated financial statements for further information regarding the
Risk Retention Rule.
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Certain other recent and anticipated federal, state and municipal rules could also impact our business. These include (1) recent
rules issued by the U.S. Commodity and Futures Trading Commission (“CFTC”) regarding commodity pool operator (“CPO”)
and commodity trading advisor (“CTA”) registration and compliance obligations, (2) recent regulatory, reporting and
compliance requirements applicable to swap dealers, security based swaps dealers and major swap participants under the Dodd-
Frank Act, (3) recent Dodd-Frank Act regulations on derivative transactions, (4) changes to bank capital rules proposed by
international regulators under the Fundamental Review of Trading Book (“FRTB”), which could require certain banks to
maintain higher levels of capital when trading in securitization positions, (5) changes in capital requirements announced by the
Basel Committee on Banking Supervision, and (6) requirements of certain states and municipalities, such as California and
New York City, that require placement agents who solicit funds from the retirement and public pension systems to register as
lobbyists. Although some of the rules may not affect us directly, the rules may affect issuers that sponsor securitizations in
which we may sell commercial mortgage loans thereby potentially affecting the structure and/or profitability of this part of our
business. Because some of the rules are not yet final or are in the process of being implemented, the full effect of the rules may
not be known for some time. In addition, the SEC and other agencies continue to generate new rules. See also “Risk factors-
Risks related to regulatory and compliance matters” and “Risk Factors-Risks related to hedging.”
Regulation of Commercial Real Estate Lending Activities
Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges
and on certain collection practices and creditor remedies, and require licensing of lenders and financiers and adequate
disclosure of certain contract terms. We also are required to comply with certain provisions of, among other statutes and
regulations, certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans, the USA PATRIOT
Act, regulations promulgated by the Office of Foreign Asset Control and U.S. federal and state securities laws and regulations.
Regulation as an Investment Adviser
We conduct investment advisory activities in the United States through our subsidiary, Ladder Capital Asset Management LLC
(“LCAM”), which is regulated by the SEC as a registered investment adviser under the Investment Advisers Act of 1940, as
amended (the “Advisers Act”). A registered investment adviser is subject to U.S. federal and state laws and regulations
primarily intended to benefit its clients. These laws and regulations include requirements relating to, among other things,
fiduciary duties to clients, maintaining an effective compliance program, solicitation agreements, conflicts of interest, record
keeping and reporting requirements, disclosure requirements, custody arrangements, limitations on agency cross and principal
transactions between an investment adviser and its advisory clients and general anti-fraud prohibitions. In addition, these laws
and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or
restrict us from conducting our advisory activities in the event we fail to comply with those laws and regulations. Sanctions that
may be imposed for a failure to comply with applicable legal requirements include the suspension of individual employees,
limitations on our engaging in various advisory activities for specified periods of time, disgorgement, the revocation of
registrations, and other censures and fines.
We may become subject to additional regulatory and compliance burdens as our investment adviser subsidiary expands its
product offerings and investment platform. For example, our investment adviser is currently an investment adviser to a mutual
fund registered under the Investment Company Act. The mutual fund and our subsidiary that serves as its investment adviser
are subject to regulation under the Investment Company Act and the rules thereunder, which, among other things, govern the
relationship between a mutual fund and its investment adviser and prohibit or severely restrict principal transactions and joint
transactions and regulate the fees our subsidiary may earn from the mutual fund. This additional regulation could increase our
compliance costs and create the potential for additional liabilities and penalties.
The SEC and its staff continue to engage in various initiatives that may change the regulations governing our investment
adviser subsidiary and its clients, particularly the mutual fund. In 2016, the SEC adopted a rule governing the liquidity
requirements applicable to mutual funds. We may incur additional expense in connection with ensuring the mutual fund
complies with the new rule, which is expected to become effective in 2018.
In 2017, a new Department of Labor regulation became applicable revising the definition of when a party may be providing
advice as a “fiduciary” for purposes of the fiduciary responsibility provisions of Title I of ERISA and the prohibited transaction
excise tax provisions of the IRS. Certain conditions of exemptions to the rule have been delayed, and the Department of Labor
is currently re-examining the rule. The rule creates certain compliance and operational challenges for companies that distribute
investment products and in some cases may make it more difficult for our investment adviser to raise capital from benefit plan
investors (including Individual Retirement Accounts) for clients that it may manage.
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Regulation as a Broker-Dealer
We have a subsidiary, Ladder Capital Securities LLC, that is registered as a broker-dealer with the SEC and in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands, and is a member of the Financial Industry Regulatory Authority
(“FINRA”). This subsidiary, which from time to time co-manages the CMBS securitizations to which an affiliate contributes
collateral as loan seller, is subject to regulations that cover all aspects of its business, including sales methods, trade practices,
use and safekeeping of clients’ funds and securities, the capital structure of the subsidiary, recordkeeping, the financing of
clients’ purchases and the conduct of directors, officers and employees. Violations of these regulations can result in the
revocation of its broker-dealer license (which could result in our having to hire new licensed investment professionals before
continuing certain operations), the imposition of censure or fines and the suspension or expulsion of the subsidiary, its officers
or employees from FINRA. The subsidiary also may be required to maintain certain minimum net capital. Rule 15c3-1 of the
Exchange Act specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part
of a broker-dealer’s assets be kept in relatively liquid form. The SEC and FINRA impose rules that require notification when
net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital
composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances.
Additionally, the SEC’s uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-
dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital. As of
December 31, 2017, Ladder Capital Securities LLC was in compliance with the minimum net capital requirements.
Regulation as a Captive Insurance Company
We maintain a captive insurance company, Tuebor, to provide coverage previously self insured by us, including nuclear,
biological or chemical coverage, excess property coverage and excess errors and omissions coverage. It is regulated by the state
of Michigan and is subject to regulations that cover all aspects of its business. Violations of these regulations can result in
revocation of its authorization to do business as a captive insurer or result in censures or fines. The subsidiary is also subject to
insurance laws of states other than Michigan (i.e., states where the insureds are located). See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and capital resources.”
Investment Company Act Exemption
We intend to conduct our operations so that neither we nor any of our subsidiaries (including any series thereof) are required to
register as an investment company under the Investment Company Act.
If we or any of our subsidiaries (including any series thereof) fail to qualify for and maintain an exemption from registration
under the Investment Company Act, or an exclusion from the definition of an investment company, we could, among other
things, be required either to (a) substantially change the manner in which we conduct our operations to avoid being required to
register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise
choose to do so, or (c) register as an investment company under the Investment Company Act, any of which could have an
adverse effect on us, our financial results, the sustainability of our business model or the value of our securities.
If we or any of our subsidiaries (including any series thereof) were required to register as an investment company under the
Investment Company Act, the registered entity would become subject to substantial regulation with respect to capital structure
(including the ability to use leverage), management, operations, transactions with affiliated persons (as defined in the
Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry
concentration, compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would
significantly change its operation and we would not be able to conduct our business as described in this Annual Report. For
example, because affiliate transactions are generally prohibited under the Investment Company Act, we would not be able to
enter into certain transactions with any of our affiliates if we are required to register as an investment company, which could
have a material adverse effect on our ability to operate our business.
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our
business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a
court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
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Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as
being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.
Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer which is engaged or proposes
to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire
investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are
U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies
and are not relying on the exception from the definition of investment company for certain privately-offered investment
vehicles set forth in Section 3(c)(1) or 3(c)(7) of the Investment Company Act.
We are organized as a holding company and conduct our businesses primarily through our majority-owned subsidiaries
(including any series thereof). We intend to conduct our operations so that we do not come within the definition of an
investment company under Section 3(a)(1)(C) of the Investment Company Act because less than 40% of the value of our total
assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will consist of “investment
securities.” We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe
that we will not be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because we
will not engage primarily, hold ourselves out as being engaged primarily, or propose to engage primarily, in the business of
investing, reinvesting or trading in securities. Rather, we will be engaged primarily in the business of holding securities of our
majority-owned subsidiaries (including any series thereof).
We expect that certain of our subsidiaries (including any series thereof) may rely on the exclusion from the definition of an
“investment company” under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act,
which is available for entities “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate.” This exclusion, as interpreted by the staff of the SEC, requires that an entity invest at least
55% of its assets in “qualifying real estate assets” and at least 80% of its assets in qualifying real estate assets and “real estate-
related assets.”
Although we reserve the right to modify our business methods at any time, as of December 31, 2017, we expect each of our
subsidiaries (including any series thereof) relying on Section 3(c)(5)(C) to primarily hold assets in one or more of the following
categories, which are comprised primarily of “qualifying real estate assets”: commercial mortgage loans, investments in
securities secured by first mortgage loans, and investments in selected net leased and other real estate assets. We expect each of
our subsidiaries (including any series thereof) relying on Section 3(c)(5)(C) to rely on guidance published by the SEC or its
staff or on our analyses of such guidance to determine which assets are qualifying real estate assets and real estate-related
assets. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be
required to adjust our strategies accordingly. In addition, we may be limited in our ability to make certain investments and these
limitations could result in a subsidiary holding assets we might wish to sell or selling assets we might wish to hold.
Any of the Company or our subsidiaries (including any series thereof) may rely on the exemption provided by Section 3(c)(6)
of the Investment Company Act to the extent that they primarily engage, directly or through majority-owned subsidiaries
(including any series thereof), in the businesses described in Sections 3(c)(3), 3(c)(4) and 3(c)(5) of the Investment Company
Act. The SEC staff has issued little interpretive guidance with respect to Section 3(c)(6) and any guidance published by the staff
could require us to adjust our strategies accordingly.
In 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of the Investment Company
Act, including the nature of the assets that qualify for purposes of the exemption and whether companies that are engaged in the
business of acquiring mortgages and mortgage-related instruments should be regulated in a manner similar to investment
companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of such
companies, including the SEC or its staff providing more specific or different guidance regarding Section 3(c)(5)(C), will not
change in a manner that adversely affects our operations.
Qualification for exclusion from the definition of an investment company under the Investment Company Act may limit our
ability to make certain investments. In addition, complying with the tests for such exclusion may restrict the time at which we
can acquire and sell assets. To the extent that the SEC or its staff provides more specific guidance regarding any of the matters
bearing upon such exclusions, we may be required to adjust our strategies accordingly. Any additional guidance from the SEC
or its staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have
chosen. See “Risk factors—Risks related to our Investment Company Act exemption—Maintenance of our exemption from
registration under the Investment Company Act imposes significant limits on our operations.”
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Employees
As of December 31, 2017, we employed 72 full-time persons. All employees are employed by our operating subsidiary, Ladder
Capital Finance LLC. None of our employees are represented by a union or subject to a collective bargaining agreement and we
have never experienced a work stoppage. We believe that our employee relations are good.
Our Corporate Information
Our principal executive offices are located at 345 Park Avenue, 8th Floor, New York, New York 10154, and our telephone
number is (212) 715-3170. We maintain a website on the Internet at http://www.laddercapital.com. The information contained
in our website is not incorporated by reference into this Annual Report. We make available on or through our website certain
reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Exchange Act. These
include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make
this information available on our website free of charge as soon as reasonably practicable after we electronically file the
information with, or furnish it to, the SEC.
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Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may adversely impact our business. If any of the following risks occur,
our business, financial condition, operating results, cash flows and liquidity could be materially adversely affected. The market
price of our Class A common stock could decline if one or more of these risks or uncertainties actually occur, causing you to
lose all or part of your investment in our Class A common stock. Certain statements in “Risk Factors” are forward-looking
statements. See “Information Regarding Forward-Looking Statements” included elsewhere in this Annual Report.
Risks Related to Our Operations
Our business model may not be successful. We may change our investment strategy and financing policy in the future
without stockholder consent and any such changes may not be successful.
Our management team is authorized to follow broad investment guidelines that have been approved by our board of directors
and has great latitude within those guidelines to determine which assets make proper investments for us. Those investment
guidelines, as well as our financing strategy or hedging policies with respect to investments, originations, acquisitions, growth,
operations, indebtedness, capitalization and distributions, may be changed at any time without the consent of our stockholders.
There can be no assurance that any business model or business plan of ours will prove accurate, that our management team will
be able to implement such business model or business plan successfully in the future or that we will achieve our performance
objectives. Any business model of ours, including any underlying assumptions and predictions, merely reflect our assessment
of the short- and long-term prospects of the business, finance and real estate markets in which we operate and should not be
relied upon in determining whether to invest in our Class A common stock.
We are dependent on our management team, and the loss of any of these individuals could adversely affect our ability to
operate profitably.
We heavily depend upon the skills and experience of our management team. The loss of the services of one or more of such
individuals could have an adverse effect on our operations, and in such case we will be subject to the risk that no suitable
replacement can be found. Furthermore, any termination of a member of the management team may be difficult and costly for
us and create obligations for us to the departing individual. If we are unable to staff our management team fully with
individuals who possess the skills and experience necessary to excel in their positions our business may be adversely affected.
Furthermore, if one or more members of our management team is no longer employed by us, our ability to obtain future
financing could be affected which could materially and adversely affect our business.
We may not be able to hire and retain qualified loan originators or grow and maintain our relationships with key loan
brokers, and if we are unable to do so, our ability to implement our business and growth strategies could be limited.
We depend on our loan originators to generate borrower clients by, among other things, developing relationships with
commercial property owners, real estate agents and brokers, developers and others, which we believe leads to repeat and
referral business. Accordingly, we must be able to attract, motivate and retain skilled loan originators. The market for loan
originators is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that we will be
able to attract or retain qualified loan originators. If we cannot attract, motivate or retain a sufficient number of skilled loan
originators, at a reasonable cost or at all, our business could be materially and adversely affected. We also depend on our
network of loan brokers, who generate a significant portion of our loan originations. While we strive to cultivate long-standing
relationships that generate repeat business for us, brokers are free to transact business with other lenders and have done so in
the past and will do so in the future. Our competitors also have relationships with some of our brokers and actively compete
with us in bidding on loans shopped by these brokers. We also cannot guarantee that we will be able to maintain or develop
new relationships with additional brokers.
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The allocation of capital among our business lines may vary, which may adversely affect our financial performance.
In executing our business plan, we regularly consider the allocation of capital to our various commercial real estate business
lines, including commercial mortgage lending, investments in securities secured by first mortgage loans, and investments in
selected net leased and other real estate assets. The allocation of capital among such business lines may vary due to market
conditions, the expected relative return on equity of each activity, the judgment of our management team, the demand in the
marketplace for commercial real estate loans and securities and the availability of specific investment opportunities. We also
consider the availability and cost of our likely sources of capital. If we fail to appropriately allocate capital and resources across
our business lines or fail to optimize our investment and capital raising opportunities, our financial performance may be
adversely affected.
Our access to the CMBS securitization market and the timing of our securitization activities and other factors may greatly
affect our quarterly financial results.
We expect to distribute certain of the first mortgage loans that we originate through securitizations and, in many circumstances,
upon completion of a securitization, we will recognize certain non-interest revenues which will be included in total other
income on our consolidated statements of income and cease to earn net interest income on the securitized loans. Our quarterly
revenue, operating results and profitability have varied substantially from quarter to quarter based on the frequency, pricing,
volume and timing of our securitizations. Our securitization activities will be affected by a number of factors, including our
loan origination volumes, changes in loan values, quality and performance during the period such loans are on our books and
conditions in the securitization and credit markets generally and at the time we seek to launch and complete our securitizations.
Although due to changes resulting from the risk retention rules required by the Dodd-Frank Act described elsewhere in this
Annual Report, Ladder may potentially be required to defer income over the life of the securitization, thereby reducing such
volatility in earnings, as a result of these quarterly variations, quarter-to-quarter comparisons of our operating results may not
provide an accurate comparison of our current period results of operations. If securities analysts or investors focus on such
comparative quarter-to-quarter performance, our stock price performance may be more volatile than if such persons compared a
wider period of results of operations.
We may not be able to maintain our joint ventures and strategic business alliances.
We often rely on other third-party companies for assistance in origination, warehousing, distribution, securitization and other
finance-related and loan-related activities. Some of our business may be conducted through non-wholly-owned subsidiaries,
joint ventures in which we share control (in whole or in part) and strategic alliances formed by us with other strategic or
business partners that we do not control. There can be no assurance that any of these strategic or business partners will continue
their relationships with us in the future or that we will be able to pursue our stated strategies with respect to non-wholly-owned
subsidiaries, joint ventures, strategic alliances and the markets in which we operate. Our ability to influence our partners in
joint ventures or strategic alliances may be limited and non-alignment of interests on various strategic decisions in joint
ventures or strategic alliances may adversely impact our business. Furthermore, joint venture or strategic alliance partners may:
(i) have economic or business interests or goals that are inconsistent with ours; (ii) take actions contrary to our policies or
objectives; (iii) undergo a change of control; (iv) experience financial and other difficulties; or (v) be unable or unwilling to
fulfill their obligations under a joint venture or strategic alliance, which may affect our financial conditions or results of
operations.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on
joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners.
We may in the future make investments through joint ventures. Such joint venture investments may involve risks not otherwise
present when we originate or acquire investments without partners, including the following:
• we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions
•
•
that are in our best interest;
joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the
interest when we desire and/or on advantageous terms;
any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate
procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to
that partner;
• we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture,
which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or
dispositions;
22
•
•
•
•
•
a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with
our business interests or goals;
a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our
policy with respect to maintaining our qualification as a REIT and our exclusion from registration under the
Investment Company Act;
a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we
and any other remaining partners generally would remain liable for the joint venture’s liabilities;
our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the
applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or
investments underlying such relationship or may need to purchase such interests or investments at a premium to the
market price to continue ownership;
disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent
our officers and directors from focusing their time and efforts on our business and could result in subjecting the
investments owned by the joint venture to additional risk; or
• we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely
affect our ability to continue to qualify as a REIT or maintain our exclusion from registration under the Investment
Company Act, even though we do not control the joint venture.
Any of the above may subject us to liabilities in excess of those contemplated and adversely affect the value of our future joint
venture investments.
We may face difficulties in obtaining and maintaining required authorizations or licenses to do business.
In order to implement our business strategies, we may be required to obtain, maintain or renew certain licenses and
authorizations (including “doing business” authorizations and licenses with respect to loan origination) from certain
governmental entities. While we do not anticipate any delays or other complications relating to such licenses and
authorizations, there is no assurance that any particular license or authorization will be obtained, maintained or renewed
quickly or at all. Any failure of ours to obtain, maintain or renew such authorizations or licenses may adversely affect our
business. Any material failure, alone or in aggregate, could lead to a default under certain of our financing arrangements and/or
result in the unenforceability of our loan documents.
The accuracy of our financial statements may be materially affected if our estimates, including loan loss reserves, prove to
be inaccurate.
Financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and
assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these
estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting
requiring the application of management’s judgment include, but are not limited to: (i) assessing the adequacy of the allowance
for loan losses; (ii) determining the fair value of investment securities; (iii) assessing other than temporary impairments on
securities; (iv) allocation of purchase price for acquired real estate; and (v) assessing impairments on real estate held for use or
held for sale. These estimates, judgments and assumptions are inherently uncertain, especially in turbulent economic times,
and, if they prove to be wrong, then we face the risk that charges to income will be required.
If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our
financial results.
We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so,
our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the
accuracy of our financial statements.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in
the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis by
the Company’s internal controls. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of a registrant’s financial reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial
statements will not be prevented or detected and corrected, on a timely basis by the Company’s internal controls.
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Although we continuously monitor the design, implementation and operating effectiveness of our internal controls over
financial reporting, there can be no assurance that significant deficiencies or material weaknesses will not occur in the future. If
we fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements
that may not be prevented or detected on a timely basis, which could cause stakeholders to lose confidence in our reported
financial information.
We may be subject to “lender liability” litigation.
A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various legal
theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either
violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of
control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or
shareholders. We cannot assure you that such claims will not arise or that we will not be subject to significant liability if a claim
of this type were to arise.
Litigation may adversely affect our business, financial condition and results of operations.
We are, from time to time, subject to legal and regulatory requirements applicable to our business and industry. We may be
subject to various legal proceedings and these proceedings may range from actions involving a single plaintiff to class action
lawsuits. Litigation can be lengthy, expensive and disruptive to our operations and results cannot be predicted with certainty.
There may also be adverse publicity associated with litigation, regardless of whether the allegations are valid or whether we are
ultimately found not liable. As a result, litigation may adversely affect our business, financial condition and results of
operations.
There can be no assurance that our corporate insurance policies will mitigate all insurable losses, costs or damages to our
business.
Based on our history and type of business, we believe that we maintain adequate insurance coverage to cover probable and
reasonably estimable liabilities should they arise. However, there can be no assurance that these estimates will prove to be
sufficient, nor can there be any assurance that the ultimate outcome of any claim or event will not have a material negative
impact on our business prospects, financial position, results of operations or cash flows.
As of December 31, 2017, we are no longer an “emerging growth company,” and, as a result, we will have to comply with
increased disclosure and governance requirements.
Because the market value of our common stock held by non-affiliates exceeded $700 million as of June 30, 2017, we were
deemed a large accelerated filer as of December 31, 2017 and, accordingly, we no longer qualify as an emerging growth
company. As a large accelerated filer, we are now subject to certain disclosure requirements that apply to other public
companies but did not previously apply to us due to our status as an emerging growth company. These requirements include:
•
•
•
•
compliance with the auditor attestation requirements in the assessment of our internal control over financial reporting;
compliance with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit
and the financial statements;
full disclosure obligations regarding executive compensation; and
compliance with the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved.
Failure to comply with these requirements could subject us to enforcement actions by the SEC, divert management’s attention,
damage our reputation and adversely affect our business, operating results or financial condition.
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We expect that the loss of “emerging growth company” status and compliance with the additional requirements of being a large
accelerated filer will substantially increase our legal and financial compliance costs and make some activities more time
consuming and costly. In particular, we expect to incur significant expenses and devote substantial management effort toward
ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”). If we are not able to comply with the requirements of Section 404 applicable to us in a timely manner,
or if significant deficiencies in our internal control over financial reporting are identified, the market price of our stock could
decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require
additional financial and management resources.
At the time of our initial public offering in 2014, we irrevocably elected not to take advantage of Section 107 of the Jumpstart
our Business Startups Act of 2012 (“JOBS Act”) which provides an “emerging growth company” with an extended transition
period for complying with new or revised financial accounting standards. Accordingly, we have complied with new or revised
financial accounting standards on the relevant dates on which adoption of such standards was required for non-emerging
growth companies.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability
to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act and the
New York Stock Exchange (“NYSE”) rules. The requirements of these rules and regulations can be onerous and expensive and
make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The
Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and
procedures and internal controls for financial reporting. In order to maintain and, if required, improve our disclosure controls
and procedures and internal control over financial reporting to meet this standard, significant resources and management
oversight may be required, and management’s attention may be diverted from other business concerns. These rules and
regulations could also make it more difficult for us to attract and retain qualified independent members of our board of
directors. Furthermore, because of our relative inexperience in operating as a public company, we might not be successful in
implementing these requirements.
Cybersecurity threats or other security breaches could compromise sensitive information belonging to us or our employees,
borrowers, clients and other counterparties and could harm our business and our reputation.
Ladder Capital relies on the efficacy of its cybersecurity policies and processes in order to protect its data assets from
cyberattacks and intrusions, including computer viruses, adware, phishing, and unauthorized persons accessing our data assets
internally or externally. The rise of high profile security breaches by hackers, foreign governments, and other malicious actors
indicates an increased risk of a security breach or IT disruption. We store sensitive data, including our proprietary business
information and that of our borrowers, clients and other counterparties, and confidential employee information, in our data
centers and on our networks. Despite our security measures, our information technology and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error, malfeasance or other disruptions that could result in unauthorized
disclosure or loss of sensitive information. Because the techniques used to obtain unauthorized access to networks, or to
sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventative measures against all forms of attack. Furthermore, in the
operation of our business we also use third-party vendors that store certain sensitive data, including confidential information
about our employees, and these third parties are subject to their own cybersecurity threats. While we conduct due diligence on
our vendors, no due diligence is infallible and any security breach of our own or a third-party vendor’s systems could cause us
to be non-compliant with applicable laws or regulations, subject us to legal claims, regulatory investigations or other
proceedings, disrupt our operations, damage our reputation, subject us to considerable remediation expenses and cause a loss of
confidence in our products and services, any of which could adversely affect our business.
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Market Risks Related to Real Estate Loans and Securities
We have a concentration of investments in the real estate sector and may have concentrations from time to time in certain
property types, locations, tenants and borrowers, which may increase our exposure to the risks of certain economic
downturns.
We operate in the commercial real estate sector. Such concentration in one economic sector may increase the volatility of our
returns and may also expose us to the risk of economic downturns in this sector to a greater extent than if our portfolio also
included other sectors of the economy. Declining real estate values may reduce the level of new mortgage and other real estate-
related loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase
of or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the value
of real estate weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our
loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Any sustained
period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from
loans in our portfolio as well as our ability to originate/acquire/sell loans, which would materially and adversely affect our
results of operations, financial condition, liquidity and business.
In addition, we are not required to observe specific diversification criteria relating to property types, locations, tenants or
borrowers. A limited degree of diversification increases risk because the aggregate return of our business may be adversely
affected by the unfavorable performance of a single property type, single tenant, single market or even a single investment. To
the extent that our portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or
type of asset may result in defaults on a number of our assets within a short time period. Additionally, borrower concentration,
in which a particular borrower is, or a group of related borrowers are, associated with multiple real properties securing
mortgage loans or securities held by us, magnifies the risks presented by the possible poor performance of such borrower(s).
We operate in a highly competitive market for lending and investment opportunities, which may limit our ability to originate
or acquire desirable loans and investments in our target assets.
We operate in a highly competitive market for lending and investment opportunities. A number of entities compete with us to
make the types of loans and investments that we seek to make. Our profitability depends, in large part, on our ability to
originate or acquire target assets at attractive prices. In originating or acquiring target assets, we compete with a variety of
institutional lenders and investors and many other market participants, including specialty finance companies, REITs,
commercial banks and thrift institutions, investment banks, insurance companies, hedge funds and other financial institutions.
Many competitors are substantially larger and have considerably greater financial, technical, marketing and other resources
than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us.
Many of our competitors are not subject to the maintenance of an exemption from the Investment Company Act. Furthermore,
competition for originations of, and investments in, our target assets may lead to the yield of such assets decreasing, which may
further limit our ability to generate desired returns. Also, as a result of this competition, desirable loans and investments in
specific types of target assets may be limited in the future and we may not be able to take advantage of attractive lending and
investment opportunities from time to time. We can offer no assurance that we will be able to identify and originate loans or
make any or all of the types of investments that are described in this Annual Report.
A shift in retail shopping from brick and mortar stores to online shopping may have an adverse impact on the value of our
debt and equity investments.
In recent periods, sales by online retailers such as Amazon have increased, and many retailers operating brick and mortar stores
have made online sales a vital piece of their businesses. Some of our debt and equity investments involve exposure to the
ongoing operations of brick and mortar retailers. Although many of the retailers operating in our properties include pharmacies
and/or sell groceries and other necessity-based soft goods or provide services, including entertainment and dining options, the
shift to online shopping may cause declines in brick and mortar sales generated by certain of our tenants and/or may cause
certain of our tenants to reduce the size or number of their retail locations in the future. As a result, the value of our debt and
equity investments, and results of operations could be adversely affected.
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Our investment guidelines and underwriting guidelines may restrict our ability to compete with others for desirable
commercial mortgage loan origination and acquisition opportunities.
We have investment guidelines and underwriting guidelines with respect to commercial mortgage loan origination and
acquisition opportunities. Additionally, under our credit facilities, the lenders have the right to review the assets which we are
seeking to finance and approve the purchase and financing of such assets in their sole discretion. These investment and
underwriting guidelines and lender approvals may restrict us from being able to compete with others for commercial mortgage
loan origination and acquisition opportunities and these guidelines may be stricter than the guidelines employed by our
competitors. As a result, we may not be able to compete with others for desirable commercial mortgage loan origination and
acquisition opportunities. In addition, these investment and underwriting guidelines and approvals impose conditions and
limitations on our ability to originate certain of our target assets, including, in particular, restrictions on our ability to originate
junior mortgage loans, mezzanine loans and preferred equity investments.
Our earnings may decrease because of changes in prevailing interest rates.
Our primary interest rate exposures relate to the yield on our assets and the financing cost of our debt, as well as the interest
rate swaps that we utilize for hedging purposes. Interest rates are highly sensitive to many factors beyond our control, including
but not limited to governmental monetary and tax policies, domestic and international economic and political considerations.
Interest rate fluctuations present a variety of risks, including the risk of a mismatch between asset yields and borrowing rates,
variances in the yield curve and fluctuating prepayment rates, and such fluctuations may adversely affect our income and may
generate losses.
The Federal Reserve recently raised rates and has indicated an intention to continue raising rates in the near future. Further
increases in interest rates could result in us having lower revenue or profitability. Demand for mortgages could be negatively
impacted by rising interest rates.
Prepayment rates on mortgage loans cannot be predicted with certainty and prepayments may result in losses to the value of
our assets.
The frequency at which prepayments (including voluntary prepayments by the borrowers and liquidations due to defaults and
foreclosures) occur on our investments can adversely impact our business, and prepayment rates cannot be predicted with
certainty, making it impossible to completely insulate us from prepayment or other such risks. Any adverse effects of
prepayments may impact our portfolio in that particular investments, which may experience outright losses in an environment
of faster actual or anticipated prepayments or may underperform relative to hedges that the management team may have
constructed for such investments (resulting in a loss to our overall portfolio). Additionally, borrowers are more likely to prepay
when the prevailing level of interest rates falls, thereby exposing us to the risk that the prepayment proceeds may be reinvested
only at a lower interest rate than that borne by the prepaid obligation.
Global capital markets could enter a period of severe disruption and instability and future military conflicts and global
unrest could have a material adverse effect on general economic conditions, consumer confidence, and market liquidity.
These conditions have historically affected and could again materially and adversely affect debt and equity capital markets
in the U.S. and around the world and our business.
Ongoing and future military conflicts and continued global unrest may affect interest rates, among other things. An increase in
interest rates may increase our cost of borrowing, leading to a reduction in our earnings. Further, the U.S. and global capital markets
experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy was
in a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe,
triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability of
certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis and any future debt
crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery, sovereign and
non-sovereign debt in certain countries and the financial condition of financial institutions generally.
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These market and economic disruptions affected, and these and other similar market and economic disruptions may in the
future affect, the U.S. capital markets, which could adversely affect our business and the broader financial and credit markets
and reduce the availability of debt and equity capital for the market as a whole and to financial firms, in particular. At various
times, these disruptions resulted in, and may in the future result in, a lack of liquidity in parts of the debt capital markets,
significant write-offs in the financial services sector and the repricing of credit risk. These conditions may reoccur for a
prolonged period of time again or materially worsen in the future, including as a result of U.S. government shutdowns or
further downgrades to the U.S. government’s sovereign credit rating or the perceived credit worthiness of the U.S. or other
large global economies. Unfavorable economic conditions, including future recessions, also could increase our funding costs,
limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may in the future have
difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global
financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of loans we originate
and/or fund, adversely affect the value of our investments or otherwise have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Terrorist attacks and other acts of violence or war may affect the real estate industry generally and our business, financial
condition and results of operations.
We cannot predict the severity of the effect that potential future terrorist attacks could have on us. Any future terrorist attacks,
the anticipation of any such attacks, the consequences of any military or other response by the United States and its allies, and
other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. We may suffer losses as a result of the adverse impact of any future
attacks and these losses may adversely impact our performance. A prolonged economic slowdown, a recession or declining real
estate values could impair the performance of our assets and harm our financial condition and results of operations, increase
our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. The
economic impact of such events could also adversely affect the credit quality of some of our loans and investments and the
property underlying our securities. Losses resulting from these types of events may not be fully insurable.
The events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile
assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the
enactment of the Terrorism Risk Insurance Act of 2002 (the “TRIA”) and subsequent extensions, including the enactment of the
Terrorism Risk Insurance Program Reauthorization Act of 2015, which extends TRIA through December 31, 2020, insurers
must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not
regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real
estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable opportunities
available to us and the pace at which we are able to acquire assets. If the properties underlying our interests are unable to obtain
affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all
or a portion of our assets.
Risks Related to Our Portfolio
The value of our investments may be adversely affected by many factors that are beyond our control.
Income from, and the value of, our investments may be adversely affected by many factors that are beyond our control,
including:
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volatility and adverse changes in international, national and local economic and market conditions, including
contractions in market liquidity for mortgage loans and mortgage-related assets and tenant bankruptcies;
changes in interest rates, credit spreads, prepayment rates and in the availability, costs and terms of financing;
changes in rates of default or recovery rates;
changes in generally accepted accounting principles;
changes in governmental laws and regulations, fiscal policies and zoning and other ordinances and costs of
compliance with laws and regulations;
the impact of the Tax Cuts and Jobs Act and/or estimates concerning the impact of the Tax Cuts and Jobs Act, which
are subject to change based on further analysis and/or IRS guidance;
downturns in the markets for mortgage-backed securities and other asset-backed and structured products, and
commercial real estate; and
civil unrest, terrorism, acts of war, nuclear or radiological disasters and natural disasters, including earthquakes,
hurricanes, tornadoes, tsunamis and floods, which may result in uninsured and underinsured losses.
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In addition to other analytical tools, our management team utilizes financial models to evaluate loans and real estate assets,
the accuracy and effectiveness of which cannot be guaranteed.
In all cases, financial models are only estimates of future results which are based upon assumptions made at the time that the
projections are developed. There can be no assurance that management’s projected results will be obtained and actual results
may vary significantly from the projections. General economic and industry-specific conditions, which are not predictable, can
have an adverse impact on the reliability of projections.
The vast majority of the mortgage loans that we originate or purchase, and those underlying the CMBS in which we invest,
are non-recourse loans and the assets securing the loans may not be sufficient to protect us from a partial or complete loss
if the borrower defaults on the loan.
Except for customary non-recourse carve-outs for certain actions and environmental liability, most commercial mortgage loans,
including those underlying the CMBS in which we invest, are effectively non-recourse obligations of the sponsor and borrower,
meaning that there is no recourse against the assets of the borrower or sponsor other than the underlying collateral. In the event
of any default under a mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the
value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect
on our cash flow from operations. Even if a mortgage loan is recourse to the borrower (or if a non-recourse carve-out to the
borrower applies), in most cases, the borrower’s assets are limited primarily to its interest in the related mortgaged property.
Further, although a mortgage loan may provide for limited recourse to a principal or affiliate of the related borrower, there is no
assurance of any recovery from such principal or affiliate will be made or that such principal’s or affiliate’s assets would be
sufficient to pay any otherwise recoverable claim. In the event of the bankruptcy of a borrower, the loan to such borrower will
be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by
the bankruptcy court), and the lien securing the loan will be subject to the avoidance powers of the bankruptcy trustee or
debtor-in-possession to the extent the lien is unenforceable under state law.
The commercial mortgages and other commercial real estate-related loans, and the commercial mortgage loans underlying
the CMBS in which we may invest, are subject to the ability of the commercial property owner to generate net income from
operating the property (and not the independent income or assets of the borrower). The volatility of real property could have
a material adverse effect on our business, financial position and results of operations.
Commercial mortgage loans and the commercial mortgage loans underlying the securities in which we may invest are subject
to the ability of the commercial property owner to generate net income from operating the property (and not the independent
income or assets of the borrower). Any reductions in net operating income (“NOI”) increase the risks of delinquency,
foreclosure and default, which could result in losses to us. NOI of an income-producing property can be affected by many
factors, including, but not limited to:
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the ongoing need for capital improvements, particularly in older structures;
changes in operating expenses;
changes in general or local market conditions;
changes in tenant mix and performance, the occupancy or rental rates of the property or, for a property that requires
new leasing activity, a failure to lease the property in accordance with the projected leasing schedule;
competition from comparable property types or properties;
unskilled or inexperienced property management;
limited availability of mortgage funds or fluctuations in interest rates which may render the sale and refinancing of a
property difficult;
development projects that experience cost overruns or otherwise fail to perform as projected including, without
limitation, failure to complete planned renovations, repairs, or construction;
unanticipated increases in real estate taxes and other operating expenses;
challenges to the borrower’s claim of title to the real property;
environmental considerations;
zoning laws;
other governmental rules and policies;
unanticipated structural defects or costliness of maintaining the property;
uninsured losses, such as possible acts of terrorism;
a decline in the operational performance of a facility on the real property (such facilities may include multifamily
rental facilities, office properties, retail facilities, hospitality facilities, healthcare-related facilities, industrial facilities,
warehouse facilities, restaurants, mobile home facilities, recreational or resort facilities, arenas or stadiums, religious
facilities, parking lot facilities or other facilities); and
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severe weather-related damage to the property and/or its operations.
Additional risks may be presented by the type and use of a particular commercial property, including specialized use as a
nursing home or hospitality property.
In instances where the borrower is acting as a landlord on the underlying property as we do for our selected net leased and other
commercial real estate assets, the ability of such borrower to satisfy the debt obligation we hold will depend on the
performance and financial health of the underlying tenants, which may be difficult for us to assess or predict. In addition, as the
number of tenants with respect to a commercial property decreases or as tenant spaces on a property must be relet, the
nonperformance risk of the loan related to such commercial property may increase. Any one or more of the preceding factors
could materially impair our ability to recover principal in a foreclosure on the related loan as lender and repay the principal as
borrower. A substantial portion of our portfolio may be committed to the origination or purchasing of commercial loans to
small and medium-sized, privately owned businesses. Compared to larger, publicly owned firms, such companies generally
have limited access to capital and higher funding costs, may be in a weaker financial position and may need more capital to
expand or compete. The above financial challenges may make it difficult for such borrowers to make scheduled payments of
interest or principal on their loans. Accordingly, advances made to such types of borrowers entail higher risks than advances
made to companies who are able to access traditional credit sources.
A portion of our portfolio also may be committed to the origination or purchasing of commercial loans where the borrower is a
business with a history of poor operating performance, based on our belief that we can realize value from a loan on the property
despite such borrower’s performance history. However, if such borrower were to continue to perform poorly after the
origination or purchase of such loan, including due to the above financial challenges, we could be adversely affected.
Certain balance sheet loans may be more illiquid and involve a greater risk of loss than long-term mortgage loans.
We originate and acquire balance sheet loans that provide interim financing to borrowers seeking short-term capital for the
acquisition or transition (for example, lease up and/or rehabilitation) of commercial real estate. Such a borrower under an
interim loan often has identified a transitional asset that has been under-managed, is located in a recovering market and/or
requires rehabilitation. If the market in which the asset is located fails to recover according to the borrower’s projections, or if
the borrower fails to improve the quality of the asset’s management and/or the value of the asset or fails to execute its business
plan, the borrower may not receive a sufficient return on the asset to satisfy the interim loan, and we bear the risk that we may
not recover some or all of our initial expenditure. In addition, borrowers usually use the proceeds of a long-term mortgage loan
to repay an interim loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay our
interim loan, which could depend on the borrower’s ability to execute its business plan, market conditions and other factors.
Further, interim loans may be relatively less liquid than loans against stabilized properties due to their short life, their potential
unsuitability for securitization, any unstabilized nature of the underlying real estate and the difficulty of recovery in the event of
a borrower’s default. This lack of liquidity may significantly impede our ability to respond to adverse changes in the
performance of our interim loan portfolio and may adversely affect the value of the portfolio.
Such “liquidity risk” may be difficult or impossible to hedge against and may also make it difficult to effect a sale of such
assets as we may need or desire. As a result, if we are required to liquidate all or a portion of our interim loan portfolio quickly,
we may realize significantly less than the value at which such investments were previously recorded, which may fail to
maximize the value of the investments or result in a loss.
We may finance first mortgages, which may present greater risks than if we had made first mortgages directly to owners of
real estate collateral.
Our portfolio may include first mortgage loan financings which are loans made to holders of commercial real estate first
mortgage loans that are secured by commercial real estate. While we have certain rights with respect to the real estate collateral
underlying a first mortgage loan, the holder of the commercial real estate first mortgage loans may fail to exercise its rights
with respect to a default or other adverse action relating to the underlying real estate collateral or fail to promptly notify us of
such an event which would adversely affect our ability to enforce our rights. In addition, in the event of the bankruptcy of the
borrower under the first mortgage loan, we may not have full recourse to the assets of the holder of the commercial real estate
loan, or the assets of the holder of the commercial real estate loan may not be sufficient to satisfy our first mortgage loan
financing. Financings of first mortgage loans might not generate qualifying income for REIT purposes and may be held in a
TRS, resulting in a lower after-tax return to Ladder than other financings. Accordingly, we may face greater risks from our first
mortgage loan financings than if we had made first mortgage loans directly to owners of real estate collateral.
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We may originate or acquire construction loans, which may expose us to an increased risk of loss.
We may originate or acquire construction loans. If we fail to fund our entire commitment on a construction loan or if a
borrower otherwise fails to complete the construction of a project, there could be adverse consequences associated with the
loan, including: a loss of the value of the property securing the loan, especially if the borrower is unable to raise funds to
complete construction from other sources; a borrower claim against us for failure to perform under the loan documents;
increased costs to the borrower that the borrower is unable to pay; a bankruptcy filing by the borrower; and abandonment by
the borrower of the collateral for the loan.
We are subject to additional risks associated with loan participations.
Some of our loans may be participation interests or co-lender arrangements in which we share the rights, obligations and
benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans,
including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the
institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to
which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely
affected by this lack of full control.
Our investments in subordinate loans, subordinate participation interests in loans and subordinate CMBS rank junior to
other senior debt and we may be unable to recover our investment in these interests.
We may originate or acquire subordinate loans (including mezzanine loans), subordinate participation interests in loans and
subordinate rated and/or unrated CMBS (including, without limitation, certain “risk retention” interests required to be retained
by certain participants in securitization transactions under new rules, which took effect in December 2016). In the event a
borrower defaults on a loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the
event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower or a non-recourse carve-out
guarantor, or the assets of the borrower or non-recourse carve-out guarantors may not be sufficient to satisfy the loan and our
legal costs. In addition, certain of our loans may be subordinate to other debt of the borrower. If a borrower defaults on a loan
to us or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt
is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend
loan documents, assign our loans, accept prepayments, exercise remedies and control decisions made in bankruptcy
proceedings relating to borrowers.
If a borrower defaults on our mezzanine loan, subordinate loan or debt senior to any loan, or in the event of a borrower
bankruptcy, our loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover some or all of our
initial expenditure. In addition, mezzanine and subordinate loans may have higher loan-to-value ratios than first mortgage
loans, resulting in less equity in the property and increasing the risk of loss of principal. Significant losses related to our
mezzanine loans or subordinate loans would result in operating losses for us.
In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the
equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-
Note, if any, then by the “first loss” subordinated security holder (generally, the “B-Piece” buyer and in some cases by the
holder of a risk retention interest) and then by the holder of a higher-rated security. Even when we purchase very senior
interests in loans and/or securitizations, in the event of default and the exhaustion of any equity support, reserve fund, letter of
credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we may invest, we may not be able to
recover all of our investment in the debt instruments or securities we purchased. In addition, if the underlying mortgage
portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available
to satisfy interest and principal payments due on the related mortgage-backed securities, the securities in which we may invest
may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us.
The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated
investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic
downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of
mortgage loans underlying the mortgage-backed securities to make principal and interest payments may be impaired. In such
event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal in
these securities.
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The market value of our investments in CMBS could fluctuate materially as a result of various risks that are out of our
control and may result in significant losses.
We currently invest in and may continue to invest in CMBS, a specific type of structured finance security. CMBS are securities
backed by obligations (including certificates of participation in obligations) that are principally secured by commercial
mortgage loans or interests therein having a multi-family or commercial use, such as shopping malls, other retail space, office
buildings, industrial or warehouse properties, hotels, nursing homes and senior living centers. Accordingly, investments in
CMBS are subject to the various risks described herein which relate to the pool of underlying assets in which the CMBS
represents an interest. The exercise of remedies and successful realization of liquidation proceeds relating to commercial
mortgage loans underlying CMBS may be highly dependent on the performance of the servicer or special servicer. There may
be a limited number of special servicers available, particularly those which do not have conflicts of interest. We will bear the
risk of loss on any CMBS we purchase. Further, the insurance coverage for various types of losses is limited in amount and we
would bear losses in excess of the applicable limitations.
We may attempt to underwrite our investments on a “loss-adjusted” basis, which projects a certain level of performance.
However, there can be no assurance that this underwriting will accurately predict the timing or magnitude of such losses. To the
extent that this underwriting has incorrectly anticipated the timing or magnitude of losses, our business may be adversely
affected. Some mortgage loans underlying CMBS may default. Under such circumstances, cash flows of CMBS investments
held by us may be adversely affected as any reduction in the mortgage payments or principal losses on liquidation of any
mortgage loan may be applied to the class of CMBS relating to such defaulted loans that we hold.
The market value of our CMBS investments could fluctuate materially over time as the result of changes in mortgage spreads,
treasury bond interest rates, capital market supply and demand factors, and many other factors that affect high-yield fixed
income products. These factors are out of our control, and could influence our ability to obtain short-term financing on the
CMBS. The CMBS in which we may invest may have no, or only a limited, trading market. In addition, we may in the future
invest in CMBS investments that are not rated by any credit rating agency, and such investments may be less liquid than CMBS
that are rated. The financial markets in the past have experienced and could in the future experience a period of volatility and
reduced liquidity which may reoccur or continue and reduce the market value of CMBS. Some or all of the CMBS that we hold
may be subject to restrictions on transfer and may be considered illiquid.
We have acquired and, in the future, may acquire net leased real estate assets, or make loans to owners of net leased real
estate assets (including ourselves), which carry particular risks of loss that may have a material impact on our financial
condition, liquidity and results of operations.
A net lease requires the tenant to pay, in addition to the fixed rent, some or all of the property expenses that normally would be
paid by the property owner. The value of our investments and the income from our investments in net leased properties, if any,
will depend upon the ability of the applicable tenant to meet its obligations to maintain the property under the terms of the net
lease. If a tenant fails or becomes unable to so maintain a property, the cash flow and/or the value of the property would be
adversely affected. In addition, under many net leases the owner of the property retains certain obligations with respect to the
property, including among other things, the responsibility for maintenance and repair of the property, to provide adequate
parking, maintenance of common areas and compliance with other affirmative covenants in the lease. If we, as the owner, or the
borrower, were to fail to meet these obligations, the applicable tenant could abate rent or terminate the applicable lease, which
may result in a loss of capital invested in, and anticipated profits from, the property. In addition, we, as the owner, or the
borrower may find it difficult to lease certain property to new tenants if that property had been suited to the particular needs of
a former tenant.
The expense of operating and owning real property may impact our cash flow from operations.
We have in the past and may in the future make equity investments in real property. Costs associated with real estate
investment, such as real estate taxes, insurance and maintenance costs, generally are not reduced even when a property is not
fully occupied, rental rates decrease or other circumstances cause a reduction in income from the property. As a result, cash
flow from the operations of our properties may be reduced if a tenant does not pay its rent or we are unable to rent out
properties on favorable terms. Under those circumstances, we might not be able to enforce our rights as landlord without delays
and may incur substantial legal costs. Additionally, new properties that we may acquire or redevelop may not produce
significant revenue immediately, and the cash flow from existing operations may be insufficient to pay the operating expenses
and principal and interest on debt associated with such properties until they are fully leased.
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Our investments in securities and mortgages issued by agencies or instrumentalities of the U.S. government face risks of
prepayments or defaults on U.S. Agency Securities that we own at a premium and of “negative convexity.”
We currently invest in and may continue to invest in securities and mortgages issued by agencies or instrumentalities of the
U.S. government, including Ginnie Mae, Fannie Mae, the Federal Housing Administration (“FHA”), Freddie Mac and other
government agency mortgages secured by single multifamily properties or skilled nursing facilities. Additionally, we invest in
real estate mortgage investment conduit (“REMIC”) securities collateralized by these mortgages. We invest in U.S. Agency
Securities, the principal of which is guaranteed implicitly or explicitly by the U.S. government. Therefore, the most significant
risks present in U.S. Agency Securities owned by us are first, in prepayments or defaults on U.S. Agency Securities that we
own at a premium and second, “negative convexity,” as defined below.
We are exposed to the risk of increased prepayments or defaults by any mortgage or security that we own at a premium, such as
any interest-only securities, most single mortgage securities and all construction and permanent loans. Any principal paydown
diminishes the amount outstanding in these securities and reduces the yield to us. Before purchasing a loan or security, we
judge the likelihood of prepayment based on certain prepayment and default parameters and our own experience in the
government agency security market. Different estimates, judgments and assumptions reasonably could be used that would have
a material effect on our judgment and, accordingly, result in losses to our business.
Convexity measures the rate of change in a bond’s duration for a given change in interest rates. For bonds with positive
convexity, there is an inverse relationship between changes in interest rates and duration. Duration increases when rates
decrease and vice versa. “Negative convexity” is the opposite relationship between interest rates and the average expected life
of a pool of mortgage loans; when interest rates rise, a mortgage may extend and when interest rates fall, a mortgage may
prepay or default. As in any mortgage security, negative convexity is a concern as the yield on mortgage-backed securities is
based on the average expected life of the underlying pool of mortgage loans. The actual prepayment experience of such pools
may cause the yield we realize to differ from that calculated by us in making the investment, resulting in losses or profits. An
unexpected default in a single large property may reduce yield. In each transaction, we attempt to understand the agencies’
underwriting processes in order to assess the risk of default associated with a particular U.S. Agency Security. We also
endeavor to diversify our holdings and at periodic points in time, sell our older positions for newer product, which may have
less likelihood of default. There is no guarantee that we will be successful in either of these activities. When interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the actual average life of such pools. We frequently update
our extension risk analyses and, if necessary, our hedging to account for this risk. The same is true when interest rates fall and
prepayments tend to increase.
Other risks associated with U.S. Agency Securities are illiquidity, re-investment and the risk that a construction loan may not
roll into a permanent loan.
We may make equity and preferred equity investments which involve a greater risk of loss than traditional debt financing.
We may invest in equity and preferred equity interests in entities owning real estate. Such investments are subordinate to debt
financing and are not secured. Should the issuer default on our investment, in most instances we would only be able to proceed
against the entity that issued the equity in accordance with the terms of the security, and not any property owned by the entity.
Furthermore, in the event of bankruptcy or foreclosure, we would only be able to recoup our capital after any creditors to the
entity are paid. As a result, we may not recover some or all of our capital, which could result in losses.
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Our participation in the market for mortgage loan securitizations may expose us to risks that could result in losses to us.
We have generally participated in the market for mortgage loan securitizations by contributing loans to securitizations led by
various large financial institutions and by leading single-asset securitizations on single mortgage loans we originated. We have
recently completed our first multi-asset securitization where a Ladder affiliate served as issuer and may, in the future, take a
larger role in multi-asset securitizations of mortgage loans, including as an issuer. We also occasionally, and may in the future,
act as a co-manager and/or co-underwriter in the securitizations in which we participate. To date, when we have primarily acted
as a mortgage loan seller into, and occasionally as an issuer of securitizations, we have been obligated to assume certain
customary liabilities. Specifically, in connection with any particular securitization, we: (i) make certain representations and
warranties regarding ourselves and the characteristics of, and origination process for, the mortgage loans that we contribute to
the securitization; (ii) undertake to cure, repurchase or replace any mortgage loan that we contribute to the securitization that is
affected by a material breach of any such representation or warranty or a material loan document deficiency; (iii) assume, either
directly or through the indemnification of third-parties, potential securities law liabilities for disclosure to investors regarding
ourselves and the mortgage loans that we contribute to the securitization; and (iv) may, depending upon our role in the
securitization, (a) retain some or all of the risk retention interests in the securitization and/or (b) retain responsibility for
ensuring compliance with risk retention rules (and may be required to indemnify other participants in the securitization for any
violation of such rules, including in circumstances where some or all of the risk retention interests are retained by and/or sold to
other parties). When we lead a single-asset or multi-asset securitization as an issuer and/or lead manager, we assume, either
directly or through indemnification agreements, additional potential securities law liabilities and third-party liabilities beyond
the liabilities we would assume when we act only as a mortgage loan seller into a securitization.
As a result of the dislocation of the credit markets during the last recession, the securitization industry has become subject to
additional and changing regulation. For example, pursuant to the Dodd-Frank Act, various federal agencies have promulgated,
or are in the process of promulgating, regulations and rules with respect to various issues that affect securitizations, including:
(a) the Risk Retention Rule requiring that either (i) a securitization’s sponsor retain, until the unpaid balance of the bonds or the
loans is reduced by a certain amount, a 5% vertical interest in each class of securities issued, (ii) the sponsor or certain Third
Party Purchasers retain, until the unpaid balance of the bonds or the loans is reduced by a certain amount (or for Third Party
Purchasers, for at least five years), securities in an amount equal to 5% of the credit risk associated with the issued securities in
the form of one or more subordinate tranches or (iii) a combination of (i) and (ii); (b) requirements for additional disclosure; (c)
requirements for additional review and reporting (including revisions to Regulation AB); (d) for public securitizations,
requirements that the CEO of an issuer file with the SEC an individual certificate attesting to certain matters, as described
below; and (e) certain restrictions designed to prohibit conflicts of interest. Other regulations have been and may ultimately be
adopted.
The risk (with respect to CMBS) must be retained by the sponsor, certain mortgage loan originators and/or, upon satisfaction of
certain requirements, a Third Party Purchaser. Significant restrictions exist, and additional restrictions may be added in the
future, regarding who may hold risk retention interests, the structure of the entities that hold risk retention interests and when
and how such risk retention interests may be transferred or financed. Therefore such risk retention interests will be generally
illiquid and may not be easily financed. As a result of the Risk Retention Rule, we may be required to purchase and retain
certain interests in a securitization into which we sell mortgage loans and/or when we act as issuer, may be required to sell
certain interests in a securitization at prices below levels that such interests have historically yielded and/or may be required to
enter into certain arrangements related to risk retention that we have not historically been required to enter into and,
accordingly, the Risk Retention Rule may increase our potential liabilities and/or reduce our potential profits in connection with
securitization of mortgage loans.
The requirement that the CEO of an issuer of public securities file an individual certificate with the SEC may introduce
additional potential liabilities whether we serve as issuer in a securitization or solely as a loan seller or loan originator. The
CEO certification includes statements as to the absence of any untrue or omitted material information relating to the mortgage
loans and the ability of the mortgage loans to support the payments required to be made under the bonds issued in connection
with the securitization in accordance with their terms. The full extent of liability that the CEO may have to the SEC and/or
investors on account of the certified statements is difficult to determine at this time. If we serve as issuer in a securitization, we
would likely to be obligated to indemnify the CEO of our issuer entity against any liabilities that such individual may incur in
connection with such certification. In addition, in securitization transactions in which we serve as only loan seller or an
originator that sells loans to a loan seller (and not as an issuer), we would likely be obligated to provide a back-up officer’s
certificate from a senior officer as to our mortgage loans as support for the issuer’s CEO certification, and similarly be
obligated to indemnify that senior officer against any liabilities that individual may incur in connection with his/her back-up
officer’s certification.
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The Risk Retention Rule, CEO certification and other rules and regulations that have been adopted or may be adopted in the
future may alter the structure of securitizations and could pose additional risks to or reduce or eliminate the economic benefits
of our participation in the securitization market. In addition, such rules and regulations could reduce or eliminate the economic
benefits of making certain mortgage loans, reduce or eliminate the economic benefits of securitization or discourage traditional
issuers, underwriters, Third Party Purchasers or other participants from participating in future securitizations and affect the
availability of securitization platforms into which we can contribute mortgage loans, which may require that we take on
additional roles and risks in connection with effectuating securitizations of our mortgage loans.
Historically, when we have served as issuer in connection with a securitization, the offering has been a private offering. In the
future, we may elect to serve as issuer of a securitization involving a public offering, which we would conduct pursuant to a
registration statement filed with the SEC by our subsidiary Ladder Capital Commercial Mortgage Securities LLC. Maintaining
a registration statement and acting as an issuer in connection with securitizations will expose us to potential liability under
various securities laws and will impose ongoing reporting and other obligations, many of which are more extensive than the
potential liabilities and obligations we incur when we act as issuer in a private offering or when we sell loans into another
issuer’s publicly offered securitization. In addition to the CEO certification referenced above, certain individuals associated
with the issuer entity would be obligated to sign the registration statement and be exposed to liability under various securities
laws. We would likely be obligated to indemnify such individuals.
Prior to any securitization, we generally finance mortgage loans with relatively short-term facilities until a sufficient portfolio is
accumulated. We are subject to the risk that we will not be able to originate or acquire sufficient eligible assets to maximize the
efficiency of a securitization. We also bear the risk that, upon expiration of a short-term facility, we might not be able to renew
such short-term facility or obtain a new short-term facility. Our inability to refinance any short-term facility would also increase
our risk because borrowings thereunder would likely be recourse to us or one of our subsidiaries. If we are unable to obtain and
renew short-term facilities or to consummate securitizations to finance our assets on a long-term basis, we may be required to
seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.
We may sponsor, or purchase the most junior securities of collateralized loan obligations, or CLOs, and such instruments
involve significant risks, including that these securities receive distributions from the CLO only if the CLO generates
enough income to first pay all the investors holding senior tranches and all CLO expenses.
We have recently completed our first contributions of shorter-term loans into CLO transactions in which we retained securities
rated below-investment grade. In CLOs, investors purchase specific tranches, or slices, of debt instruments that are secured or
backed by a pool of loans. The CLO debt classes have a specific seniority structure and priority of payments. The most junior
securities of a CLO are generally retained by the sponsor of the CLO and are usually entitled to all of the income generated by
the pool of loans after the payment of debt service on all the more senior classes of debt and the payment of all expenses.
Defaults on the pool of loans therefore first affect the the most junior tranches. The subordinate tranches of CLO debt may also
experience a lower recovery and greater risk of loss, including risk of deferral or non-payment of interest than more senior
tranches of the CLO debt because they bear the bulk of defaults from the loans held in the CLO and serve to protect the other,
more senior tranches from default in all but the most severe circumstances. Often CLOs contain loans that are more transitional
than loans contributed to conduit securitizations. Despite the protection provided by the subordinate tranches, even more senior
CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default
and disappearance of protecting tranches, decline in market value due to market anticipation of defaults and aversion to CLO
securities as a class. Further, the transaction documents relating to the issuance of CLO securities may impose eligibility
criteria on the assets of the CLO, restrict the ability of the CLO’s sponsor to trade investments and impose certain portfolio-
wide asset quality requirements. Finally, the Risk Retention Rule imposes a retention requirement of 5% of the issued debt
classes by the sponsor of the CLO (as described above). These criteria, restrictions and requirements may limit the ability of the
CLO’s sponsor (or collateral manager) to maximize returns on the CLO securities.
In addition, CLOs are not actively traded and are relatively illiquid investments and volatility in CLO trading market may cause
the value of these investments to decline. The market value of CLO securities may be affected by, among other things, changes
in the market value of the underlying loans held by the CLO, changes in the distributions on the underlying loans, defaults and
recoveries on the underlying loans, capital gains and losses on the underlying losses (or foreclosure assets), prepayments on
underlying loan and the availability, prices and interest rate of underlying loans. Furthermore, the leveraged nature of each
subordinated tranche may magnify the adverse impact on such class of changes in the value of the loans, changes in the
distributions on the loans, defaults and recoveries on the loans, capital gains and losses on the loans (or foreclosure assets),
prepayment on loans and availability, price and interest rates of the loans.
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Because of the requirements of the Risk Retention Rule, if we purchase a horizontal subordinate strip of a CLO to satisfy the
Risk Retention Rule, we would not be able to dispose of those subordinate interests during the required risk retention period,
which may increase our risk of loss.
A CLO may include certain interest coverage tests, overcollateralization coverage tests or other tests that, if not met, may result
in a change in the priority of distributions, which may result in the reduction or elimination of distributions to the subordinate
debt and equity tranches until the tests have been met or certain senior classes of securities have been paid in full. Accordingly,
if we hold subordinate debt interests in a CLO that contains such tests and such tests are not satisfied, we may experience a
significant reduction in our cash flow from those interests.
Furthermore, if any CLO that we sponsor or hold interests in fails to meet certain tests relevant to the most senior debt issued
and outstanding by the CLO issuer, an event of default may occur under that CLO. If that occurs, (i) if we were serving as
manager of the CLO, our ability to manage the CLO may be terminated and (ii) our ability to attempt to cure any defaults in the
CLO may be limited, which would increase the likelihood of a reduction or elimination of cash flow and returns to us in the
CLOs for an indefinite time.
Any credit ratings assigned to our investments could be downgraded, which could have a material impact on our financial
condition, liquidity and results of operations.
Some of our investments may be rated by one or more of Moody’s, Fitch, Standard & Poor’s, Realpoint, Dominion Bond
Rating Service, Morningstar Credit Ratings, Kroll Bond Ratings or other credit rating agencies. Any credit ratings on our
investments are subject to ongoing evaluation by credit rating agencies, and we cannot be assured that any such ratings will not
be changed or withdrawn by a credit rating agency in the future if, in its judgment, circumstances warrant. If credit rating
agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings
of our investments in the future, the value of these investments could significantly decline, which would adversely affect the
value of our portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service
obligations to us.
The credit ratings currently assigned to our investments may not accurately reflect the risks associated with those
investments.
Credit rating agencies rate investments based upon their assessment of the perceived safety of the receipt of principal and
interest payments from the issuers of such debt securities. Credit ratings assigned by the credit rating agencies may not fully
reflect the true risks of an investment in such securities. Also, credit rating agencies may fail to make timely adjustments to
credit ratings based on recently available data or changes in economic outlook or may otherwise fail to make changes in credit
ratings in response to subsequent events, so that our investments may in fact be better or worse than the ratings indicate. We try
to reduce the impact of the risk that a credit rating may not accurately reflect the risks associated with a particular debt security
by not relying solely on credit ratings as the indicator of the quality of an investment. We make our acquisition decisions after
factoring in other information, such as the discounted value of a CMBS security’s projected future cash flows, and the value of
the real estate collateral underlying the mortgage loans owned by the issuing REMIC trust. However, our assessment of the
quality of a CMBS investment may also prove to be inaccurate and we may incur credit losses in excess of our initial
expectations.
We could incur losses from investments in non-conforming and non-investment grade-rated loans or securities, which could
have a material impact on our financial condition, liquidity and results of operations.
Some of our investments may not conform to conventional loan standards applied by traditional lenders and either may not be
rated or may be rated as non-investment grade by the credit rating agencies. The non-investment grade ratings for these assets
typically result from the overall leverage of the underlying loans, the lack of a strong operating history for the properties
underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result, these
investments will have a higher risk of default and loss than investment grade-rated assets. Any loss that we incur may be
significant. There may be no limits on the percentage of unrated or non-investment grade rated assets that we may hold in our
portfolio.
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Some of our portfolio investments will be recorded at fair value and there is uncertainty as to the value of these investments.
Furthermore, our determinations of fair value may have a material impact on our financial condition and results of
operations.
The value of some of our investments may not be readily determinable or may be unreliable. We will value these investments
quarterly at fair value, as determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (Topic 820): Fair Value Measurement, or ASC 820. Because such valuations are subjective, the fair
value of certain of our assets may fluctuate over short periods of time and our determinations of fair value may differ materially
from the values that would have been used if a ready market for these assets existed. Our determinations of fair value may have
a material impact on our earnings, in the case of impaired loans and other assets, trading securities and available-for-sale
securities that are subject to OTTI, or our accumulated other comprehensive income/(loss) in our shareholders’ equity, in the
case of available-for-sale securities that are subject only to temporary impairments.
We utilize an internal model as our primary pricing source to develop prices for our CMBS and U.S. Agency Securities. To
confirm our own valuations, we request prices for each of our CMBS and U.S. Agency Securities investments from third-party
dealers and pricing services. Third parties that provide pricing services develop estimates of fair value for CMBS and U.S.
Agency Securities employ various techniques, including discussion with their internal trading desks and the use of proprietary
models and matrix pricing. We do not have access to, and are therefore not able to review in detail, the inputs used by these
third parties in developing their fair value estimates. Furthermore, in general, dealers and pricing services heavily disclaim their
valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they
may disclaim any and all liability for any direct, incidental or consequential damages arising out of any inaccuracy or
incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and
illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another.
Additionally, our results of operations for a given period could be adversely affected if our determinations regarding the fair
value of these investments were materially higher than the values that we ultimately realize upon their disposal.
Our ability to collect upon mortgage loans may be limited by the application of state laws.
Each of our mortgage loans permits us to accelerate the debt upon default by the borrower. The courts of all states will enforce
acceleration clauses in the event of a material payment default, subject in some cases to a right of the court to revoke such
acceleration and reinstate the mortgage loan if a payment default is cured. The equity courts of any state, however, may refuse
to allow the foreclosure of a mortgage, deed of trust, or other security instrument or to permit the acceleration of the
indebtedness if the exercise of those remedies would be inequitable or unjust or the circumstances would render the
acceleration unconscionable. Thus, a court may refuse to permit foreclosure or acceleration if a default is deemed immaterial or
the exercise of those remedies would be unjust or unconscionable or if a material default is cured.
Further, the ability to collect upon mortgage loans may be limited by the application of state and U.S. federal laws. Several
states (including California) have laws that prohibit more than one “judicial action” to enforce a mortgage obligation. Some
courts have construed the term “judicial action” broadly.
The borrowers under the loans underlying our investments may be unable to repay their remaining principal balances on
their stated maturity dates, which could negatively impact our business results.
Our mortgage loans may be non-amortizing or partially amortizing balloon loans that provide for substantial payments of
principal due at their stated maturities. Balloon loans involve a greater risk to the lender than amortizing loans because a
borrower’s ability to repay a balloon mortgage loan on its stated maturity date typically will depend upon its ability either to
refinance the mortgage loan (although some loans such as those on condominium projects, may be at least partially self-
liquidating) or to sell the mortgaged property at a price sufficient to permit repayment. A borrower’s ability to effect a
refinancing or sale will be affected by a number of factors. We are not obligated to refinance any of these mortgage loans.
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Third-party diligence reports on mortgaged properties are made as of a point in time and are therefore limited in scope.
Appraisals and engineering and environmental reports, as well as a variety of other third-party reports, are generally obtained
with respect to each of the mortgaged properties underlying our investments at or about the time of origination. Appraisals are
not guarantees of present or future value. One appraiser may reach a different conclusion than the conclusion that would be
reached if a different appraiser were appraising that property. Moreover, the values of the mortgaged properties may have
fluctuated significantly since the appraisals were performed. In addition, any third-party report, including any engineering
report, environmental report, site inspection or appraisal represents only the analysis of the individual consultant, engineer or
inspector preparing such report at the time of such report, and may not reveal all necessary or desirable repairs, maintenance,
remediation and capital improvement items.
The owners of, borrowers on, and tenants occupying, the properties which secure our investments may seek the protection
afforded by bankruptcy, insolvency and other debtor relief laws, which may create potential for risk of loss to us.
Although commercial mortgage lenders typically seek to reduce the risk of borrower bankruptcy through such items as non-
recourse carveouts for bankruptcy and special purpose entity/separateness covenants and/or non-consolidation opinions for
borrowing entities, the owners of, borrowers on, and tenants occupying, the properties which secure our investments may still
seek the protection afforded by bankruptcy, insolvency and other debtor relief laws. One of the protections offered in such
proceedings to each of these parties is a stay of legal proceedings, and a stay of enforcement proceedings against collateral for
such loans or underlying such securities (including the properties and cash collateral). A stay of foreclosure proceedings could
adversely affect our ability to realize on its collateral, and could adversely affect the value of those assets. Other protections in
such proceedings to borrowers, owners and tenants include forgiveness of debt, the ability to create super priority liens in favor
of certain creditors of the debtor, the potential loss of cash collateral held by the lender if the lender is over-collateralized, and
certain well defined claims procedures. Additionally, the numerous risks inherent in the bankruptcy process create a potential
risk of loss of our entire investment in any particular investment.
Liability relating to environmental matters may impact the value of properties that we may acquire or the properties
underlying our investments.
Liability relating to environmental matters may decrease the value of the underlying properties of our investments and may
adversely affect the ability of a person to sell such property or real estate instrument related to the property or borrow using
such property as collateral and may adversely affect the security afforded by a property for a mortgage loan. Under various U.S.
federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain
hazardous substances released on, about, under or in its property. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the release of such hazardous substances. To the extent that an owner of an
underlying property becomes liable for removal costs, testing, monitoring, remediation, bodily injury or property damage, the
ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant
mortgage asset related to such property. If we acquire any properties by foreclosure or otherwise, the presence of hazardous
substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs,
thereby harming our financial condition. The discovery of material environmental liabilities attached to such properties could
have a material adverse effect on our results of operations and financial condition. Moreover, some U.S. federal and state laws
provide that, in certain situations, a secured lender, such as us, may be liable as an “owner” or “operator” of the real property,
regardless of whether the borrower or previous owner caused the environmental damage. Therefore, the presence of hazardous
materials on certain property could have an adverse effect on us in our capacity as the owner of such property, as the mortgage
lender to the owner of such property, or as the holder of a real estate instrument related to such property.
Insurance on the real estate underlying our loans and investments may not cover all losses, and this shortfall could result in
both loss of cash flow from and a decrease in the asset value of the affected property.
The borrower, or we as property owner and/or originating lender, as the case may be, might not purchase enough or the proper
types of insurance coverage to cover all losses. Further, there are certain types of losses, generally of a catastrophic nature, such
as earthquakes, floods, hurricanes, terrorism or acts of war that may be uninsurable or not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war,
also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under such
circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the
affected real property. Any uninsured loss could result in both loss of cash flow from and a decrease in the asset value of the
affected property.
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Our entitlement to repayment on a loan may be impacted by the doctrine of equitable subordination, which would result in
the subordination of our claim to the claims of other creditors of the borrower.
Courts have, in some cases, applied the doctrine of equitable subordination to subordinate the claim of a lending institution
against a borrower to claims of other creditors of the borrower, when the lending institution is found to have engaged in unfair,
inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lending
institution or its affiliates are found to have exerted inappropriate control over a borrower, including control resulting from the
ownership of equity interests in a borrower. In certain instances where we own equity in a property, we also may make one or
more loans to the owner of such property. Payments on one or more of our loans, particularly a loan to a borrower in which we
also hold equity interests, may be subject to claims of equitable subordination that would place our entitlement to repayment of
the loan on an equal basis with holders of the borrower’s common equity only after all of the borrower’s obligations relating to
its other debt and preferred securities has been satisfied.
If we purchase or originate loans secured by liens on facilities that are subject to a ground lease and such ground lease is
terminated unexpectedly, our interests could be adversely affected.
A ground lease is a lease of land, usually on a long-term basis, that does not include buildings or other improvements on the
land. Normally any real property improvements made by the lessee during the term of the lease will revert to the owner at the
end of the lease term. We may purchase or originate loans secured by liens on facilities that are subject to a ground lease, and, if
the ground lease were to terminate unexpectedly, due to the borrower’s default on such ground lease, our business could be
adversely affected.
For certain of our loans, we may rely on loan agents or other lenders and such agents or other lenders may not act in the
manner that we expect.
With respect to some of our loans, we will be neither the agent of the lending group that receives payments under the loan nor
the agent of the lending group that controls the collateral for purposes of administering the loan. When we are not the agent for
a loan, we may not receive the same financial or operational information as we would receive for loans for which we are the
agent and, in many instances, the information on which we must rely may be provided by the agent rather than directly by the
borrower. As a result, it may be more difficult for us to track or rate such loans than it is for the loans for which we are the
agent. Additionally, we may be prohibited or otherwise restricted from taking actions to enforce the loan or to foreclose upon
the collateral securing the loan without the agreement of other lenders holding a specified minimum aggregate percentage, such
as a majority or two-thirds of the outstanding principal balance. It is possible that an agent or other lenders for one of such
loans may choose not to take the same actions to enforce the loan or to foreclose upon the collateral securing the loan that we
would have taken had we been agent for the loan.
We may not be able to control the party who services the mortgage loans included in the CMBS in which we may invest if
those loans are in default and, in such cases, our interests could be adversely affected.
With respect to each series of the CMBS in which we may invest, overall control over the special servicing of the related
underlying mortgage loans will be held by a “directing certificate-holder” or a “controlling class representative,” which is
appointed by the holders of the most subordinate class of CMBS in such series. We may not have the right to appoint the
directing certificate-holder or controlling class representative. In connection with the servicing of the specially serviced
mortgage loans, the related special servicer may, at the direction of the directing certificate-holder or controlling class
representative, take actions with respect to the specially serviced mortgage loans that could adversely affect our interests.
However, the special servicer is not permitted to take actions that are prohibited by law or violate the applicable servicing
standard or the terms of the mortgage loan documents.
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We may be required to make determinations of a borrower’s creditworthiness based on incomplete information or
information that we cannot verify, which may cause us to purchase or originate loans that we otherwise would not have
purchased or originated and, as a result, may negatively impact our business or reputation.
The commercial real estate lending business depends on the creditworthiness of borrowers, which we must judge. In making
such judgment, we will depend on information obtained from non-public sources and the borrowers in making many decisions
related to our portfolio, and such information may be difficult to obtain or may be inaccurate. As a result, we may be required
to make decisions based on incomplete information or information that is impossible or impracticable to verify. A
determination as to the creditworthiness of a prospective borrower is based on a wide-range of information including, without
limitation, information relating to the form of entity of the prospective borrower, which may indicate whether the borrower can
limit the impact that its other activities have on its ability to pay obligations related to the mortgaged property. Even if we are
provided with full and accurate disclosure of all material information concerning a borrower, members of the management team
may misinterpret or incorrectly analyze this information, which may cause us to purchase or originate loans that we otherwise
would not have purchased or originated and, as a result, may negatively impact our business or the borrower could still defraud
us after origination leading to a loss and negative publicity.
Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.
We maintain and regularly evaluate financial reserves to protect against potential future losses. Our reserves reflect
management’s judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be
correct and that reserves will be adequate over time to protect against potential future losses because of unanticipated adverse
changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or
markets in which our borrowers or their properties are located. We must evaluate existing conditions on our debt investments to
make determinations to record loan loss reserves on these specific investments. If our reserves for credit losses prove
inadequate, we could suffer losses which would have a material adverse effect on our financial performance.
If the loans that we originate or purchase do not comply with applicable laws, we may be subject to penalties.
Loans that we originate or purchase may be directly or indirectly subject to U.S. laws. Real estate lenders and borrowers may
be responsible for compliance with a wide range of law intended to protect the public interest, including, without limitation, the
Truth in Lending, Equal Credit Opportunity, Fair Housing and Americans with Disabilities Acts and local zoning laws
(including, but not limited, to zoning laws that allow permitted non-conforming uses). If we or any other person fail to comply
with such laws in relation to a loan that we have purchased or originated, legal penalties may be imposed, and our business may
be adversely affected as a result. Additionally, jurisdictions with “one action,” “security first” and/or “antideficiency rules” may
limit our ability or the ability of a special servicer of a CMBS issuance to foreclose on a real property or to realize on
obligations secured by a real property. In the future, new laws may be enacted or imposed by U.S. federal, state or local
governmental entities, and such laws may have an adverse effect on our business.
We are subject to various risks relating to non-U.S. securities and loans that may make them more risky than our
investments in U.S.-based securities and loans.
Investments in securities or loans of non-U.S. issuers or borrowers or on non-U.S. properties and securities denominated or
whose prices are quoted in non-U.S. currencies pose, to the extent not hedged, currency exchange risks (including blockage,
devaluation and nonexchangeability), as well as a range of other potential risks which could include expropriation, confiscatory
taxation, withholding or other taxes on interest, dividends, capital gain or other income, political or social instability, illiquidity,
price volatility, market manipulation and the burdens of complying with international licensing and regulatory requirements and
prohibitions that differ between jurisdictions. In addition, less information may be available regarding non-U.S. properties or
securities of non-U.S. issuers or borrowers and non-U.S. issuers or borrowers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to or as uniform as those of U.S. issuers. Transaction costs of
investing in non-U.S. securities or loan markets are generally higher than in the United States, and there may be less
government supervision and regulation of exchanges, brokers and issuers than there is in the United States. We might have
greater difficulty taking appropriate legal action in non-U.S. courts and non-U.S. markets also have different clearance and
settlement procedures which in some markets have at times failed to keep pace with the volume of transactions, thereby
creating substantial delays and settlement failures that could adversely affect our performance.
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Risks Related to Our Indebtedness
Our business is highly leveraged, which could lead to greater losses than if we were not as leveraged.
We do and, in the future, intend to use financial leverage in executing our business plan. Such borrowings may take the form of
“financing facilities” such as bank credit facilities, credit facilities from government agencies (including the FHLB), repurchase
agreements and warehouse lines of credit, which are secured revolving lines of credit that we utilize to warehouse portfolios or
real estate instruments until we exit them through securitization. We do and, in the future, intend to enter into securitization and
other long-term financing transactions to use the proceeds from such transactions to reduce the outstanding balances under
these financing facilities. However, such agreements may include a recourse component. Further, any financing facilities that
we currently have or may use in the future to finance our assets may require us to provide additional collateral or pay down
debt if the market value of our assets pledged or sold to the provider of the credit facility or the repurchase agreement
counterparty decline in value. In addition, our borrowings are generally based on floating interest rates, the fluctuation of which
could adversely affect our business and results of operations. Our use of leverage in a market that moves adversely to our
business interests could result in a substantial loss to us, which would be greater than if we were not leveraged.
There can be no assurance that we will be able to utilize financing arrangements in the future on favorable terms, or at all.
There is no assurance that we will be able to obtain, maintain or renew our financing facilities on terms or advance rates
favorable to us or at all. Furthermore, any financing facility that we enter into will be subject to conditions and restrictive
covenants relating to our operations, which may inhibit our ability to grow our business and increase revenues. To the extent we
breach a covenant or cannot satisfy a condition, such facility may not be available to us, or may be required to be repaid in full
or in part, which could limit our ability to pursue our business strategies. Further, such borrowings may limit the length of time
during which any given asset may be used as eligible collateral.
Additionally, if we are unable to securitize our loans to replenish a warehouse line of credit, we may be required to seek other
forms of potentially less attractive financing or otherwise to liquidate our assets. Furthermore, some of our warehouse lines of
credit contain cross-default provisions. If a default occurs under one of these warehouse lines of credit and the lenders
terminate one or more of these agreements, we may need to enter into replacement agreements with different lenders. There can
be no assurance that we will be successful in entering into such replacement agreements on the same terms as the terminated
warehouse line of credit.
We may issue more unsecured corporate bonds in the future depending on the financing requirements of our business and
market conditions. Our failure to maintain the credit ratings on our debt securities could negatively affect our ability to access
capital and could increase our interest expense. The credit rating agencies periodically review our capital structure and the
quality and stability of our earnings. Deterioration in our capital structure or the quality and stability of our earnings could
result in a downgrade of the credit ratings on our Notes and other debt securities. Any negative ratings actions could constrain
the capital available to us and could limit our access to funding for our operations. We are dependent upon our ability to access
capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest
costs could increase, which could have material adverse effect on our results of operations, financial condition and cash flows.
The effective subordination of our Notes, or other similar debt securities that we may issue in the future, may limit our
ability to meet all of our debt service obligations.
Our Notes are unsecured and unsubordinated obligations and rank equally in right of payment with each other and with all of
our unsecured and unsubordinated indebtedness. However, our Notes are effectively subordinated in right of payment to all of
our secured indebtedness to the extent of the value of the collateral securing such indebtedness. As of December 31, 2017, we
had $3.2 billion of secured consolidated indebtedness outstanding. While the indentures governing our Notes limit our ability to
incur secured indebtedness in the future, they do not prohibit us from incurring such indebtedness if we and our subsidiaries are
in compliance with certain financial ratios and other requirements at the time of incurrence. In the event of a bankruptcy,
liquidation, dissolution, reorganization, or similar proceeding with respect to us, the holders of any secured indebtedness will
be entitled to proceed directly against the collateral that secures such indebtedness. Therefore, the collateral will not be
available for satisfaction of any amounts owed under our unsecured indebtedness, including our Notes or similar debt securities
that we may issue in the future, until such secured indebtedness is satisfied in full.
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Our Notes are also effectively subordinated to all liabilities, whether secured or unsecured. In the event of a bankruptcy,
liquidation, dissolution, reorganization, or similar proceeding with respect to any of our subsidiaries, we (as a common equity
owner of such subsidiary), and therefore holders of our debt (including our Notes or similar debt securities that we may issue in
the future), will be subject to the prior claims of such subsidiary’s creditors, including trade creditors and preferred equity
holders. As of December 31, 2017, our subsidiaries had approximately $4.5 billion of indebtedness and other liabilities
outstanding and no preferred equity.
The indentures governing our Notes contains restrictive covenants that may limit our ability to expand or fully pursue our
business strategies.
The indentures governing our Notes contain financial and operating covenants that may limit our ability to take specific
actions, even if we believe them to be in our best interest and require us to, among other things, maintain at all times a specified
ratio of indebtedness to equity and a certain level of unencumbered assets. These covenants may restrict our ability to expand
or fully pursue our business strategies. Our ability to comply with these and other provisions of our debt agreements may be
affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse
regulatory developments, or other events.
Our use of leverage may create a mismatch between the duration of financing and the life of the investments made using the
proceeds of such financing.
We generally intend to structure our leverage such that we minimize the differences between the term of our investments and
the leverage we use to finance such an investment. However, under certain circumstances, we may determine not to do so or we
may be unable to do so. In the event that our leverage is for a shorter term than the financed investment, we may not be able to
extend or find appropriate replacement leverage, which would have an adverse impact on our liquidity and our returns. In the
event that our leverage is for a longer term than the financed investment, we may not be able to repay such leverage or replace
the financed investment with an optimal substitute or at all, which would negatively impact our desired leveraged returns.
We generally attempt to structure our leverage such that we minimize the differences between the index of our investments and
the index of our leverage (i.e., financing floating rate investments with floating rate leverage and fixed rate investments with
fixed rate leverage). If such a product is not available to us from our lenders on reasonable terms, we may use hedging
instruments to effectively create such a match. For example, in the case of future fixed rate investments, we may finance such
an investment with floating rate leverage, but effectively convert all or a portion of the attendant leverage to fixed rate using
hedging strategies.
Our attempts to mitigate such risk are subject to factors outside our control, such as the availability of favorable financing and
hedging options, which is subject to a variety of factors, of which duration and term-matching are only two. The risks of a
duration mismatch are magnified by the potential for the extension of loans in order to maximize the likelihood and magnitude
of their recovery value in the event the loans experience credit or performance challenges. Employment of this asset
management practice would effectively extend the duration of our investments, while our liabilities have set maturity dates.
The utilization of any of our repurchase and warehouse facilities and other financing arrangements is subject to the pre-
approval of the lender, which we may be unable to obtain.
In order to borrow funds under a repurchase or warehouse agreement or other financing arrangement, the lender has the right to
review the potential assets for which we are seeking financing and approve such asset in its sole discretion. Accordingly, we
may be unable to obtain the consent of a lender to finance an investment and alternate sources of financing for such asset may
not exist.
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Our use of repurchase agreements to finance our securities and/or loans may give our lenders greater rights in the event
that either we or a lender files for bankruptcy, including the right to repudiate our repurchase agreements, which could
limit or delay our claims.
In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S.
Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase
agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement
without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender
may be permitted under applicable insolvency laws to repudiate the contract, and our claim against the lender for damages may
be treated simply as an unsecured claim. In addition, if the lender is a broker or dealer subject to the Securities Investor
Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise
our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the
lender’s insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and
when received, may be substantially less than the damages we actually incur. Therefore, our use of repurchase agreements to
finance our portfolio assets exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or ourselves.
If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security and/or loans to
us at the end of the transaction term, or if the value of the underlying security and/or loans has declined as of the end of
that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase
transactions.
When we engage in repurchase transactions, we generally sell securities and/or loans to lenders (i.e., repurchase agreement
counterparties) in return for cash from the lenders. The lenders then are obligated to resell the same securities and/or loans to us
at the end of the term of the transaction. In a repurchase agreement, the cash we receive from a lender when we initially sell the
securities and/or loans to such lender is less than the value of the securities and/or loans sold. If the lender defaults on its
obligation to resell the same securities and/or loans to us under the terms of a repurchase agreement, we will incur a loss on the
transaction equal to the difference between the value of the securities and/or loans sold and the cash we received from the
lender (assuming there was no change in the value of the securities and/or loans). We also would lose money on a repurchase
transaction if the value of the underlying securities and/or loans has declined as of the end of the transaction term, as we would
have to repurchase the securities and/or loans for their initial value but would receive securities and/or loans worth less than
that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender will be able to terminate
the transaction and cease entering into any other repurchase transactions with us. Our repurchase agreements generally contain
cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements also could
declare a default. If a default occurs under any of our repurchase agreements and the lenders terminate one or more of their
repurchase agreements, we may need to enter into replacement repurchase agreements with different lenders. There can be no
assurance that we will be successful in entering into such replacement repurchase agreements on the same terms as the
repurchase agreements that were terminated or at all. Any losses that we incur on our repurchase transactions could adversely
affect our earnings.
We may be subject to repurchases of loans or indemnification on loans and real estate that we have sold if certain
representations or warranties in those sales are breached.
If loans that we sell or securitize do not comply with representations and warranties that we make about the loans, the
borrowers, or the underlying properties, we may be required to repurchase such loans (including from a trust vehicle used to
facilitate a structured financing of the assets through a securitization) or replace them with substitute loans. Additionally, in the
case of loans and real estate that we have sold, we may be required to indemnify persons for losses or expenses incurred as a
result of a breach of a representation or warranty. Repurchased loans typically will require a significant allocation of working
capital to be carried on our books, and our ability to borrow against such assets may be limited. Any significant repurchases or
indemnification payments could adversely affect our business.
Despite our substantial outstanding indebtedness, we may still incur significantly more indebtedness in the future, which
would exacerbate any or all of the risks described herein.
We may incur substantial additional indebtedness in the future. Although the agreements governing our indebtedness do limit
our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and,
under certain circumstances, debt incurred in compliance with these restrictions could be substantial. To the extent that we
incur substantial additional indebtedness in the future, the risks associated with our substantial leverage described herein,
including our inability to meet all of our debt service obligations, would be exacerbated.
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We cannot predict the effect of changes to, or the transition away from, LIBOR on Ladder’s assets and liabilities.
Ladder’s floating rate mortgage loans and financing facilities bear interest at adjustable rates based on LIBOR for one-month
Eurodollar deposits or other established interest indices. Regulators and law enforcement agencies from a number of
governments, including entities in the United States, Japan, Canada and the United Kingdom, have been conducting civil and
criminal investigations into whether the banks that contributed to the British Bankers’ Association (the “BBA”) in connection
with the calculation of daily LIBOR may have underreported or otherwise manipulated or attempted to manipulate LIBOR.
Several financial institutions have reached settlements with the U.S. Commodity Futures Trading Commission, the U.S.
Department of Justice Fraud Section and the United Kingdom Financial Services Authority in connection with investigations
by such authorities into submissions made by such financial institutions to the bodies that set LIBOR and other interbank
offered rates. In such settlements, such financial institutions admitted to submitting rates to the BBA that were lower than the
actual rates at which such financial institutions could borrow funds from other banks. Additional investigations remain ongoing
with respect to other major banks and no assurance can be made that there will not be further admissions or findings of rate
setting manipulation or that improper manipulation of LIBOR or other similar inter-bank lending rates will not occur in the
future.
Based on a review conducted by the Financial Conduct Authority of the United Kingdom (the “FCA”) and a consultation
conducted by the European Commission, proposals have been made for governance and institutional reform, regulation,
technical changes and contingency planning. In particular: (a) new legislation has been enacted in the United Kingdom
pursuant to which LIBOR submissions and administration are now “regulated activities” and manipulation of LIBOR has been
brought within the scope of the market abuse regime; (b) legislation has been proposed which, if implemented, would, among
other things, alter the manner in which LIBOR is determined, compel more banks to provide LIBOR submissions, and require
these submissions to be based on actual transaction data; and (c) LIBOR rates for certain currencies and maturities are no
longer published daily. In addition, pursuant to authorization from the FCA, ICE Benchmark Administration Limited (formerly
NYSE Euronext Rate Administration Limited) (the “IBA”) took over the administration of LIBOR from the BBA on February
1, 2014. Any new administrator of LIBOR may make methodological changes to the way in which LIBOR is calculated or may
alter, discontinue or suspend calculation or dissemination of LIBOR.
In a speech on July 27, 2017, Andrew Bailey, the Chief Executive of the FCA, announced the FCA’s intention to cease
sustaining LIBOR after 2021. The FCA has statutory powers to require panel banks to contribute to LIBOR where necessary.
The FCA has decided not to ask, or to require, that panel banks continue to submit contributions to LIBOR beyond the end of
2021. The FCA has indicated that it expects that the current panel banks will voluntarily sustain LIBOR until the end of 2021.
The FCA’s intention is that after 2021, it will no longer be necessary for the FCA to ask, or to require, banks to submit
contributions to LIBOR. The FCA does not intend to sustain LIBOR through using its influence or legal powers beyond that
date. It is possible that the IBA and the panel banks could continue to produce LIBOR on the current basis after 2021, if they
are willing and able to do so, but it is not clear LIBOR will survive in its current form, or at all.
We cannot predict the effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the
effect of those changes on Ladder’s assets and liabilities. We cannot predict what alternative index would be chosen by our
lenders, should this occur. The uncertainty as to the nature of, and methodology for calculating and administering, any
replacement reference rate, the uncertainty regarding interest rate calculations prior to the establishment of such replacement
rate, whether the replacement rate will gain widespread market acceptance and the potential need to amend existing
documentation present additional risks.
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Risks Related to Regulatory and Compliance Matters
One of our subsidiaries is registered as a broker-dealer and is subject to various broker-dealer regulations. Violations of
these regulations could result in revocation of broker-dealer licenses, fines or other disciplinary action.
We have a subsidiary, LCS, which is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia,
Puerto Rico and the U.S. Virgin Islands, and is a member of FINRA. This subsidiary, which from time to time serves as a
manager (or co-manager) of the CMBS securitizations to which an affiliate contributes collateral as loan seller, is subject to
regulations that cover all aspects of its business, including sales methods, trade practices, use and safekeeping of clients’ funds
and securities, the capital structure of the subsidiary, recordkeeping, the financing of clients’ purchases and the conduct of
directors, officers and employees. The SEC and FINRA have also imposed both conduct-based and disclosure-based
requirements with respect to research reports. Violation of these regulations can result in the revocation of broker-dealer
licenses (which could result in our having to hire new licensed investment professionals before continuing certain operations),
the imposition of censure or fines and the suspension or expulsion of the subsidiary, its officers or employees from FINRA. In
addition, LCS is subject to routine periodic examination by the staff of FINRA.
As a registered broker-dealer and member of a self-regulatory organization, LCS is subject to the SEC’s uniform net capital
rule. Rule 15c3-1 of the Exchange Act specifies the minimum level of net capital a broker-dealer must maintain and also
requires that a significant part of a broker-dealer’s assets be kept in relatively liquid form. The SEC and FINRA impose rules
that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in
the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under
certain circumstances. Additionally, the SEC’s uniform net capital rule imposes certain requirements that may have the effect of
prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain
withdrawals of capital.
The Dodd-Frank Act imposes additional regulation by the SEC, the CFTC and LCS’ other regulators. The legislation calls for
the imposition of expanded standards of care by market participants in dealing with clients and customers, including by
providing the SEC with authority to adopt rules establishing fiduciary duties for broker-dealers and directing the SEC to
examine and improve sales practices and disclosure by broker-dealers and investment advisers. LCS is also affected by rules
adopted by U.S. federal agencies pursuant to the Dodd-Frank Act that require that any person who organizes or initiates an
asset-backed security transaction to retain a portion (at least 5%) of any credit risk that the person conveys to a third party.
Securitizations will also be affected by rules prohibiting securitization participants’ engaging in any transaction that would
involve or result in any material conflict of interest with an investor in a securitization transaction. The rules exempt bona fide
market-making activities and risk-mitigating hedging activities in connection with securitization activities from the general
prohibition.
If our subsidiary that is regulated as a registered investment adviser is unable to meet the requirements of the SEC or fails
to comply with certain U.S. federal and state securities laws and regulations, it may face termination of its investment
adviser registration, fines or other disciplinary action.
Our subsidiary, LCAM, is regulated by the SEC as a registered investment adviser. Registered investment advisers are subject
to the requirements and regulations of the Advisers Act. Such requirements relate to, among other things, fiduciary duties to
advisory clients, maintaining an effective compliance program, solicitation agreements, conflicts of interest, recordkeeping and
reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between an advisor and
advisory clients and general anti-fraud prohibitions. LCAM currently is an investment adviser to a mutual fund registered under
the Investment Company Act, which subjects LCAM to regulation under the Investment Company Act, including with respect
to the fees our subsidiary earns from the fund and the ability of the mutual fund to enter into principal transactions or joint
transactions with us and our affiliates. Non-compliance with the Advisers Act, the Investment Company Act or other U.S.
federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational
damage.
45
If our subsidiary that is regulated as a registered investment adviser is unable to accumulate assets under management or
successfully negotiate the terms of its management fees, our results of operations could be negatively impacted.
Our asset management business depends in large part on our ability to raise capital from third-party investors. If we are unable
to raise capital from third-party investors, we would be unable to collect management fees or deploy their capital into
investments and potentially receive additional fees and compensation, which would materially reduce our revenue and cash
flow from our asset management business and adversely affect our financial condition. Regulations adopted and anticipated to
be adopted by the Department of Labor may create compliance and operational challenges for companies that distribute
investment products and may make it more difficult for our investment adviser subsidiary to raise capital for clients that it
manages.
In connection with creating new investment products, we negotiate terms with potential investors. The outcome of such
negotiations could result in our agreement to terms that are materially less favorable to us than the terms of other accounts or
vehicles one of our investment adviser subsidiaries has advised. Such terms could restrict our subsidiaries’ ability to advise
accounts or vehicles with investment objectives or strategies that compete with existing accounts or vehicles, reduce fee
revenues we earn, reduce the percentage of profits on third-party capital that we share in or add expenses and obligations for us
in managing the accounts or vehicles or increase our potential liabilities, all of which could ultimately reduce our profitability.
The advisory contracts our investment adviser subsidiary enters into with clients provide investors or, in some cases, the
independent directors of the clients with significant latitude to terminate such contracts, withdraw funds or liquidate funds by
simple majority vote with limited notice or penalty or to remove our subsidiary as a fund’s investment adviser (or equivalent).
The investment advisory agreement with our registered investment company client is required, after an initial two year term, to
be renewed and approved annually by the fund’s boards of directors, a majority of whom are independent from the Company.
The historical returns attributable to the accounts and investment vehicles currently or formerly managed by our asset
management business are not indicative of the future results of the accounts and investment vehicles managed by this
business, our future results or the performance of our Class A common stock.
The historical and potential future returns of the accounts and investment vehicles managed by our asset management business
are not directly linked to returns on our business. Therefore, any positive performance of the accounts and investment vehicles
that we manage will not necessarily result in positive returns on an investment in our common equity. However, poor
performance of the accounts and investment vehicles that we manage would cause a decline in our revenue from such accounts
and investment vehicles, and would therefore have a negative effect on our performance.
We cannot be certain that consents required for assignments of our investment management agreements will be obtained if
a change of control occurs at the Company, which may result in the termination of these agreements and a corresponding
loss of revenue.
The Advisers Act requires that any investment management agreements be terminated upon an “assignment” without investor
consent. Such “assignment” may be deemed to occur in the event such adviser experiences a direct or indirect change of control
(at the Company level). The Investment Company Act has a similar requirement, except that a majority of the fund’s
independent directors also must consent. Termination of these agreements would cause us to lose the fees we earn from such
account or fund.
If our subsidiary that operates as a captive insurance company fails to comply with insurance laws or is no longer a member
of the FHLB, our sources of financing may be limited, which may have an adverse financial impact on the captive and us.
We maintain a captive insurance company to provide coverage previously self-insured by us, including nuclear, biological or
chemical coverage, excess property coverage and excess errors and omissions coverage. The captive is regulated by the State of
Michigan and is subject to regulations that cover all aspects of its business, including a requirement to maintain a certain
minimum net capital. Violation of these regulations can result in revocation of its authorization to do business as a captive
insurer or result in censures or fines. The captive could also be found to be in violation of the insurance laws of states other
than Michigan (i.e., states where insureds are located), in which case, fines and penalties could apply from those states. Under
certain circumstances, regulatory actions (such as new rulemakings) impacting the captive could result in limitations on the
ability of the captive to borrow from the FHLB, or termination of its membership in the FHLB, and thereby impact the FHLB’s
availability as a source of financing for our operations.
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The captive is a member of the FHLB, and as such, is eligible to borrow funds, on a fully collateralized basis, in accordance
with the terms and conditions of the FHLB’s Advances, Pledge and Security Agreement and is subject to the lending policies of
the FHLB as established from time to time. As a member, the captive is required to purchase shares of FHLB stock based on
the amount of funds currently borrowed. The organization of the captive and its membership in the FHLB is viewed as a risk
financing and investment vehicle of Ladder. Like any other investment, the captive’s participation in the FHLB involves some
risk of loss and/or access to assets of the captive, both with respect to the shares of FHLB stock and the assets provided by the
captive as collateral for its borrowings. Furthermore, if the captive’s membership in the FHLB is terminated, then it may have
an adverse financial impact on the captive and us.
The FHFA has revised its regulation on FHLB membership, which, without further modification, will ultimately result in
the inability of our captive insurance company to borrow new advances from, or be a member of, the FHLB no later than
February 19, 2021.
On January 20, 2016, the FHFA, regulator of the FHLB, published a final rule amending its regulation on FHLB membership.
The final rule was effective February 19, 2016 and requires that Tuebor’s FHLB membership be terminated by the FHLB no
later than February 19, 2021. According to the final rule, during this five-year transition period, the FHLB may continue to
make new advances to Tuebor so long as they do not exceed the lesser of forty percent of Tuebor’s total assets, and they do not
have a maturity of later than February 19, 2021. Existing advances that mature after the termination of Tuebor’s membership
are permitted to remain in place until maturity of such advances. On December 6, 2017, Tuebor’s advance limit was updated by
the FHLB to the lowest of a Set Dollar Limit ($2.0 billion), 40% of Tuebor’s total assets or 150% of the Company’s total
equity. Tuebor’s outstanding advances from the FHLB as of December 31, 2017 were less than forty percent of Tuebor’s total
assets and less than 150% of the Company’s total equity at that date. Beginning April 1, 2020 through December 31, 2020, the
Set Dollar Limit will be $1.5 billion. Beginning January 1, 2021 through February 19, 2021, the Set Dollar Limit will be $750.0
million. Tuebor is well-positioned to meet its obligations and pay down its advances in accordance with the scheduled
reduction in the Set Dollar Limit, which remains subject to revision by the FHLB or as a result of any future changes in
applicable regulations.
FHLB advances amounted to 31.3% of the Company’s outstanding debt obligations as of December 31, 2017. The Company
does not anticipate that the FHFA’s final regulation will materially impact its operations as it will continue to access FHLB
advances during the five-year transition period and it has multiple, diverse funding sources for financing its portfolio in the
future. In the latter stages of the five-year transition period, the Company expects to adjust its financing activities by gradually
making greater use of alternative sources of funding of types currently used by the Company including secured and unsecured
borrowings from banks and other counterparties, the issuance of corporate bonds and equity, and the securitization or sale of
assets. Future moves to alternative funding sources could result in higher or lower advance rates from secured funding sources
but also the incurrence of higher funding and operating costs than would have been incurred had FHLB funding continued to be
available. In addition, the Company may find it more difficult to obtain committed secured funding for multiple year terms as
it has been able to obtain from the FHLB. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and capital resources.”
The five-year transition period allows time for events to occur that may impact Tuebor’s long-term membership in the FHLB,
including further regulatory changes, the enactment of legislation, or the filing of litigation challenging the validity of the final
rule. During this period, a combination of these external events and/or Tuebor’s own actions could result in the emergence of
feasible alternative approaches for it to retain its FHLB membership.
There is no assurance that the FHFA or the FHLB may not take actions that could adversely impact Tuebor’s membership in the
FHLB and continuing access to new or existing advances prior to February 19, 2021.
Regulatory changes in the United States and regulatory compliance failures could adversely affect our reputation, business
and operations.
Potential regulatory action poses a significant risk to our business. Certain of our subsidiaries’ businesses are subject to
extensive regulation in the United States and may rely on exemptions from various requirements of the Securities Act, the
Exchange Act, the Investment Company Act and ERISA. These exemptions are sometimes highly complex and may in certain
circumstances depend on compliance by third parties who we do not control. If for any reason these exemptions were to be
revoked or challenged or otherwise become unavailable to us, we could be subject to regulatory action or third-party claims,
and our business could be materially and adversely affected.
47
Further, each of the regulatory bodies with jurisdiction over one or more of our subsidiaries has regulatory powers dealing with
many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to
carry on particular activities, which may negatively affect our business.
In addition, we are subject to the Sarbanes-Oxley Act and other applicable securities rules and regulations. Compliance with
these rules and regulations may increase our legal and financial compliance costs, make some activities more difficult, time-
consuming or costly and increase demand on our systems and resources. We may also be involved in trading activities which
implicate a broad number of United States securities law regimes, including laws governing trading on inside information,
market manipulation and a broad number of technical trading requirements that implicate fundamental market regulation
policies. Violation of these laws could result in severe restrictions on our activities and damage to our reputation.
Compliance with any new laws or regulations could make compliance more difficult and expensive, affect the manner in which
we conduct our business and adversely affect our profitability.
Employee misconduct could harm us by impairing our ability to attract and retain clients and subjecting us to significant
legal liability and reputational harm.
There is a risk that our employees could engage in misconduct that adversely affects our business. We are subject to a number
of obligations and standards arising from our regulated businesses and our authority over the assets managed by our asset
management business. The violation of these obligations and standards by any of our employees would adversely affect our
clients and us. If our employees were improperly to use or disclose confidential information obtained during discussions
regarding a potential investment, we could suffer serious harm to our reputation, financial position and current and future
business relationships. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take
to detect and prevent this activity may not be effective in all cases. If one of our employees were to engage in misconduct or
were to be accused of such misconduct, our business and our reputation could be adversely affected.
Accounting and tax rules for certain of our transactions are highly complex and involve significant judgment and
assumptions. Changes in accounting interpretations or assumptions could impact our consolidated financial statements.
Accounting and tax rules for transfers of financial assets, securitization transactions, consolidation of variable interest entities,
or (“VIEs”), and other aspects of our anticipated operations are highly complex and involve significant judgment and
assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this
information to our shareholders. Changes in accounting interpretations or assumptions could impact our consolidated financial
statements, result in a need to restate our financial results and affect our ability to timely prepare our consolidated financial
statements. Our inability to timely prepare our consolidated financial statements in the future would likely adversely affect our
security prices significantly.
Risks Related to Our Investment Company Act Exemption
Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on our
operations. The value of our securities, including our Class A common stock, may be adversely affected if we are required to
register as an investment company under the Investment Company Act.
We intend to conduct our operations so that neither we nor any of our subsidiaries (including any series thereof) are required to
register as an investment company under the Investment Company Act.
If we or any of our subsidiaries (including any series thereof) fail to qualify for and maintain an exemption from registration
under the Investment Company Act, or an exclusion from the definition of an investment company, we could, among other
things, be required either to: (i) substantially change the manner in which we conduct our operations to avoid being required to
register as an investment company; (ii) effect sales of our assets in a manner that, or at a time when, we would not otherwise
choose to do so; or (iii) register as an investment company under the Investment Company Act, any of which could have an
adverse effect on us, our financial results, the sustainability of our business model, the value of our securities (including the
Notes) or our ability to satisfy our obligations in respect of the Notes.
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If we or any of our subsidiaries (including any series thereof) were required to register as an investment company under the
Investment Company Act, the registered entity would become subject to substantial regulation with respect to capital structure
(including the ability to use leverage), management, operations, transactions with affiliated persons (as defined in the
Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry
concentration, compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would
significantly change its operations and we would not be able to conduct our business as described herein. For example, because
affiliate transactions are generally prohibited under the Investment Company Act, we would not be able to enter into certain
transactions with any of our affiliates if we are required to register as an investment company, which could have a material
adverse effect on our ability to operate our business.
If we were required to register ourselves as an investment company but failed to do so, we would be prohibited from engaging
in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable
unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
We believe we are not an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not
engage primarily, or hold ourselves out as being engaged primarily, and do not propose to engage primarily, in the business of
investing, reinvesting or trading in securities. However, under Section 3(a)(1)(C) of the Investment Company Act, because we
are a holding company that will conduct its businesses primarily through majority-owned subsidiaries (including any series
thereof), the securities issued by these subsidiaries (including any series thereof) that are excepted from the definition of
“investment company” under Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment
securities we may own, may not have a combined value in excess of 40% of the value of our adjusted total assets (exclusive of
government securities and cash items) on an unconsolidated basis (the “40% test”). This requirement limits the types of
businesses in which we may engage through our subsidiaries (including any series thereof). In addition, the assets we and our
subsidiaries (including any series thereof) may originate or acquire are limited by the provisions of the Investment Company
Act and the rules and regulations promulgated thereunder, which may adversely affect our business.
We expect that certain of our subsidiaries (including any series thereof) may rely on the exclusion from the definition of
“investment company” under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act,
which is available for entities “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate.” This exclusion, as interpreted by the staff of the SEC, requires that an entity invest at least
55% of its assets in qualifying real estate assets and at least 80% of its assets in qualifying real estate assets and real estate-
related assets. We expect each of our subsidiaries (including any series thereof) relying on Section 3(c)(5)(C) to rely on
guidance published by the SEC staff or on our analyses of such guidance to determine which assets are qualifying real estate
assets and real estate-related assets. However, the SEC’s guidance was issued in accordance with factual situations that may be
substantially different from the factual situations we may face. We have not received, nor have we sought, a no-action letter
from the SEC regarding how our investment strategy fits within the exclusions from the definition of an “investment company”
under the Investment Company Act that we and our subsidiaries (including any series thereof) are relying on. The SEC staff
may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an
exclusion from the definition of an “investment company” under the Investment Company Act. If we are required to re-classify
our assets, certain of our subsidiaries (including any series thereof) may no longer be in compliance with the exclusion from the
definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act. To the extent that the
SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy
accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in a
subsidiary holding assets we might wish to sell or selling assets we might wish to hold.
Any of the Company or our subsidiaries (including any series thereof) may rely on the exemption provided by Section 3(c)(6)
of the Investment Company Act to the extent that they primarily engage, directly or through majority-owned subsidiaries
(including any series thereof), in the businesses described in Sections 3(c)(3), 3(c)(4) and 3(c)(5) of the Investment Company
Act. The SEC staff has issued little interpretive guidance with respect to Section 3(c)(6) and any guidance published by the
staff could require us to adjust our strategy accordingly.
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We determine whether an entity (including any series thereof) is one of our majority-owned subsidiaries. The Investment
Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities
of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The
Investment Company Act further defines voting securities as any security presently entitling the owner or holder thereof to vote
for the election of directors of a company. We treat companies in which we own at least a majority of the outstanding voting
securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the SEC to approve our treatment
of any company as a majority-owned subsidiary and the SEC has not done so. If the SEC were to disagree with our treatment of
one or more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to
continue to pass the 40% test. Any such adjustment in our strategy could have a material adverse effect on us.
There can be no assurance that the laws and regulations governing the Investment Company Act exemptions and exclusions
described above will not change in a manner that adversely affects our operations, including the SEC or its staff providing more
specific or different guidance regarding Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of the
exclusion and whether companies that are engaged in the business of acquiring mortgages and mortgage-related instruments
should be regulated in a manner similar to investment companies. If we or our subsidiaries (including any series thereof) fail to
maintain an exemption from registration under the Investment Company Act, we could, among other things, be required to: (i)
change the manner in which we conduct our operations to avoid being required to register as an investment company; (ii) effect
sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so; or (iii) register as an investment
company, any of which could negatively affect our financial results, the sustainability of our business model, or the value of our
securities.
Risks Related to Conflicts of Interest
Our officers and directors may be involved in other businesses related to the commercial real estate industry and potential
conflicts of interests may arise if we invest in commercial real estate instruments or properties affiliated with such
businesses.
Our officers or directors may be involved in other businesses related to the commercial real estate industry, and we may wish to
invest in commercial real estate instruments or properties affiliated with such persons. Potential conflicts of interest may exist
in such situations, and as a result, the benefits to our business of such investments may be limited. Although we do have a
policy governing approval of certain related party transactions by the board of directors, we do not expressly prohibit our
directors, officers, security holders or affiliates from having a direct or indirect pecuniary interest in any transaction in which
we have an interest or engaging for their own account in business activities of the types that we conduct.
Certain of our entities may make loans to other of our entities on other-than-arms’-length terms.
Certain of our entities have in the past and may in the future make loans to other of our entities. Such loans may be made on
other-than-arms’-length terms, and as a result, we could be deemed to be subject to an inherent conflict of interest in the event
that the interest rates and related fees of such loans differ from those rates and fees then available in the marketplace. We expect
that such loans will not give rise to a conflict of interest because such loans generally will be made at rates, and subject to fees,
lower than those available in the marketplace; however, we will attempt to resolve any conflicts of interest that arise in a fair
and equitable manner.
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The Company and certain of its affiliates, including the Ladder Select Bond Fund (“LSBIX”), may compete to acquire the
Company’s target assets, which are allocated in accordance with the allocation policy established by LCAM, but which may
present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions
that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.
LCAM and Ladder acquire for themselves or accounts they manage, as the case may be, assets that they determine, in their
reasonable and good faith judgment, are appropriate based on account objectives, policies and strategies, and other relevant
factors. From time to time, Ladder may seek to purchase for its proprietary account the same or similar assets that LCAM
seeks to purchase for LSBIX, which is currently limited to commercial real estate-related securities, or for other accounts that
may be managed by LCAM in the future.
Because many of our targeted assets are typically available only in specified quantities and because many of our targeted assets
are also targeted assets for LSBIX and may be targeted assets for other accounts LCAM may manage in the future, neither
Ladder nor LCAM may be able to buy as much of any given asset as required to satisfy the needs of Ladder, LSBIX and any
other account LCAM may manage in the future. In these cases, the allocation policy adopted by LCAM will require the
allocation of such assets among us and accounts managed by LCAM in a manner consistent with LCAM’s fiduciary duty and in
accordance with applicable law and regulatory interpretations.
In making such allocations, LCAM seeks to allocate investment opportunities in a fair and equitable manner over time. In
making such allocations, LCAM may allocate an investment opportunity that is appropriate for us and accounts managed by
LCAM in a manner that excludes us or results in a disproportionate allocation based on factors or criteria applicable under the
allocation policy. We and accounts managed by LCAM also may purchase different classes of securities in the same issuer and
a conflict of interest could arise between the holders of the different classes of securities if the issuer were to develop
insolvency concerns. In addition, conflicts of interest may exist in the valuation of our investments and the allocation of fees
and costs among us and accounts managed by LCAM.
There is no guarantee that the policies and procedures adopted by us, the terms and conditions of an investment management
agreements or the policies and procedures adopted by LCAM, Ladder and our affiliates, will enable us to identify, adequately
address or mitigate these conflicts of interest. To the extent we fail to appropriately address any such conflicts, it could
negatively impact our reputation and ability to raise additional capital, LCAM’s ability to manage additional accounts or result
in potential litigation or regulatory action against us or LCAM.
Our engagement in transactions with, and investment in, certain securitization vehicles under which we also serve as
collateral manager, directing holder and/or special servicer may present conflicts of interest.
We have engaged in transactions with, and invested in, certain of the securitization vehicles under which we also serve as
collateral manager, directing holder and/or special servicer, and/or may do so in the future. We have previously, and may in the
future, purchase investments in these vehicles that are senior or junior to, or have rights and interests different from or adverse
to, other investors or credit support providers in the debt or other securities of such securitization vehicles. Our interests in such
transactions and investments may conflict with the interests of such other investors or credit support providers at the time of
origination or in the event of a default or restructuring of a securitization vehicle or underlying assets.
We may have conflicts of interest in exercising our rights as holder of subordinated classes of CMBS and in owning the entity
that also acts as or directs the special servicer for such transactions. It is possible that we, acting as the directing holder for a
CMBS or CLO transaction, may direct special servicer actions that conflict with the interests of certain other classes of the
CMBS or CLO issued in that transaction.
Although we seek to make decisions with respect to our securitization vehicles in a manner that we believe is fair and
consistent with the operative legal documents governing these vehicles, perceived or actual conflicts may create dissatisfaction
among the other investors in such vehicles and may give rise to litigation or regulatory enforcement actions. Regulatory
scrutiny of, or litigation in connection with, such conflicts of interest could materially adversely affect our ability to manage or
generate income or cash flow from our securitizations business, cause harm to our reputation and adversely affect our ability to
attract investors for future vehicles. Appropriately dealing with conflicts of interest is complex and our reputation could be
damaged if we fail to deal appropriately with one or more perceived or actual conflicts of interest.
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We hold CMBS and the master servicer, special servicer or sub-servicer or their affiliates may have relationships with
borrowers under related mortgage loans and such relationships may impact the value of such CMBS.
In instances where we hold CMBS, the master servicer, special servicer or sub-servicer or any of their respective affiliates may
have interests in, or other financial relationships with, borrowers under related mortgage loans. Such relationships may create
conflicts of interest that negatively impact the value of such CMBS.
Risks Related to Hedging
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income
that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of
the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real
estate assets, and such instrument is properly identified under applicable U.S. Department of the Treasury (the “Treasury”)
regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying
income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use
of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the
cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with
changes in interest rates than we would otherwise want to bear. In addition, hedging-related losses in our TRSs will generally
not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.
We may enter into hedging transactions that could expose us to contingent liabilities in the future and adversely impact our
financial condition.
Part of our strategy will involve entering into hedging transactions that could require us to fund cash payments in certain
circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination
event, or the decision by a counterparty to request margin transfers it is contractually owed under the terms of the hedging
instrument). These potential payments will be contingent liabilities and therefore may not appear in our financial statements.
The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could
also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund
these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these
obligations could adversely impact our financial condition.
Hedging against interest rate exposure may adversely affect our earnings.
We intend to pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging
activity will vary in scope based on the level and volatility of interest rates, the type of assets held, compliance with REIT rules,
and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect our business because,
among other things:
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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
due to a credit loss or other factors, the duration of the hedge may not match the duration of the related liability;
applicable law may require mandatory margining or clearing of certain interest rate hedges we may wish to use, which
may raise costs;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it
impairs our ability to sell or assign its side of the hedging transaction; and
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
In addition, we may fail to recalculate, readjust and execute hedges in an efficient manner.
Any hedging activity in which we engage may materially and adversely affect our results of operations and cash flows.
Therefore, while we may enter into such transactions seeking to reduce interest rate risks, unanticipated changes in interest
rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In
addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price
movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we
may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being
hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.
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A liquid secondary market may not exist for certain hedging instruments and they therefore may involve risks and costs that
could result in material losses.
The enforceability of agreements underlying certain hedging transactions may depend on compliance with applicable statutory
and regulatory requirements under U.S. law and, depending on the identity of the counterparty, applicable international
requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely
result in its default, resulting in the loss of unrealized profits and forcing us to cover our commitments, if any, at the then
current market price. A liquid secondary market may not exist for these hedging instruments, and we may be required to
maintain a position until exercise or expiration, which could result in material losses.
We may enter into hedging transactions that subject us to mandatory clearing and/or margin requirements.
Part of our strategy will involve entering into hedging transactions that may be subject to mandatory clearing under the Dodd-
Frank Act and therefore subject to associated margin requirements imposed by the applicable clearinghouse. The margin we
may be required to post may be subject to the rules of the relevant clearinghouse, which may provide the clearinghouse with
discretion to increase those requirements. In addition, clearing intermediaries who clear our trades with a clearinghouse may
have contractual rights to increase the margin requirements we are required to provide above clearinghouse minimums.
With respect to uncleared swaps that could be needed to execute our hedging strategy, regulations that have been adopted in the
U.S. (under the Dodd-Frank Act) impose mandatory margin requirements. Similar rules have been adopted in Europe and other
jurisdictions where our dealer counterparties may be located. These rules impose obligations on many derivatives market
participants to collect and post “variation margin” in connection with over-the-counter derivatives and, on a smaller group of
market participants, to also collect and post “initial margin.” The impacts on us depend on the impact on prices in the
interdealer hedging market (which may affect the pricing we can obtain from dealers) and whether one or both of these margin
requirements apply to our derivatives counterparties when transacting with us. The rules began to go into effect in the
interdealer market in September 2016 and variation margin requirements in the broader market went into effect in the U.S. in
March 2017. Initial margin requirements are phasing in over several years. The rules are intended to provide that the margin
requirements for parties subject to “initial margin” requirements are higher than the margin requirements for similar cleared
derivatives.
Our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to
fund these obligations could adversely impact our financial condition. In addition, the failure to satisfy a margin call may result
in the liquidation of all or a portion of the relevant hedge transactions. The implementation of the new margin rules for
uncleared over-the-counter derivatives could also increase the cost to us of using these products.
Changes in the regulatory environment for derivatives could adversely affect our hedging activities.
The Dodd-Frank Act regulates derivative transactions with a material U.S. nexus, which covers certain hedging instruments we
may use in our risk management activities. Similarly, governments and regulators in other G-20 countries have committed to
increased regulation of derivative transactions and are in various stages of implementing regulations similar to those that have
either been adopted or proposed in the U.S. Depending on where our derivatives providers are located, these other regulations
may apply instead of, or in addition to, regulations under the Dodd-Frank Act. The regulations that have been adopted to date
include significant new provisions regarding conduct, documentation, risk management and reporting when transacting in
derivatives (including mandatory clearing and margin requirements), although the full impact of those provisions will not be
known definitively until they have been fully implemented.
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Additional non-U.S. regulations governing derivative transactions and market participants are also expected, particularly in
Europe. In the U.S., the situation is less certain as the Dodd-Frank Act requires U.S. regulators to finalize certain regulations
that have not yet been adopted; however, the Trump administration and Republicans in Congress have indicated that they intend
to roll back some of the regulations previously adopted. Additional regulations could increase the short- and long-term
operational and transactional cost of derivatives contracts and also affect the number and/or creditworthiness of available hedge
counterparties. Reductions or revisions to regulations previously adopted in the U.S. also may impose short-term adjustment
costs. To the extent that we may enter hedging transactions with European regulated entities (“EU counterparties”), we expect
that the new compliance requirements of such EU counterparties may affect our own operational and compliance costs. From
January 2018, European regulations such as the Second EU Markets in Financial Instruments Directive (Directive 2014/65/EU)
(“MiFID 2”) and the European Markets in Financial Instruments Regulation (Regulation (EU) No 600/2014) (“MiFIR”) will
affect the EU rules on conduct of business, pre- and post-trade transparency, transaction reporting and mandatory trading
(amongst other areas relating to financial services). The EU counterparties’ pricing, costs and charges may change as a result of
MiFID 2 and MiFIR, thus impacting our derivatives positions with EU counterparties.
Risks Related to Our Organization and Structure
Our only material asset is our interest in each Series of LCFH and we are accordingly dependent upon distributions from
such Series of LCFH to pay dividends, taxes and other expenses.
We are a holding company and have no material assets other than our direct and indirect ownership of Series REIT limited
partnership units (“Series REIT LP Units”) and Series TRS limited partnership units (“Series TRS LP Units” and, collectively
with Series REIT LP Units, “Series Units”) of LCFH. Series TRS LP Units are exchangeable for the same number of limited
liability company interests of LC TRS I LLC (“LC TRS I Shares”), which is a limited liability company that is a TRS as well as
the general partner of Series TRS. We have no independent means of generating revenue. We expect each Series of LCFH to
make distributions to its unitholders in an amount sufficient to cover all applicable taxes payable by them determined according
to assumed rates, payments owing under the tax receivable agreement with the Continuing LCFH Limited Partners (the “Tax
Receivable Agreement” or “TRA”), and to cover dividends declared by us. To the extent that we need funds, and LCFH is
restricted from making such distributions under applicable law or regulation, or is otherwise unable to provide such funds, it
could materially adversely affect our liquidity and financial condition. Please see Note 1 to our consolidated financial
statements for the year ended December 31, 2017 included elsewhere in this Annual Report for a description of our capital
structure.
We may be required to pay certain existing unitholders of LCFH Series TRS for certain tax benefits we may claim arising in
connection with future exchanges of Series TRS LP Units under the Third Amended and Restated Limited Liability Limited
Partnership Agreement of LCFH, as amended (the “LLLP Agreement”), which payments could be substantial.
The Continuing LCFH Limited Partners may from time to time exchange an equal number of Series REIT LP Units, LC TRS I
Shares (or Series TRS LP Units in lieu of such LC TRS I Shares) and shares of our Class B common stock for shares of our
Class A common stock on a one-for-one basis (as described in more detail in “Certain Relationships and Related Transactions
and Director Independence—Amended and Restated Limited Liability Limited Partnership Agreement.” As a result of these
additional exchanges we will become entitled to certain tax basis adjustments reflecting the difference between the price we
pay to acquire Series Units and the proportionate share of LCFH Series TRS’s tax basis allocable to such units at the time of the
exchange. As a result, the amount of tax that we would otherwise be required to pay in the future may be reduced by the
increase (for tax purposes) in depreciation and amortization deductions attributable to our interests in LCFH Series TRS,
although the U.S. IRS may challenge all or part of that tax basis adjustment, and a court could sustain such a challenge. The
expected benefits for prior conversions which have not yet been realized have been reduced as a result of the Tax Cuts and Jobs
Act which reduced the corporate federal income tax rate in periods subsequent to 2017. The Company adjusted the expected
deferred tax benefits and related payable in 2017 to reflect the impact of this change.
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The Tax Receivable Agreement provides for the payment by us to certain of the Continuing LCFH Limited Partners of 85% of
the amount of cash savings, if any, in U.S. federal, state and local tax that we realize as a result of: (i) the tax basis adjustments
referred to above; (ii) any incremental tax basis adjustments attributable to payments made pursuant to the Tax Receivable
Agreement; and (iii) any deemed interest deductions arising from payments made by us pursuant to the Tax Receivable
Agreement. While the actual amount of the adjusted tax basis, as well as the amount and timing of any payments under this
agreement will vary depending upon a number of factors, including the basis of our proportionate share of LCFH Series TRS’s
assets on the dates of exchanges, the timing of exchanges, the price of shares of our Class A common stock at the time of each
exchange, the extent to which such exchanges are taxable, the deductions and other adjustments to taxable income to which
LCFH Series TRS is entitled, and the amount and timing of our income, we expect that during the anticipated term of the Tax
Receivable Agreement, the payments that we may make to the Continuing LCFH Limited Partners could be substantial.
Payments under the Tax Receivable Agreement will give rise to additional tax benefits and therefore to additional potential
payments under the Tax Receivable Agreement. In addition, the Tax Receivable Agreement provides for interest accrued from
the due date (without extensions) of the corresponding tax return for the taxable year with respect to which the payment
obligation arises to the date of payment under the agreement. LC TRS I LLC will have the right to terminate the Tax
Receivable Agreement by making payments to the Continuing LCFH Limited Partners calculated by reference to the present
value of all future payments that of the Continuing LCFH Limited Partners would have been entitled to receive under the Tax
Receivable Agreement using certain valuation assumptions, including assumptions that any Series TRS LP Units and shares of
our Class B common stock that have not been exchanged are deemed exchanged for the market value of our Class A common
stock at the time of termination and that LC TRS I LLC will have sufficient taxable income in each future taxable year to fully
realize all potential tax savings.
There may be a negative effect on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the
Tax Receivable Agreement exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable
agreement, and/or (ii) distributions to LC TRS I LLC by LCFH Series TRS are not sufficient to permit us to make payments
under the Tax Receivable Agreement after it has paid its taxes and other obligations. For example, were the IRS to challenge a
tax basis adjustment, or other deductions or adjustments to taxable income of LCFH Series TRS, the existing unitholders of
LCFH Series TRS will not reimburse us for any payments that may previously have been made under the Tax Receivable
Agreement, except that excess payments made to an existing unitholder will be netted against payments otherwise to be made,
if any, after our determination of such excess. As a result, in certain circumstances we could make payments to the existing
unitholders of LCFH Series TRS under the Tax Receivable Agreement in excess of our ultimate cash tax savings. In addition,
the payments under the Tax Receivable Agreement are not conditioned upon any recipient’s continued ownership of interests in
us or LCFH Series TRS. A Continuing LCFH Limited Partner that exchanges its Series REIT LP Units, LC TRS I Shares (or
Series TRS LP Units in lieu of such LC TRS I Shares) and shares of our Class B common stock for our Class A common stock
will receive payments under the Tax Receivable Agreement until such time that it validly assigns or otherwise transfers its right
to receive such payments.
In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual
benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provides that upon certain changes of control, or if, at any time, we elect an early termination
of the Tax Receivable Agreement, the amount of our (or our successor’s) payment obligations with respect to exchanged or
acquired Series TRS LP Units (whether exchanged or acquired before or after such transaction) will be determined based on
certain assumptions. These assumptions include the assumption that we (or our successor) will have sufficient taxable income
to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into
the Tax Receivable Agreement. Moreover, in the event we elect an early termination of the Tax Receivable Agreement, we
would be required to make an immediate payment equal to the present value (at a discount rate equal to LIBOR plus basis
points) of the anticipated future tax benefits (based on the foregoing assumptions). Accordingly, if we so elect, payments under
the Tax Receivable Agreement may be made years in advance of the actual realization, if any, of the anticipated future tax
benefits and may be significantly greater than the actual benefits we realize in respect of the tax attributes subject to the Tax
Receivable Agreement. In these situations, our obligations under the Tax Receivable Agreement could have a substantial
negative impact on our liquidity. We may not be able to finance our obligations under the Tax Receivable Agreement and our
existing indebtedness may limit our subsidiaries’ ability to make distributions to us to pay these obligations.
55
Anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control.
Our amended and restated certificate of incorporation and amended and restated by-laws may delay or prevent a merger or
acquisition that a shareholder may consider favorable by permitting our board of directors to issue one or more series of
preferred stock, requiring advance notice for shareholder proposals and nominations, and placing limitations on convening
shareholder meetings. In addition, we are subject to provisions of the Delaware General Corporate Law (the “DGCL”) that
restrict certain business combinations with interested shareholders. These provisions may also discourage acquisition proposals
or delay or prevent a change in control, which could harm our stock price.
Our charter contains REIT-related restrictions on the ownership of, and ability to transfer our Class A common stock.
Among other things, our charter provides that, subject to the exceptions and the constructive ownership rules described
herein, no person may own, or be deemed to own, in excess of (i) 9.8% in value of the outstanding shares of all classes or
series of Ladder capital stock or (ii) 9.8% in value or number (whichever is more restrictive) of the outstanding shares of any
class of Ladder common stock.
In addition, the charter prohibits (i) any person from transferring shares of Ladder capital stock if such transfer would result in
shares of Ladder capital stock being beneficially owned by fewer than 100 persons, and (ii) any person from beneficially or
constructively owning shares of Ladder capital stock if such ownership would result in Ladder failing to qualify as a REIT.
These ownership limitations and transfer restrictions could have the effect of delaying, deferring or preventing a takeover or
other transaction in which shareholders might receive a premium for their shares of Ladder capital stock over the then
prevailing market price or which shareholders might believe to be otherwise in their best interest.
Certain existing shareholders that currently hold in excess of 9.8% of the value of the outstanding shares of any class or series
of Ladder capital stock are exempt from the ownership limitations in our charter.
The amendment and restatement of our certificate of incorporation effective as of February 27, 2015 (the “Charter
Amendment”), among other things, eliminated the previous transfer restrictions on our Class B common stock, effectively
“decoupling” the voting rights of the Class B common stock from the economic rights of the Series Units.
The Charter Amendment eliminated the transfer restrictions on the shares of Class B common stock that were imposed by our
amended and restated certificate of incorporation in order to facilitate compliance with the REIT requirements. As a result,
holders of Class B common stock are no longer be required to hold their Class B common stock together with their Series
Units. The Charter Amendment effectively “decoupled” the voting rights of the Class B common stock from the economic
rights of the Series Units and as a result, shareholders are able to purchase or retain shares of Class B common stock and the
corresponding voting rights without having any economic stake in the Company or the matters to be voted on. The interests of
any such shareholders may not coincide with our interests or those of our other shareholders. The holders of Series Units may
from time to time cause us to exchange an equal number of Series REIT LP Units, LC TRS I Shares (or Series TRS LP Units
in lieu of such LC TRS I Shares) and shares of our Class B common stock for shares of our Class A common stock on a one-
for-one basis. Holders of Series Units who sell all or any portion of their Class B common stock would no longer be able to
exchange their Series REIT LP Units and LC TRS I Shares (or Series TRS LP Units in lieu of such LC TRS I Shares) for a
corresponding number of shares of our Class A common stock.
56
Risks Related to Our Class A Common Stock
The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and
substantial losses for our shareholders.
The market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. In addition,
the trading volume in our Class A common stock may fluctuate and cause significant price variations to occur. If the market
price of our Class A common stock declines significantly, you may be unable to sell your Class A common stock at or above
your purchase price, if at all. We cannot assure you that the market price of our Class A common stock will not fluctuate or
decline significantly in the future. Some of the factors that could negatively affect the price of our Class A common stock or
result in fluctuations in the price or trading volume of our Class A common stock include: variations in our quarterly operating
results; failure to meet our earnings estimates; publication of research reports about us or the investment management industry
or the failure of securities analysts to cover our Class A common stock after the offering; additions or departures of our
executive officers and other key management personnel; adverse market reaction to any indebtedness we may incur or
securities we may issue in the future; actions by shareholders; changes in market valuations of similar companies; speculation
in the press or investment community; changes or proposed changes in laws or regulations or differing interpretations thereof
affecting our business or enforcement of these laws and regulations, or announcements relating to these matters; adverse
publicity about the financial advisory industry generally or individual scandals, specifically; and general market and economic
conditions. In addition, our Board Authorization Policy, adopted by the board of directors on October 30, 2014, authorizes the
Company to make up to $50.0 million in repurchases of our Class A common stock from time to time without further approval.
The existence of this authorization and any repurchases pursuant thereto could affect our stock price and increase stock price
volatility and could potentially reduce the market liquidity for our Class A common stock. Additionally, we are permitted to and
could discontinue Class A common stock repurchases at any time and any such discontinuation could cause the market price of
our Class A common stock to decline.
Our Class A common stock price may decline due to the large number of shares eligible for future sale and for exchange
into Class A common stock.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A
common stock or an exchange of a large number of Series REIT LP Units, LC TRS I Shares (or Series TRS LP Units in lieu of
such LC TRS I Shares) and shares of our Class B common stock into Class A common stock, or the perception that such sales
or exchanges could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to
sell equity securities in the future at a time and price that we deem appropriate.
Our amended and restated certificate of incorporation authorizes us to issue additional shares of Class A common stock and
options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and
conditions established by our board of directors in its sole discretion. In accordance with the DGCL and the provisions of our
certificate of incorporation, we may also issue preferred stock that has designations, preferences, rights, powers and duties that
are different from, and may be senior to, those applicable to shares of Class A common stock. Similarly, the LLLP Agreement
permits Series REIT and Series TRS to issue an unlimited number of additional Series Units with designations, preferences,
rights, powers and duties that are different from, and may be senior to, those applicable to the Series Units, and which may be
exchangeable for shares of our Class A common stock.
Holders of Class A common stock may be diluted by the future issuance of additional Class A common stock in connection
with our incentive plans, acquisitions or otherwise.
Our amended and restated certificate of incorporation authorizes us to issue shares of Class A common stock and options,
rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions
established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Any Class A
common stock that we issue, including under our 2014 Omnibus Incentive Plan or other equity incentive plans that we may
adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in the
offering.
57
Risks Related to Our Taxation as a REIT
We have limited experience operating a REIT and we cannot assure you that our past experience will be sufficient to
successfully manage our business as a REIT.
We have limited experience operating a REIT. The REIT provisions of the Code are complex, and any failure to comply with
those provisions in a timely manner could prevent us or certain of our subsidiaries from qualifying as REITs or could force us
to pay unexpected taxes and penalties. As a result, we cannot assure you that we will be able to successfully manage our
business as a REIT, which would substantially reduce our earnings. In the event of a failure to qualify as a REIT, our net
income could be reduced.
If we fail to qualify as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability,
which would reduce the amount of cash available for distribution to our shareholders.
We operate and intend to continue operating in a manner that will allow us to qualify as a REIT for U.S. federal income tax
purposes commencing with our taxable year ending December 31, 2015. Although we have not requested and we do not intend
to request a ruling from the IRS as to our REIT qualification, in connection with various corporate initiatives we have received
opinions from Skadden, Arps, Slate, Meagher & Flom LLP and Kirkland & Ellis LLP with respect to our qualification as a
REIT. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinions of
Skadden, Arps, Slate, Meagher & Flom LLP and Kirkland & Ellis LLP represent only the view of our counsel based on our
counsel’s review and analysis of existing law and on certain representations as to factual matters and covenants made by us,
including representations relating to the values of our assets and the sources of our income. The opinions were expressed as of
the date issued and does not cover subsequent periods. Skadden, Arps, Slate, Meagher & Flom LLP and Kirkland & Ellis LLP
have no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated,
represented or assumed, or of any subsequent change in applicable law. Furthermore, both the validity of the opinions of
Skadden, Arps, Slate, Meagher & Flom LLP and Kirkland & Ellis LLP, and our qualification as a REIT depend on our
satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a
continuing basis, the results of which are not monitored by Skadden, Arps, Slate, Meagher & Flom LLP and Kirkland & Ellis
LLP. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets,
some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our
compliance with the annual REIT income and quarterly asset requirements also depends upon our ability to successfully
manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as
debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the
application of the REIT qualification requirements as described below. Accordingly, there can be no assurance that the IRS
will not contend that our interests in subsidiaries or in securities of other issuers will not cause a violation of the REIT
requirements.
If we were to fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we
would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at
regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable
income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for
distribution to our shareholders, which in turn could have an adverse impact on the value of our common stock. Unless we
were entitled to relief under certain provisions of the Code, we also would be disqualified from taxation as a REIT for the four
taxable years following the year in which we failed to qualify as a REIT.
Certain of our subsidiaries have also elected to be taxed as a REIT under the Code and are, therefore, subject to the same risks
in the event that they fail to qualify as a REIT in any taxable year. If any of these subsidiaries were to fail to qualify as a REIT,
then we might also fail to qualify as a REIT.
58
Our ownership of and relationship with TRSs is limited, and a failure to comply with the limits would jeopardize our REIT
qualification, and our transactions with our TRSs may result in the application of a 100% excise tax if such transactions
are not conducted on arm’s-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be REIT-qualifying
income if earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock and securities of one or more TRSs. A
domestic TRS will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In
addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not
conducted on an arm’s-length basis.
We elected for certain of our subsidiaries to be treated as TRSs. Our TRSs will pay U.S. federal, state and local income tax on
their consolidated taxable income, and their after-tax income will be available for distribution to us but will not be required to
be distributed to us. We have structured the formation transactions such that the aggregate value of the TRS stock and
securities owned by us will be less than 20% of the value of our total assets (including the TRS stock and securities).
Furthermore, we will monitor the value of our investments in our TRSs to ensure compliance with the rule that no more than
20% of the value of our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter).
In addition, we will scrutinize all of our transactions with TRSs to ensure that they are entered into on arm’s-length terms to
avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply
with the TRS limitations or to avoid application of the 100% excise tax discussed above.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any
net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that
we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S.
federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a non-deductible 4%
excise tax if the actual amount distributed to our shareholders in a calendar year is less than a minimum amount specified
under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with the REIT qualification
requirements of the Code.
From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in
accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash
may occur. For example, if we purchase agency securities at a discount, we are generally required to include the discount
in taxable income prior to receiving the cash proceeds of the accrued discount at maturity. Additionally, if we incur capital
losses in excess of capital gains, such net capital losses are not allowed to reduce our taxable income for purposes of
determining our distribution requirement. Such net capital losses may be carried forward for a period of up to five years
and applied against future capital gains subject to the limitation of our ability to generate sufficient capital gains, which
cannot be assured. If we do not have other funds available in these situations we could be required to borrow funds on
unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in
future acquisitions to make distributions sufficient to maintain our qualification as a REIT, or avoid corporate income tax
and the non-deductible 4% excise tax in a particular year. These alternatives could increase our costs or reduce our
shareholders’ equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely
affect the value of our common stock.
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We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions
in the future.
To maintain our qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make
regular quarterly cash distributions to our shareholders out of legally available funds therefor. Our intended dividend policy as
a REIT will be to pay quarterly distributions either in cash or stock which, on an annual basis, will equal all or substantially
all of our net taxable income. We have not, however, established a minimum distribution payment level and our ability to pay
distributions may be adversely affected by a number of factors, including the risk factors described in this Annual Report. All
distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition,
any debt covenants, maintenance of our REIT qualification, restrictions on making distributions under Delaware law and
other factors as our board of directors may deem relevant from time to time. We may not be able to make distributions in the
future and our board of directors may change our distribution policy in the future. We believe that a change in any one of the
following factors, among others, could adversely affect our results of operations and impair our ability to pay distributions to
our shareholders:
•
•
•
•
•
the profitability of the assets we hold or acquire;
the allocation of assets between our REIT-qualified and non-REIT-qualified subsidiaries.
our ability to make profitable investments and to realize profit therefrom;
margin calls or other expenses that may reduce our cash flow; and
defaults in our asset portfolio or decreases in the value of our portfolio.
We cannot assure you that we will achieve results that will allow us to make a specified level of cash distributions or any
increase in the level of such distributions in the future.
If we were to make a taxable distribution of shares of our stock, shareholders may be required to sell such shares or
sell other assets owned by them in order to pay any tax imposed on such distribution.
We may distribute taxable dividends that are payable in shares of our common stock. If we were to make such a taxable
distribution of shares of our stock, shareholders would be required to include the full amount of such distribution as income.
As a result, a shareholder may be required to pay tax with respect to such dividends in excess of cash received. Accordingly,
shareholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be
required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax
imposed on such distribution. If a shareholder sells the shares it receives as a dividend in order to pay such tax, the sale
proceeds may be less than the amount included in income with respect to the dividend. Moreover, in the case of a taxable
distribution of shares of our stock with respect to which any withholding tax is imposed on a non-U.S. shareholder, we may
have to withhold or dispose of part of the shares in such distribution and use such withheld shares or the proceeds of such
disposition to satisfy the withholding tax imposed. In addition, if a significant number of our shareholders determine to sell
shares of our Class A common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading
price of our Class A common stock.
There are uncertainties relating to the estimate of our E&P Distribution paid on January 21, 2016.
To qualify for taxation as a REIT effective for the year ended December 31, 2015, we were required to distribute to our
shareholders our undistributed accumulated earnings and profits attributable to taxable periods ending prior to January 1, 2015
(the “E&P Distribution”). To satisfy this requirement, on November 30, 2015, our board of directors approved the fourth
quarter 2015 dividend of $1.45 per share of our Class A common stock.
We believe that the total value of the E&P Distribution was sufficient to fully distribute our accumulated earnings and profits.
However, the amount of our undistributed accumulated earnings and profits is a complex factual and legal determination. We
may have had less than complete information at the time we estimated our earnings and profits or may have interpreted the
applicable law differently from the IRS. Substantial uncertainties exist relating to the computation of our undistributed
accumulated earnings and profits, including the possibility that the IRS could, in auditing tax years through 2015, successfully
assert that our taxable income should be increased, which could increase our pre-REIT accumulated earnings and profits. Thus,
we may fail to satisfy the requirement that we distribute all of our pre-REIT accumulated earnings and profits by the close of
our first taxable year as a REIT. Moreover, although there are procedures available to cure a failure to distribute all of our pre-
REIT accumulated earnings and profits, we cannot now determine whether we will be able to take advantage of them or the
economic impact to us of doing so.
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Distributions payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from “qualified dividends” payable to domestic shareholders that are individuals,
trusts and estates is currently 20%. Distributions of ordinary income payable by REITs, however, generally are not eligible for
these reduced rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of
non-REIT corporations that pay qualified dividends, which could adversely affect the value of the stock of REITs, including
our common stock.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and
assets, including taxes on any undistributed income, taxes on income from some activities conducted as a result of a
foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes.
In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income,
or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we
intend to hold some of our assets through our TRSs or other subsidiary corporations that will be subject to corporate level
income tax at regular corporate rates. In addition, if we lend money to a TRS, the TRS may be unable to deduct all or a
portion of the interest paid to us, which could result in an even higher corporate level tax liability. Furthermore, the Code
imposes a 100% excise tax on certain transactions between a TRS and a REIT that are not conducted on an arm’s length basis.
We intend to structure any transaction with a TRS on terms that we believe are arm’s length to avoid incurring this 100%
excise tax. There can be no assurances, however, that we will be able to avoid application of the 100% excise tax. The
payment of any of these taxes would decrease cash available for distribution to our shareholders.
Moreover, the Company owns appreciated assets at the REIT level that it held before the effective date of its REIT election,
January 1, 2015. If the Company disposes of any such appreciated assets during the five-year period following the Company’s
qualification as a REIT, the Company will be subject to tax at the highest corporate tax rates on any gain from such assets to
the extent of the excess of the fair market value of the assets at the time that the Company became a REIT over the adjusted
tax basis of such assets on such date, which are referred to as built-in gains. The Company would be subject to this tax
liability even if it qualifies and maintains its status as a REIT. Any recognized built-in gain will retain its character as ordinary
income or capital gain and will be taken into account in determining REIT taxable income and the Company’s distribution
requirement. Any tax on the recognized built-in gain will reduce REIT taxable income. The Company may choose not to sell
in a taxable transaction appreciated assets it might otherwise sell during the five-year period in which the built-in gain tax
applies in order to avoid the built-in gain tax. However, if the Company sells such assets in a taxable transaction, the amount
of corporate tax that the Company will pay will vary depending on the actual amount of net built-in gain or loss present in
those assets as of the time the Company became a REIT. The amount of tax could be significant.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or liquidate otherwise
attractive investments.
To qualify as REITs for U.S. federal income tax purposes, we and certain of our subsidiaries must continually satisfy tests
concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we
distribute to our shareholders and the ownership of our stock. We may be required to make distributions to shareholders at
disadvantageous times or when we do not have funds readily available for distribution and may be unable to pursue
investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification
requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in
certain cases, to maintain ownership of, certain attractive investments.
Further, to qualify as REITs, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets
consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in
securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one
issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real
estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be
represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter,
we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions
to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate
otherwise attractive investments from our investment portfolio. These actions could have the effect of reducing our income
and amounts available for distribution to our shareholders.
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The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to continue to qualify as a
REIT.
We invest in mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the
safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of
the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes
of the REIT 75% income test. We or certain of our REIT subsidiaries may acquire mezzanine loans that do not meet all of the
requirements of this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor, the IRS could
challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge
were sustained, it could impact our ability to qualify as a REIT.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to
qualify as a REIT.
We enter into certain financing arrangements that are structured as sale and repurchase agreements pursuant to which we
nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets
at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the
assets sold pursuant thereto. We believe that we will be treated for REIT asset and income test purposes as the owner of the
assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer
record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS
could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could
fail to qualify as a REIT.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our Class A common stock nor gain from the sale of Class A
common stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are
certain exceptions to this rule. In particular:
•
•
•
•
part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock
may be treated as unrelated business taxable income if shares of our Class A common stock are predominantly held by
qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting
one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as
unrelated business taxable income;
part of the income and gain recognized by a tax-exempt investor with respect to our Class A common stock would
constitute unrelated business taxable income if the investor incurs debt in order to acquire the common stock;
part or all of the income or gain recognized with respect to our Class A common stock by social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans
which are exempt from U.S. federal income taxation under the Code may be treated as unrelated business taxable
income; and
to the extent that we have "excess inclusion income," e.g., from: (i) us (or a part of us, or a disregarded subsidiary of
ours) being treated as a “taxable mortgage pool"; (ii) us holding residual interests in a REMIC securitization; or (iii) us
receiving income from another REIT that is treated as excess inclusion income, a portion of the distributions paid to a
tax-exempt shareholder that is allocable to such excess inclusion income may be treated as unrelated business taxable
income.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.
To qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If
we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if
we sell assets that are treated as dealer property or inventory.
62
We may be required to report taxable income for certain investments in excess of the economic income we ultimately
realize from them.
We may acquire mortgage-backed securities in the secondary market for less than their face amount. In addition, pursuant to
our ownership of certain mortgage-backed securities, we may be treated as holding certain debt instruments acquired in the
secondary market for less than their face amount. The discount at which such securities or debt instruments are acquired may
reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will
nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is
reported as income when, and to the extent that, any payment of principal of the mortgage-backed security or debt instrument
is made. If we collect less on the mortgage-backed security or debt instrument than our purchase price plus the market
discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions. In addition,
pursuant to our ownership of certain mortgage-backed securities, we may be treated as holding distressed debt investments
that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant
modifications” under applicable Treasury regulations, the modified debt may be considered to have been reissued to us at a
gain in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent
the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt
or the payment expectations have not changed.
Moreover, some of the mortgage-backed securities that we acquire may have been issued with original issue discount. We are
required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that
all future projected payments due on such mortgage-backed securities will be made. If such mortgage-backed securities turn
out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectibility is
provable.
Under the recently enacted Tax Cuts and Jobs Act, we generally will be required to take certain amounts into income not later
than the time such amounts are reflected on certain financial statements. The application of this rule may require the accrual of
income with respect to certain debt instruments or mortgage-backed securities, such as original issue discount or market
discount, earlier than would be the case under the previous tax rules, although the precise application of this rule is unclear at
this time. This rule generally will be effective for tax years beginning after December 31, 2017 or, for debt instruments or
mortgage-backed securities issued with original issue discount, for tax years beginning after December 31, 2018.
Finally, in the event that mortgage-backed securities or any debt instruments we are treated as holding pursuant to our
investments in mortgage-backed securities are delinquent as to mandatory principal and interest payments, we may
nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its
ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate mortgage-backed
securities at the stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In
each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was
determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or
thereafter.
Certain apportionment rules may affect our ability to comply with the REIT asset and gross income tests.
The Code provides that a regular or a residual interest in a REMIC is generally treated as a real estate asset for the purpose of
the REIT asset tests, and any amount includible in our gross income with respect to such an interest is generally treated as
interest on an obligation secured by a mortgage on real property for the purpose of the REIT gross income tests. If, however,
less than 95% of the assets of a REMIC in which we hold an interest consist of real estate assets (determined as if we held
such assets), we will be treated as holding our proportionate share of the assets of the REMIC for the purpose of the REIT
asset tests and receiving directly our proportionate share of the income of the REMIC for the purpose of determining the
amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property. In
connection with the expanded FHFA RMBS-backed Home Affordable Refinance Program loan program in which we may
invest, the IRS issued guidance providing that, among other things, if a REIT holds a regular interest in an “eligible REMIC,”
or a residual interest in an “eligible REMIC” that informs the REIT that at least 80% of the REMIC’s assets constitute real
estate assets, then the REIT may treat 80% of the interest in the REMIC as a real estate asset for the purpose of the REIT
income and asset tests. Although the portion of the income from such a REMIC interest that does not qualify for purposes of
the REIT 75% gross income test would likely be qualifying income for the purpose of the 95% REIT gross income test, the
remaining 20% of the REMIC interest generally would not qualify as a real estate asset, which could adversely affect our
ability to satisfy the REIT asset tests. Accordingly, owning such a REMIC interest could adversely affect our ability to qualify
as a REIT.
63
Qualifying as a REIT involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited
judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT
qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution,
shareholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to
qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence,
including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax
purposes.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of
structuring mortgage-backed securities transactions (“MBS Transactions”), which would be treated as prohibited
transactions for U.S. federal income tax purposes.
Net income that we derive from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction”
generally includes a sale or other disposition of property (including agency securities, but other than foreclosure
property) that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a
borrower that has issued a shared appreciation mortgage or similar debt instrument to us. We could be subject to this
tax if we were to dispose of or structure MBS Transactions in a manner that was treated as a prohibited transaction for
U.S. federal income tax purposes. The 100% tax does not apply to gains from the sale of foreclosure property or
property that is held through a TRS or other taxable corporation, as is the case with our securitization business,
although such income will be subject to tax in the hands of the corporation at regular corporate rates.
We intend to conduct our operations at the REIT level so that no asset that we own (or are treated as owning) will be treated as,
or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary
course of our business. As a result, we may choose not to engage in certain transactions at the REIT level, and may limit the
structures we utilize for our MBS Transactions, even though the sales or structures might otherwise be beneficial to us. In
addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the
particular facts and circumstances. We intend to structure our activities to avoid prohibited transaction characterization but no
assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can
comply with certain safe-harbor provisions of the Code that would prevent such treatment.
Our taxable income is calculated differently than net income based on U.S. GAAP.
Our taxable income may substantially differ from our net income based on U.S. GAAP. For example, interest income on our
mortgage related securities does not necessarily accrue under an identical schedule for U.S. federal income tax purposes as
for accounting purposes. Please see Note 16 to our consolidated financial statements for the year ended December 31, 2017
included elsewhere in this Annual Report.
Rapid changes in the values of our target assets may make it more difficult for us to maintain our qualification
as a REIT.
If the fair market value or income potential of our assets declines as a result of increased interest rates, prepayment rates,
general market conditions, government actions or other factors, we may need to increase our real estate assets and income or
liquidate our non-REIT-qualifying assets to maintain our REIT qualification. If the decline in real estate asset values or
income occurs quickly, this may be especially difficult to accomplish. We may have to make decisions that we otherwise
would not make absent the REIT election.
64
The Company’s qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may
be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that the
Company acquires, and the inaccuracy of any such opinions, advice or statements may adversely affect the Company’s
REIT qualification and result in significant corporate-level tax.
When purchasing securities, the Company may rely on opinions or advice of counsel for the issuer of such securities, or
statements made in related offering documents, for purposes of determining whether such securities represent debt or equity
securities for U.S. federal income tax purposes, and also to what extent those securities constitute real estate assets for
purposes of the REIT asset tests and produce income which qualifies for purposes of the REIT income tests. In addition,
when purchasing the equity tranche of a securitization, the Company may rely on opinions or advice of counsel regarding the
qualification of the securitization for exemption from U.S. corporate income tax and the qualification of interests in such
securitization as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may
adversely affect the Company’s REIT qualification and result in significant corporate-level tax.
Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative,
judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in our
common equity. The U.S. federal income tax rules dealing with REITs constantly are under review by persons involved in the
legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions
to regulations and interpretations. The recently enacted Tax Cuts and Jobs Act made substantial changes to the Code. Among
those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of
individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject
to “sunset” provisions, the elimination or modification of various currently allowed deductions (including substantial
limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes),
certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT
dividends in comparison to other income recognized by such taxpayers. The effect of these, and the many other, changes made
in the Tax Cuts and Jobs Act is highly uncertain, both in terms of their direct effect on the taxation of an investment in our
common equity and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the
provisions of the Tax Cuts and Jobs Act will require guidance through the issuance of Treasury regulations in order to assess
their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the
ultimate effect of the statutory amendments on us. There may also be technical corrections legislation proposed with respect to
the Tax Cuts and Jobs Act, the effect and timing of which cannot be predicted and may be adverse to us or our stockholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters office at 345 Park Avenue, 8th Floor, New York, New York, 10154. We also rent regional
offices at 10250 Constellation Boulevard, Suite 260, Los Angeles, California, 90067 and 433 Plaza Real, Suite 275, Boca
Raton, Florida, 33432.
We own a portfolio of commercial real estate properties which are included in our real estate business segment. As of
December 31, 2017, we owned 132 single tenant net leased properties with an aggregate book value of $683.3 million. These
properties are fully leased on a net basis where the tenant is generally responsible for payment of real estate taxes, property,
building and general liability insurance and property and building maintenance expenses. As of December 31, 2017, our net
leased properties comprised a total of 5.1 million square feet, 100% leased with an average age since construction of 13.5 years
and a weighted average remaining lease term of 14.3 years. Given the long term nature and single tenant occupancy of the net
leased properties, there are no rent concessions or abatements on these properties. We generally originate senior secured
mortgage loans on our net leased properties, and many of these mortgage loans have subsequently been securitized and are
included as non-recourse mortgage loan financing in debt obligations on our consolidated balance sheets at December 31, 2017.
65
In addition, as of December 31, 2017, we owned 34 other properties with an aggregate book value of $331.1 million. Through
separate joint ventures, we owned a portfolio of 13 office buildings in Richmond, VA with a book value of $90.6 million with
an 88.1% occupancy rate, a mobile home community in El Monte, CA with a book value of $52.9 million with a 66.5%
occupancy rate, a portfolio of four single-tenant office buildings in St. Paul, MN with a book value of $50.6 million, an
apartment complex in Miami, FL with a book value of $37.0 million and an occupancy rate of 94.1%, a portfolio of seven
office buildings in Richmond, VA with a book value of $16.1 million and an 87.1% occupancy rate, a 13-story office building in
Oakland County, MI with a book value of $11.5 million and a 86.9% occupancy rate, a two-story office building in Grand
Rapids, MI with a book value of $8.8 million and a 100.0% occupancy rate, and a single-tenant warehouse in Grand Rapids, MI
with a book value of $5.5 million. We also own a single-tenant office building in Ewing, NJ with a book value of $29.5 million,
a single-tenant office building in Crum Lynne, PA with a book value of $10.5 million, a single-tenant two-story office building
in Wayne, NJ with a book value of $8.6 million, a shopping center in Carmel, NY with a book value of $6.6 million and a
42.5% occupancy rate, and an office building in Peoria, IL with a book value of $3.0 million and a 48.9% occupancy rate.
In addition, as of December 31, 2017, we owned 13 residential condominium units at Veer Towers in Las Vegas, NV with a
book value of $4.9 million through a consolidated joint venture with an operating partner and 48 residential condominium units
at Terrazas River Park Village in Miami, FL with a book value of $12.8 million. None of the remaining Veer units we hold were
leased and occupied as of December 31, 2017 and the remaining Terrazas units we hold were 81.3% leased and occupied as of
December 31, 2017. As of December 31, 2017, three condominium units were under contract for sale at Veer Towers with a
book value of $0.8 million and seven condominium units were under contract for sale at Terrazas with a book value of $1.6
million. We expect to substantially complete the sale of the remaining Veer units in 2018 and the remaining Terrazas units in
less than 18 months. The condominium units are included in our real estate business segment. Depending on market conditions
for new leases and renewals in this residential inventory, we may provide tenants rent concessions or abatements. We intend to
sell the entire inventory of units over time. We are leasing the units currently under short-term leases (less than two-year terms)
to offset operating expenses during our sales process, and therefore, any rent concessions or abatements would have no material
impact on our operations.
The following table, organized by tenant type and acquisition date, summarizes our owned properties as of December 31, 2017
($ amounts in thousands):
Location
Acquisition
date
Acquisition
price/basis
Year
built/
reno.
Lease
expiration
(1)
Approx.
square
footage
Carrying
value of
asset
Mortgage
loan
outstanding
(2)
Asset net of
mortgage
loan
outstanding
Annual
rental
income
(3)
Ownership
Percentage
(4)
Net Lease
Rockford, MN
Winterset, IA
Kawkawlin, MI
Aroma Park, IL
East Peoria, IL
Milford, IA
Jefferson City, MO
Denver, IA
Port O'Connor, TX
Wabasha, MN
Jacksonville, FL
Shelbyville, IL
Jesup, IA
Hanna City, IL
Ridgedale, MO
Peoria, IL
Carmi, IL
Springfield, IL
Fayetteville, NC
Dryden Township, MI
Lamar, MO
Union, MO
Pawnee, IL
Decatur, IL
12/08/17
$
12/08/17
10/05/17
10/05/17
10/05/17
09/08/17
06/02/17
05/31/17
05/25/17
05/25/17
05/23/17
05/23/17
05/05/17
04/11/17
03/09/17
02/06/17
02/03/17
11/16/16
11/15/16
10/26/16
07/22/16
07/01/16
07/01/16
06/30/16
1,195
1,258
1,234
1,218
1,350
1,298
1,241
1,183
1,255
1,280
115,641
1,132
1,163
1,141
1,298
1,183
1,411
1,322
6,971
1,190
1,176
1,227
1,201
1,365
2017
2017
2017
2017
2017
2017
2016
2017
2017
2016
1989
2016
2017
2016
2016
2016
2016
2016
2008
2016
2016
2016
2016
2016
8/31/32
7/31/32
7/31/32
7/31/32
6/1/32
2/28/32
3/31/31
3/31/30
3/31/31
9/30/31
1/31/31
3/31/30
6/30/31
6/30/31
8/31/31
10/31/31
6/30/31
10/31/34
8/31/31
5/31/31
5/31/31
5/31/31
5/31/31
10/31/32
9,002
$
1,241
$
— $
1,241
$
9,026
9,100
9,002
9,100
9,100
9,002
9,026
9,100
9,026
1,300
1,283
1,249
1,383
1,343
1,315
1,209
1,282
1,339
—
—
950
1,020
989
954
908
959
974
1,300
1,283
299
363
354
361
301
323
365
87
91
89
88
98
94
90
86
91
92
822,540
138,563
83,516
55,047
7,296
1,217
1,177
1,206
1,337
1,242
1,410
1,373
6,703
1,242
1,192
1,291
1,184
1,425
872
893
874
1,002
913
1,111
1,011
4,933
920
910
954
954
1,061
345
284
332
335
329
299
362
1,770
322
282
337
230
364
82
84
83
94
86
102
96
450
87
86
90
88
100
9,026
9,026
9,100
9,002
7,489
9,100
9,026
14,820
9,100
9,100
9,100
9,002
9,002
66
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Cape Girardeau, MO
Linn, MO
Rantoul, IL
Flora Vista, NM
Champaign, IL
Mountain Grove, MO
Decatur, IL
San Antonio, TX
Borger, TX
St.Charles, MN
Philo, IL
Dimmitt, TX
Radford, VA
Albion, PA
Rural Retreat, VA
Mount Vernon, AL
Malone, NY
Mercedes, TX
Gordonville, MO
Rice, MN
Bixby, OK
Farmington, IL
Grove, OK
Jenks, OK
Bloomington, IL
Montrose, MN
Lincoln County , MO
Wilmington, IL
Danville, IL
Moultrie, GA
Rose Hill, NC
Rockingham, NC
Biscoe, NC
De Soto, IL
Kerrville, TX
Floresville, TX
Minot, ND
Lebanon, MI
Effingham County, IL
Ponce, PR
Tremont, IL
Pleasanton, TX
Peoria, IL
Bridgeport, IL
Warren, MN
Canyon Lake, TX
Wheeler, TX
Aurora, MN
Red Oak, IA
Zapata, TX
St. Francis, MN
Yorktown, TX
Battle Lake, MN
Paynesville, MN
Wheaton, MO
Rotterdam, NY
Hilliard, OH
Niles, OH
06/30/16
06/30/16
06/21/16
06/06/16
06/03/16
06/03/16
06/03/16
05/06/16
05/06/16
04/26/16
04/26/16
04/26/16
12/23/15
12/23/15
12/23/15
12/23/15
12/16/15
12/16/15
11/10/15
10/28/15
10/27/15
10/23/15
10/20/15
10/19/15
10/14/15
10/14/15
10/14/15
10/07/15
10/07/15
09/22/15
09/22/15
09/22/15
09/22/15
09/08/15
08/28/15
08/28/15
08/19/15
08/14/15
08/10/15
08/03/15
06/25/15
06/24/15
06/24/15
06/24/15
06/24/15
06/18/15
06/18/15
06/18/15
05/07/15
05/07/15
03/26/15
03/25/15
03/25/15
03/05/15
03/05/15
03/03/15
03/02/15
03/02/15
1,281
1,122
1,204
1,305
1,324
1,279
1,181
1,096
978
1,198
1,156
1,319
1,564
1,525
1,399
1,224
1,474
1,263
1,207
1,242
12,151
1,408
5,583
13,418
1,294
1,193
1,137
1,399
1,160
1,305
1,420
1,158
1,216
1,111
1,236
1,312
6,946
1,261
1,252
9,345
1,192
1,377
1,293
1,241
1,090
1,443
1,127
993
1,208
1,204
1,180
1,301
1,168
1,254
970
12,619
6,384
5,200
2016
2016
2016
2016
2016
2016
2016
2015
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2012
2015
2012
2009
2015
2015
2015
2015
2015
2014
2014
2014
2014
2015
2015
2015
2012
2015
2015
2012
2015
2015
2015
2015
2015
2015
2015
2015
2014
2015
2014
2015
2014
2015
2015
1996
2007
2007
5/31/31
5/31/31
4/30/31
4/30/31
4/30/31
4/30/31
4/30/31
3/31/31
3/31/31
3/31/31
3/31/31
3/31/31
9/30/30
9/30/30
9/30/30
6/30/30
6/30/30
11/30/30
9/30/30
9/30/30
12/31/32
8/31/30
8/31/32
9/24/33
8/31/30
8/31/30
8/31/30
8/31/30
8/31/30
6/30/29
6/30/29
6/30/29
6/30/29
7/31/30
7/31/30
7/31/30
1/31/34
7/31/30
6/30/30
8/31/37
5/31/30
5/31/30
5/31/30
5/31/30
4/30/30
3/31/30
3/31/30
3/31/30
10/31/29
3/31/30
1/31/30
2/28/30
2/28/30
11/30/26
11/30/29
8/31/32
8/31/32
11/30/32
9,100
9,002
9,100
9,002
9,002
10,566
9,002
9,100
9,100
9,026
9,026
10,566
8,360
8,184
8,305
8,323
8,320
9,100
9,026
9,002
75,996
9,100
31,500
80,932
9,026
9,100
9,002
9,002
9,100
8,225
8,320
8,320
8,320
9,100
9,100
9,100
55,440
9,050
9,002
15,660
9,026
9,026
9,002
9,100
9,100
9,100
9,002
9,100
9,026
9,100
9,002
10,566
9,100
9,100
9,100
1,329
1,143
1,250
1,272
1,381
1,343
1,223
1,098
998
1,203
1,187
1,329
1,479
1,401
1,326
1,166
1,392
1,204
1,145
1,152
11,518
1,326
5,208
12,664
1,221
1,101
1,072
1,319
1,099
1,204
1,323
1,071
1,127
1,040
1,146
1,221
6,588
1,197
1,177
8,795
1,110
1,282
1,203
1,158
994
1,343
1,033
924
1,107
1,078
1,053
1,164
1,036
1,143
876
1,018
868
932
1,010
1,026
990
946
887
784
961
924
1,048
1,137
1,132
1,044
949
1,087
838
774
820
7,984
899
3,639
8,834
820
787
741
906
742
933
1,004
824
863
706
769
815
4,701
821
821
6,526
791
867
857
824
697
910
718
630
778
746
732
784
719
804
651
311
275
318
262
355
353
277
211
214
242
263
281
342
269
282
217
305
366
371
332
3,534
427
1,569
3,830
401
314
331
413
357
271
319
247
264
334
377
406
1,887
376
356
2,269
319
415
346
334
297
433
315
294
329
332
321
380
317
339
225
115,660
10,824
5,871
4,773
14,820
14,820
67
8,905
4,579
3,721
1,919
1,292
1,052
94
82
88
95
97
93
86
80
71
87
84
96
104
101
93
84
99
86
80
85
769
93
364
912
85
83
76
93
76
85
93
76
80
76
84
89
419
85
85
560
82
93
87
84
75
98
76
68
84
82
79
86
78
89
69
940
399
325
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Youngstown, OH
Kings Mountain, NC
Iberia, MO
Pine Island, MN
Isle, MN
Jacksonville, NC
Evansville, IN
Woodland Park, CO
Bellport, NY
Ankeny, IA
Springfield, MO
Cedar Rapids, IA
Fairfield, IA
Owatonna, MN
Muscatine, IA
Sheldon, IA
Memphis, TN
Bennett, CO
Conyers, GA
O'Fallon, IL
El Centro, CA
Durant, OK
Gallatin, TN
Mt. Airy, NC
Aiken, SC
Johnson City, TN
Palmview, TX
Ooltewah, TN
Abingdon, VA
Wichita, KS
North Dartmouth, MA
Vineland, NJ
Saratoga Springs, NY
Waldorf, MD
Mooresville, NC
Sennett, NY
DeLeon Springs, FL
Orange City, FL
Satsuma, FL
Greenwood, AR
Snellville, GA
Columbia, SC
Millbrook, AL
Pittsfield, MA
Spartanburg, SC
Tupelo, MS
Lilburn, GA
Douglasville, GA
Elkton, MD
Lexington, SC
Total Net Lease
Other
Crum Lynne, PA
Miami, Fl
El Monte, CA
Peoria, IL
Ewing, NJ
02/20/15
01/29/15
01/23/15
01/23/15
01/23/15
01/22/15
11/26/14
11/14/14
11/13/14
11/04/14
11/04/14
11/04/14
11/04/14
11/04/14
11/04/14
11/04/14
10/24/14
10/02/14
08/28/14
08/08/14
08/08/14
01/28/13
12/28/12
12/27/12
12/21/12
12/21/12
12/19/12
12/18/12
12/18/12
12/14/12
09/21/12
09/21/12
09/21/12
09/21/12
09/21/12
09/21/12
08/13/12
05/23/12
04/19/12
04/12/12
04/04/12
04/04/12
03/28/12
02/17/12
01/14/11
08/13/10
08/12/10
08/12/10
07/27/10
06/28/10
09/29/17
08/31/17
04/12/17
10/21/16
08/04/16
2005
1995
2015
2014
2014
2014
2014
2014
2014
2013
2011
2012
2011
2010
2013
2011
1962
2014
2014
1984
2014
2007
2007
2007
2008
2007
2012
2008
2006
2012
1989
2003
1994
1999
2000
1996
2011
2011
2011
2009
2011
2001
2008
2011
2007
2007
2007
2008
2008
2009
5,400
24,167
1,328
1,142
1,077
8,632
9,000
3,969
18,100
16,510
11,675
11,000
10,695
9,970
7,150
4,300
5,310
3,522
32,530
8,000
4,277
4,991
5,062
4,492
5,926
5,262
6,820
5,703
4,688
7,200
29,965
22,507
20,222
18,803
17,644
7,476
1,242
1,317
1,092
5,147
8,000
7,800
6,941
14,700
3,870
5,128
5,791
5,409
4,872
4,732
724,379
9/30/30
9/30/30
12/31/29
4/30/27
1/31/30
12/31/29
12/31/35
8/31/29
8/16/34
10/30/34
10/30/34
10/30/34
10/30/34
10/30/34
10/30/34
10/30/34
12/31/29
8/31/29
4/30/29
1/31/28
6/30/29
2/28/33
6/30/82
6/30/82
2/28/83
9/30/82
8/31/87
1/31/83
6/30/81
10/15/62
7/31/57
7/31/57
7/31/57
7/31/57
7/31/57
7/31/57
1/31/27
3/31/27
11/30/26
7/31/84
4/30/32
4/30/32
1/31/83
10/31/61
8/31/82
11/30/92
4/30/82
10/31/83
9/30/82
9/30/83
14,820
467,781
10,542
9,100
9,100
55,000
71,680
22,141
87,788
94,872
88,793
79,389
69,280
70,825
78,218
35,385
68,761
21,930
499,668
141,436
19,168
14,550
14,820
14,820
14,550
14,550
14,820
14,550
15,371
73,322
103,680
115,368
116,620
115,660
108,528
68,160
9,100
9,026
9,026
13,650
67,375
71,744
14,820
85,188
14,820
14,691
14,752
13,434
13,706
14,820
4,931
25,880
1,201
1,020
960
7,962
8,193
3,536
16,408
15,039
10,846
9,738
9,620
9,042
7,966
3,948
4,691
3,112
3,838
18,674
896
771
725
5,688
6,436
2,804
12,848
11,719
8,366
7,808
7,595
7,129
5,113
3,075
3,922
2,490
29,184
22,837
7,213
3,860
4,347
4,482
4,040
5,218
4,550
6,002
4,939
4,353
5,969
23,517
17,997
16,013
15,889
13,841
5,798
977
1,037
820
4,407
6,504
6,536
5,858
5,686
2,984
3,233
3,304
2,934
3,865
3,435
4,562
3,821
3,068
4,781
18,948
13,909
12,497
11,620
10,904
4,727
818
797
718
3,409
5,314
5,169
4,596
12,132
11,109
3,368
4,195
4,713
4,558
3,971
3,963
2,652
3,090
3,474
3,264
2,925
2,901
1,093
7,206
305
249
235
2,274
1,757
732
3,560
3,320
2,480
1,930
2,025
1,913
2,853
873
769
622
6,347
1,527
876
1,114
1,178
1,106
1,353
1,115
1,440
1,118
1,285
1,188
4,569
4,088
3,516
4,269
2,937
1,071
159
240
102
998
1,190
1,367
1,262
1,023
716
1,105
1,239
1,294
1,046
1,062
336
1,534
94
81
77
517
540
258
1,119
991
701
660
642
598
429
258
358
229
1,956
460
278
323
329
292
384
341
437
365
300
536
2,212
1,662
1,493
1,388
1,303
628
98
103
86
332
626
610
448
1,118
291
400
443
417
380
362
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
5,091,472
683,260
495,949
187,311
48,515
9,196
38,145
54,110
2,760
30,640
1999
1987
1968
1926
2009
9/30/32
9/30/18
11/1/27
7/31/30
7/31/30
56,320
166,176
(5)
252,940
110,765
68
10,509
37,005
52,892
3,049
29,474
6,034
—
—
—
21,818
4,475
37,005
52,892
3,049
7,656
675
3,586
3,064
1,610
2,582
100.0%
80.0% (6)
70.0% (6)
100.0%
100.0%
Carmel, NY
Wayne, NJ
Grand Rapids, MI
Grand Rapids, MI
St. Paul, MN
Richmond, VA
Richmond, VA
Oakland County, MI
Total Other
Condominium
Miami, FL
Las Vegas, NV
Total Condominium
Total
10/14/15
06/24/15
06/18/15
06/18/15
09/22/14
08/14/14
06/07/13
02/01/13
11/21/13
12/20/12
1985
1980
1963
1992
1900
1986
1984
1989
2010
2006
6,706
9,700
9,731
6,300
62,540
19,850
118,405
18,000
386,083
80,000
119,000
199,000
1/31/39
7/31/27
6/30/24
6/30/24
10/1/21
4/30/21
4/30/21
12/31/21
50,121
56,387
97,167
160,000
760,318
195,881
994,040
240,900
6,562
8,642
8,763
5,451
50,608
16,102
90,572
11,478
—
6,658
7,226
4,918
47,620
15,796
86,679
—
3,141,015
331,107
196,749
(8)
(10)
—
12,778
4,896
17,674
—
—
—
6,562
1,984
1,537
533
2,988
306
3,893
11,478
134,358
12,778
4,896
17,674
491
1,156
849
552
12,609
2,711
10,915
3,539
44,339
1,438
225
1,663
$ 1,309,462
8,232,487
$1,032,041
$
692,698
$
339,343
$ 94,517
100.0%
100.0%
97.0% (6)
97.0% (6)
97.0% (6)(7)
77.5% (6)
77.5% (6)
90.0% (6)
100.0% (9)
98.8% (6)(11)
Lease expirations reflect the earliest date the lease is cancellable without penalty, although actual terms may be longer.
(1)
(2) Non-recourse.
(3) Annual rental income represents twelve months of contractual rental income, excluding concessions, due under leases
outstanding for the year ended December 31, 2017. Operating lease income on the consolidated statements of income
represents rental income earned and recorded on a straight line basis over the term of the lease.
Properties were consolidated as of acquisition date.
421 mobile home pads.
See Note 13 to our consolidated financial statements for further information regarding noncontrolling interests.
Includes real estate acquired for parking purposes on April 21, 2016 with an acquisition price of $0.2 million and a
carrying value of $0.4 million as of December 31, 2017.
48 remaining condominium units. As of December 31, 2017, seven condominium units were under contract for sale with
a book value of $1.6 million.
(4)
(5)
(6)
(7)
(8)
(9) We own a portfolio of residential condominium units, some of which are subject to residential leases. We intend to sell
these units. The residential leases are generally short term in nature and are not included in the table above given our
intention to sell the units.
(10) 13 remaining condominium units. As of December 31, 2017, three condominium units were under contract for sale with
a book value of $0.8 million.
(11) We own, through a majority-owned joint venture with an operating partner, a portfolio of residential condominium units,
some of which are subject to residential leases. The joint venture intends to sell these units. The residential leases are
generally short term in nature and are not included in the table above given the joint venture’s intention to sell the units.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation and claims incidental to the conduct of our business in the ordinary course.
Further, certain of our subsidiaries, including our registered broker-dealer, registered investment advisers and captive insurance
company, are subject to scrutiny by government regulators, which could result in enforcement proceedings or litigation related
to regulatory compliance matters. We are not presently a party to any material enforcement proceedings, litigation related to
regulatory compliance matters or any other type of material litigation matters. We maintain insurance policies in amounts and
with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience
and industry standards.
Item 4. Mine Safety Disclosures
Not applicable.
69
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock began trading on the NYSE under the symbol “LADR” on February 6, 2014. Prior to that time, there was no
public market for our common stock.
Class A Common Stock
The following table sets forth the quarterly high, low and closing price per share of Class A common stock, reported on the
NYSE, with respect to the periods indicated:
Period
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
High
Low
Close
$ 15.23
15.11
$ 13.48
13.35
$ 14.44
13.41
13.88
14.00
12.83
13.23
13.78
13.63
$ 12.88
$
8.64
$ 12.45
13.01
13.87
15.53
11.29
11.57
12.14
12.20
13.24
13.72
The following table presents dividends declared (on a per share basis) of Class A common stock for the years ended
December 31, 2017 and 2016:
Declaration Date
March 1, 2017
June 1, 2017
September 1, 2017
November 7, 2017
March 1, 2016
June 1, 2016
September 1, 2016
December 2, 2016
Total
Dividend per Share
$
$
$
$
0.300
0.300
0.300
0.315
1.215
0.275
0.275
0.275
0.460 (1)
1.285
(1) On December 1, 2016, our board of directors approved the fourth quarter 2016 dividend of $0.46 per share of our Class A
common stock in order to meet our annual REIT taxable income distribution requirement. The dividend was paid as a
combination of cash and Class A common stock with the total cash paid to shareholders equaling $20.8 million.
70
Please see Note 12 to our consolidated financial statements for the year ended December 31, 2017 included elsewhere in this
Annual Report for the tax treatment for our aggregate distributions per share.
Consistent with our intention to operate as a REIT, we have paid and in the future intend to declare regular quarterly
distributions to our shareholders.
In order to qualify as a REIT we must annually distribute at least 90% of our taxable income. We have paid our fourth quarter
distribution in cash and may pay future distributions in cash and stock as permitted under IRS guidance, although, the REIT
distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. We believe
that our significant capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet
current and anticipated capital requirements, including funding new investment opportunities, paying distributions to our
shareholders and servicing our debt obligations.
On March 1, 2017, we announced that our board of directors declared a quarterly cash dividend of $0.300 per share of Class A
common stock, which was paid on April 3, 2017, to shareholders of record as of the close of business on March 13, 2017.
On June 1, 2017, we announced that our board of directors declared a quarterly cash dividend of $0.300 per share of Class A
common stock, which was paid on July 3, 2017, to shareholders of record as of the close of business on June 12, 2017.
On September 1, 2017, we announced that our board of directors declared a quarterly cash dividend of $0.300 per share of
Class A common stock, which was paid on October 2, 2017, to shareholders of record as of the close of business on
September 11, 2017.
On November 7, 2017, we announced that our board of directors declared a quarterly cash dividend of $0.315 per share of
Class A common stock, which was paid on January 3, 2018 to shareholders of record as of the close of business on
December 11, 2017.
The total number of shares of Class A common stock distributed pursuant to the fourth quarter 2016 dividend was determined
based on shareholder elections and the volume weighted average price of $14.06 per share of Class A common stock on the
New York Stock Exchange for the three trading days after January 12, 2017, the date that election forms were due. Shares of
Class A common stock distributed as part of Ladder’s fourth quarter 2016 dividend shall accrue dividend and other benefits
together with all other shares of Ladder’s Class A common stock.
On January 24, 2017, we paid an aggregate of $20.8 million in cash to our Class A shareholders, accrued for dividends payable
on unvested restricted stock of $0.7 million and issued 815,819 shares of our Class A common stock, equivalent to $11.5
million, in connection with the fourth quarter 2016 dividend of $0.46 per share. In connection with the dividend, we also issued
432,314 shares of our Class B common stock and each of Series REIT and Series TRS of LCFH, issued 1,248,133 Series LP
units corresponding to these Class A and Class B shares.
Holders
On February 26, 2018, the Company had 18 Class A common shareholders of record. This does not include the beneficial
ownership of shares held in nominee name. The closing price per share of Class A common stock on February 26, 2018 was
$14.82. On February 26, 2018, the Company had 15 Class B common shareholders of record.
Stock Repurchases
On October 30, 2014, our board of directors authorized the Company to make up to $50.0 million in repurchases of the
Company’s Class A common stock from time to time without further approval. Stock repurchases by the Company are generally
made in open market transactions at prevailing market prices but may also be made in privately negotiated transactions or
otherwise. The timing and amount of purchases are determined based upon prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors. During the year ended December 31, 2017, the Company repurchased
189,897 shares of Class A common stock at an average of $13.61 per share for a total aggregate purchase price of $2.6 million.
All repurchased shares are recorded in treasury stock at cost.
71
The following table presents information with respect to repurchases of Class A common stock of the Company made during
the year ended December 31, 2017 ($ in thousands, except per share data and average price paid per share):
Period
January 1, 2017 - January 31, 2017
February 1, 2017 - February 28, 2017
March 1, 2017 - March 31, 2017
April 1, 2017 - April 30, 2017
May 1, 2017 - May 31, 2017
June 1, 2017 - June 30, 2017
July 1, 2017 - July 31, 2017
August 1, 2017 - August 31, 2017
September 1, 2017 - September 30, 2017
October 1, 2017 - October 31, 2017
November 1, 2017 - November 30, 2017
December 1, 2017 - December 31, 2017
Total
Total Number of
Shares
Purchased(1)
Average Price
Paid per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs(2)
Approximate
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs
— $
—
—
—
—
—
—
—
—
—
154,897
35,000
189,897
$
—
—
—
—
—
—
—
—
—
—
13.61
13.59
13.61
— $
—
—
—
—
—
—
—
—
—
154,897
35,000
189,897
$
44,353
44,353
44,353
44,353
44,353
44,353
44,353
44,353
44,353
44,353
42,245
41,769
41,769
(1) The total number of shares repurchased includes shares purchased pursuant to the plan described in footnote (2) below.
(2) In August 2015, we publicly disclosed that our board of directors had authorized the Company to repurchase up to $50.0
million of the Company’s common stock from time to time.
Recent Sales of Unregistered Securities
Pursuant to the LLLP Agreement, the Continuing LCFH Limited Partners may from time to time (subject to the terms of the
LLLP Agreement as in effect at the time) cause LCFH to exchange Series REIT LP Units and LC TRS I Shares (or Series TRS
LP Units in lieu of such LC TRS I Shares) with an equal number of shares of our Class B common stock, for shares of our Class
A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications.
During the year ended December 31, 2017, 20,767,407 Series REIT LP Units and 20,767,407 Series TRS LP Units were
collectively exchanged for 20,767,407 shares of Class A common stock and 20,767,407 shares of Class B common stock were
canceled. We received no other consideration in connection with these exchanges, which were effected in reliance on Section
4(a)(2) of the Securities Act.
72
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information, as of December 31, 2017, relating to equity compensation plans of the Company
(including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for
issuance.
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of
Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column
(a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by
shareholders
Equity compensation plans not approved by
shareholders
Total
982,135
$
N/A
982,135
$
15.03
N/A
15.03
4,122,374
N/A
4,122,374
The Company currently has stock option and restricted stock awards to directors and employees outstanding under its 2014
Omnibus Incentive Plan (the “Plan”). The Plan provides for the equitable adjustment of outstanding awards upon the
occurrence of certain events, including an extraordinary dividend, in order to preserve the intrinsic value of such awards. The
compensation committee of the board of directors, which holds the authority to administer and interpret the Plan, determined it
was necessary and appropriate, and in the best interests of the Company and its shareholders, to equitably adjust the outstanding
stock option and restricted stock awards in respect of the fourth quarter 2015 dividend and to increase the number of shares
available under the Plan to reflect the equitable adjustment of the stock options and restricted stock. Such equitable adjustment
occurred on January 21, 2016 and is not reflected in the table above.
73
Performance Graph
Our common stock began trading on the NYSE under the symbol “LADR” on February 6, 2014. Prior to that time, there was no
public market for our common stock.
The following graph compares total shareholder returns, assuming reinvestment of dividends, for the period February 6, 2014
through December 31, 2017 to the Wells Fargo Commercial Mortgage REIT Index (“Commercial Mortgage REIT Index”) and
the Standard & Poor’s Index (“S&P 500”). The closing price of the Company’s Class A common stock on February 6, 2014 (on
which the graph is based) was $16.99. The past shareholder return shown on the following graph is not necessarily indicative of
future performance.
Comparison of Cumulative Total Shareholder Returns
Based upon initial investment of $100 on February 6, 2014(1)
Ladder Capital
Corp
Commercial
Mortgage REIT
Index
S&P 500 Index
February 6, 2014
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
(1) Dividend reinvestment is assumed at quarter end.
$
$
$
$
$
74
100.00
115.42
86.20
101.41
108.03
$
$
$
$
$
100.00
104.24
98.59
111.83
116.67
$
$
$
$
$
100.00
116.10
115.25
126.24
150.76
Item 6. Selected Financial Data
The information below should be read in conjunction with “Cautionary Statement Regarding Forward-Looking Statements,”
“Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
consolidated financial statements and the related notes thereto included in this Annual Report.
The historical financial information for this report included for all periods prior to our IPO were derived from the consolidated
financial statements of LCFH and the balance sheet of LCC and does not reflect what our financial position, results of
operations, and cash flows would have been had we been a separate, stand-alone public company during those periods. We were
not operated as a separate, stand-alone public company for historical periods presented prior to the IPO on February 11, 2014.
The consolidated financial information may not be indicative of our future financial condition, results of operations or cash
flows.
The following table sets forth selected financial data on a consolidated basis for the Company. The consolidated selected
operating and balance sheet data of the Company as of December 31, 2017, 2016, 2015, 2014 and 2013, and for the years then
ended have been derived from the Company’s financial statements for the respective periods. ($ in thousands, except per share
and dividend data)
2017
Year Ended December 31,
2015
2014
2016
2013
Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Total other income
Total costs and expenses
Income before taxes
Tax expense
Net income
Net (income) loss attributable to
noncontrolling interest in consolidated joint
ventures
Net income of combined Class A Common
shareholders and predecessor unit holders
Net (income) loss attributed to predecessor
unit holders
Net (income) loss attributed to noncontrolling
interest in operating partnership
Net income attributed to Class A common
shareholders
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
$
263,667
$
236,372
$
241,539
$
187,325
$
121,578
146,118
117,549
—
117,549
186,470
170,428
133,591
7,712
125,879
120,827
115,545
(300)
115,245
163,312
158,517
120,040
6,320
113,720
113,303
128,236
(600)
127,636
201,221
168,166
160,691
14,557
146,134
77,574
109,751
(600)
109,151
189,166
174,086
124,231
26,605
97,626
48,745
72,833
(600)
72,233
241,705
121,475
192,463
3,730
188,733
(226)
138
(1,568)
370
1,098
$
125,653
$
113,858
$
144,566
$
97,996
$
189,831
—
—
—
12,628
(30,377)
(47,131)
(70,745)
(66,437)
95,276
$
66,727
$
73,821
$
44,187
1.16
1.13
$
$
1.08
1.06
$
$
1.43
1.42
$
$
0.90
0.86
$
$
$
Basic
Diluted
81,902,524
61,998,089
51,702,188
49,296,417
109,704,880
107,638,788
51,870,808
97,583,310
Dividends per share of Class A common
stock
$
1.215
$
1.285
$
2.225
$
—
75
2017
Year Ended December 31,
2015
2014
2016
2013
Cash Flow Data:
Net cash provided by (used in):
Operating activities(1)
Investing activities(1)
Financing activities
$
11,985
$
338,427
$
(306,635)
387,905
36,285
(448,077)
(38,307) $
34,650
22,001
124,162
(2,284,953)
2,158,268
$
418,843
(1,025,629)
640,349
Balance Sheet Data (at end of period):
Cash and cash equivalents
$
76,674
$
44,615
$
108,959
$
76,218
$
Restricted cash
106,009
44,813
53,835
42,438
182,683
3,508,642
1,106,517
1,032,041
6,025,615
4,379,826
4,537,469
1,234,968
89,428
2,353,977
2,100,947
822,338
5,578,337
3,942,138
4,068,783
971,390
162,794
2,310,409
2,407,217
834,779
5,895,212
4,274,723
4,403,804
828,215
118,656
1,939,008
2,815,566
768,986
5,814,235
4,182,954
4,309,028
785,432
78,742
28,521
107,263
979,568
1,657,246
624,219
3,482,216
2,208,041
2,296,983
1,176,397
Total cash, cash equivalents and restricted
cash
Mortgage loan receivables
Real estate securities
Real estate and related lease intangibles, net
Total assets
Total debt outstanding
Total liabilities
Total shareholders’ equity (partners’ capital)
Total noncontrolling interest in operating
partnership
Total noncontrolling interest in consolidated
joint ventures
240,861
533,246
657,380
711,674
—
12,317
4,918
5,813
8,101
8,837
Total equity (capital)
1,488,146
1,509,554
1,491,408
1,505,207
1,185,234
(1) The Company adopted Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) during the three month period ended
December 31, 2017. The only significant impact was the reclassification of a portion of payments received in Interest
Only (“I/O”) securities previously reflected as operating cash inflows under prevailing industry practice to investing cash
inflows. Refer to recently adopted accounting pronouncements in Note 2 to our consolidated financial statements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the
consolidated financial statements and the related notes of Ladder Capital Corp included within this Annual Report. This
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements. See “Cautionary Statement Regarding Forward-Looking Statements” within this Annual Report and “Risk
Factors” within this Annual Report for a discussion of the uncertainties, risks and assumptions associated with these
statements. Actual results may differ materially from those contained in any forward-looking statements as a result of various
factors, including but not limited to, those in “Risk Factors” set forth within this Annual Report.
References to “Ladder,” the “Company,” and “we,” “our” and “us” refer to Ladder Capital Corp, a Delaware corporation
incorporated in 2013, and its consolidated subsidiaries subsequent to the initial public offering (“IPO”) and related
transactions described below.
Ladder Capital Corp was incorporated on May 21, 2013 as a holding company for the purpose of facilitating an IPO of
common equity. On February 5, 2014, a registration statement relating to shares of Class A common stock of Ladder Capital
Corp was declared effective and the price of such shares was set at $17.00 per share. The IPO closed on February 11, 2014.
76
As a result of the IPO and certain other recapitalization transactions (collectively, the “IPO Transactions”), Ladder Capital
Corp became the sole general partner of LCFH and, as a result of the serialization of LCFH on December 31, 2014, became
the sole general partner of Series REIT of LCFH. LC TRS I LLC, a wholly-owned subsidiary of Series REIT of LCFH, is the
general partner of Series TRS of LCFH. Ladder Capital Corp has a controlling interest in Series REIT of LCFH, and through
such controlling interest, also has a controlling interest in Series TRS of LCFH. Ladder Capital Corp’s only business is to act
as the sole general partner of LCFH and Series REIT of LCFH, and, as a result of the foregoing, Ladder Capital Corp directly
and indirectly operates and controls all of the business and affairs of LCFH, and each Series thereof, and consolidates the
financial results of LCFH, and each Series thereof, into Ladder Capital Corp’s consolidated financial statements.
Results since inception consist of LCFH’s operations from October 2008 to February 10, 2014 and Ladder Capital Corp’s
operations from February 11, 2014 to December 31, 2017.
Results of Operations
Year ended December 31, 2017 compared to the year ended December 31, 2016
Investment overview
Investment activity in the year ended December 31, 2017 focused on loan and security activities. We originated and funded
$2.9 billion in principal value of commercial mortgage loans, which was offset by $1.5 billion of sales and $386.9 million of
principal repayments in the year ended December 31, 2017. We acquired $210.5 million of new securities, which was offset by
$1.0 billion of sales and $138.4 million of amortization in the portfolio, which partially contributed to a net decrease in our
securities portfolio of $1.0 billion. We also invested $236.9 million in real estate and received proceeds from the sale of real
estate of $31.1 million.
Investment activity in the year ended December 31, 2016 focused on loan and securities activities. We originated and funded
$2.1 billion in principal value of commercial mortgage loans, which was offset by $1.4 billion of sales and $651.7 million of
principal repayments in the year ended December 31, 2016. We acquired $977.5 million of new securities, which was offset by
$539.3 million of sales and $684.1 million of amortization in the portfolio, which partially contributed to a net decrease in our
securities portfolio of $306.3 million. We also invested $62.5 million in real estate and received proceeds from the sale of real
estate of $66.5 million.
Operating overview
Net income (loss) attributable to Class A common shareholders totaled $95.3 million for the year ended December 31, 2017,
compared to $66.7 million for the year ended December 31, 2016. The most significant drivers of the $28.6 million increase are
as follows:
•
•
•
•
an increase in total other income (loss) of $23.2 million, primarily as a result of an increase of $28.0 million in sales of
loans, net, an increase of $12.2 million in operating lease income and an increase of $9.5 million in realized gains on
securities, partially offset by a $11.2 million decrease in net results from derivative transactions, a $9.2 million
decrease in profits on sale of real estate and a $5.5 million decrease in gain on extinguishment of debt; and
an increase in total costs and expenses of $11.9 million compared to the prior year, primarily as a result of a $6.2
million increase in salaries and employee benefits and a $2.7 million increase in real estate operating expenses.
an increase in income tax expense (benefit) of $1.4 million compared to the prior year, primarily as a result of
increased income in our TRSs, the recently enacted Tax Cuts and Jobs Act and certain other one-time adjustments.
a decrease in net income attributable to noncontrolling interest in operating partnership of $16.8 million due to
exchanges of Class B common stock for Class A common stock during the year.
77
Core Earnings, a non-GAAP financial measure, totaled $178.8 million for the year ended December 31, 2017, compared to
$158.2 million for the year ended December 31, 2016. The significant components of the $20.5 million increase in Core
Earnings are an increase in total other income (loss) of $24.2 million, primarily as a result of an increase of $29.5 million in
sale of loans, net, an increase of $12.2 million in operating lease income and an increase of $9.5 million in gain (loss) on
securities, partially offset by a decrease of $10.3 million in net results from derivative transactions, a decrease of $9.2 million in
sale of real estate, net, a decrease of $5.5 million in gain on extinguishment of debt and an increase in total costs and expenses
discussed in the preceding paragraph. See “—Reconciliation of Non-GAAP Financial Measures” for our definition of Core
Earnings and a reconciliation to income (loss) before taxes.
Net interest income
Interest income totaled $263.7 million for the year ended December 31, 2017, compared to $236.4 million for the year ended
December 31, 2016. For the year ended December 31, 2017, securities investments averaged $1.5 billion and loan investments
averaged $3.0 billion. For the year ended December 31, 2016, securities investments averaged $2.5 billion and loan
investments averaged $2.3 billion. There was a $774.1 million increase in loan investments, offset by a $1.0 billion decrease in
securities investments, resulting in higher interest income due to the higher yield on loans versus securities.
Interest expense totaled $146.1 million for the year ended December 31, 2017, compared to $120.8 million for the year ended
December 31, 2016. The $25.3 million increase in interest expense was primarily attributable to an increase in average debt
obligations, the increase in LIBOR rates throughout 2016 and 2017 and a shift away from borrowings from the FHLB and
securities repurchase financing, a lower source of funding, to higher cost, loan repurchase financing and senior unsecured
notes. Our interest expense also includes interest expense related to mortgage loan financing against our real estate investments.
Our investment in real estate and related lease intangibles, net has continued to increase during 2016 and 2017 and our
mortgage loan financing secured by such investments has also similarly increased. Our interest expense related to mortgage
loan financing increased by $3.4 million from $18.1 million for the year ended December 31, 2016 to $21.5 million for the year
ended December 31, 2017, primarily as a result of our increase in average outstanding mortgage loan financing of $635.2
million for the year ended December 31, 2017 compared to $553.1 million for the year ended December 31, 2016.
Net interest income after provision for loan losses totaled $117.5 million for the year ended December 31, 2017, compared to
$115.2 million for the year ended December 31, 2016. The $2.3 million increase in net interest income after provision for loan
losses was primarily attributable to the increase in net interest income, increase in interest expense discussed above and
increase in debt obligations.
Cost of funds, a non-GAAP financial measure, totaled $161.4 million for the year ended December 31, 2017, compared to
$150.7 million for the year ended December 31, 2016. The $10.7 million increase in cost of funds was primarily attributable to
the increase in LIBOR rates throughout 2016 and 2017 and a shift away from borrowings from the FHLB and securities
repurchase financing, a lower cost source of funding, to higher cost loan repurchase financing and senior unsecured notes.
We present cost of funds, which is a non-GAAP financial measure, as a supplemental measure of the Company’s cost of debt
financing. We define cost of funds as interest expense as reported on our consolidated statements of income adjusted to exclude
interest expense related to liabilities for transfers not considered sales and include the net interest expense component resulting
from our hedging activities, which is currently included in net results from derivative transactions on our consolidated
statements of income. See “—Reconciliation of Non-GAAP Financial Measures” for our definition of cost of funds and a
reconciliation to interest expense.
Interest spreads
As of December 31, 2017, the weighted average yield on our mortgage loan receivables was 7.0%, compared to 6.7% as of
December 31, 2016 as the weighted average yield on new loans originated was higher than the weighted average yield on loans
that were securitized or paid off. As of December 31, 2017, the weighted average interest rate on borrowings against our
mortgage loan receivables was 3.1%, compared to 2.3% as of December 31, 2016. The increase in the rate on borrowings
against our mortgage loan receivables from December 31, 2016 to December 31, 2017 was primarily due to higher prevailing
market borrowing rates as of December 31, 2017 compared to December 31, 2016. As of December 31, 2017, we had
outstanding borrowings secured by our mortgage loan receivables equal to 47.6% of the carrying value of our mortgage loan
receivables, compared to 43.3% as of December 31, 2016.
78
As of December 31, 2017, the weighted average yield on our real estate securities was 2.9%, compared to 2.9% as of
December 31, 2016. As of December 31, 2017, the weighted average interest rate on borrowings against our real estate
securities was 1.7%, compared to 1.3% as of December 31, 2016. The increase in the rate on borrowings against our real estate
securities from December 31, 2016 to December 31, 2017 was primarily due to higher prevailing market borrowing rates as of
December 31, 2017 versus December 31, 2016. As of December 31, 2017, we had outstanding borrowings secured by our real
estate securities equal to 72.8% of the carrying value of our real estate securities, compared to 83.2% as of December 31, 2016.
Our real estate is comprised of non-interest bearing assets; however, interest incurred on mortgage financing collateralized by
such real estate is included in interest expense. As of December 31, 2017 and 2016, the weighted average interest rate on
mortgage borrowings against our real estate was 4.9%. As of December 31, 2017, we had outstanding borrowings secured by
our real estate equal to 67.1% of the carrying value of our real estate, compared to 71.8% as of December 31, 2016.
Provision for loan losses
We had no provision for loan loss expense for the year ended December 31, 2017 compared to a $0.3 million provision for loan
losses for the year ended December 31, 2016. We originate and invest primarily in loans with high credit quality, and we sell
our conduit loans in the ordinary course of business. We estimate our loan loss provision based on our historical loss experience
and our expectation of losses inherent in the investment portfolio but not yet realized. To ensure that the risk exposures are
properly measured and the appropriate reserves are taken, the Company assesses a loan loss provision balance that will grow
over time with its portfolio and the related risk as the assets approach maturity and ultimate refinancing where applicable. As a
result, we determined that no provision expense for loan losses was required for the year ended December 31, 2017. As of
December 31, 2017, two of the Company’s loans, which were originated simultaneously as part of a single transaction, with a
carrying value of $26.9 million were in default. The Company determined that no impairment was necessary due to the
property’s liquidation value, however, the Company has placed the loans on non-accrual status as of July 1, 2017.
Operating lease income and tenant recoveries
Operating lease income totaled $89.5 million for the year ended December 31, 2017, compared to $77.3 million for the year
ended December 31, 2016. The an increase of $12.2 million was primarily attributable to acquisitions, which increased real
estate assets to $1.0 billion at December 31, 2017 versus $822.3 million at December 31, 2016, as well as a full period of
operations of properties acquired in 2016.
Tenant recoveries totaled $7.2 million for the year ended December 31, 2017, compared to $6.0 million for the year ended
December 31, 2016. The increase of $1.2 million primarily reflects additional recoveries on properties acquired in 2017 and a
full period of recoveries on properties acquired in 2016, partially offset by the decrease in recoveries on an existing office
property due to a lease expiration.
Sale of loans, net
Income (loss) from sale of loans, net, which includes all loan sales, whether by securitization, whole loan sales or other means,
totaled $54.0 million for the year ended December 31, 2017, compared to $26.0 million for the year ended December 31, 2016,
an increase of $28.0 million. Income from sales of loans, net also includes unrealized losses on loans related to lower of cost or
market adjustments. During the year ended December 31, 2017, we participated in seven separate securitization transactions,
selling/transferring 114 loans with an aggregate outstanding principal balance of $1.5 billion. In June 2017, we executed a
Ladder-only multi-borrower securitization from Ladder’s CMBS shelf, recognizing a gain of $26.1 million, which is included
in the seven separate securitization transactions mentioned above. During the year ended December 31, 2016, we participated
in six separate securitization transactions, selling 104 loans with an aggregate outstanding principal balance of $1.3 billion.
Income from sales of loans, net is subject to market conditions impacting timing, size and pricing and as such may vary
significantly quarter to quarter. The increase in income (loss) from sales of securitized loans, net of hedging of $49.3 million
for the year ended December 31, 2017 compared to $38.4 million for the year ended December 31, 2016 was due to an increase
in the aggregate outstanding principal balance of loans sold, period over period, partially offset by increasing competition in the
market and lower prevailing lending credit spreads for conduit loans.
Income (loss) from sale of loans, net, represents gross proceeds received from the sale of loans, less the book value of those
loans at the time they were sold, less any costs, such as legal and closing costs, associated with the sale. Income from sales of
securitized loans, net of hedging, a non-GAAP financial measure, represents the portion of income (loss) from sale of loans, net
related to the sale of loans into securitization trusts. See “—Reconciliation of Non-GAAP Financial Measures” for our
definition of income from sales of securitized loans, net of hedging and a reconciliation to income (loss) from sale of loans, net.
79
Realized gain (loss) on securities
Realized gain (loss) on securities totaled $17.2 million for the year ended December 31, 2017, compared to $7.7 million for the
year ended December 31, 2016, an increase of $9.5 million. Other than temporary impairment on U.S. Agency Securities,
which is included in realized gain (loss) on securities totaled $(3.5) million for the year ended December 31, 2017, compared to
$(4.7) million for the year ended December 31, 2016, a reduction of $1.2 million. For the year ended December 31, 2017, we
sold $1.0 billion of securities, comprised of $1.0 billion of CMBS and $7.6 million U.S. Agency Securities. For the year ended
December 31, 2016, we sold $539.3 million of securities, comprised of $538.1 million of CMBS and $1.2 million U.S. Agency
Securities. The increase in sales of securities reflects higher transaction volume in 2017 as compared to 2016.
Unrealized gain (loss) on Agency interest-only securities
Unrealized gain (loss) on Agency interest-only securities represented a gain of $1.4 million for the year ended December 31,
2017, compared to a loss of $0.1 million for the year ended December 31, 2016. The positive change of $1.5 million in
unrealized gain (loss) on Agency interest-only securities was due to the increase in interest rates throughout 2016 and 2017,
partially offset by sales and amortization of the portfolio during the year ended December 31, 2017. Agency interest-only
securities are recorded at fair value with changes in fair value recorded in current period earnings.
Realized gain on sale of real estate, net
For the year ended December 31, 2017, realized gain on sale of real estate, net totaled $11.4 million, compared to $20.6 million
for the year ended December 31, 2016. The decrease of $9.2 million was a result of the commercial real estate and residential
condominium sales discussed below.
During the year ended December 31, 2017, we sold no single-tenant net lease properties. During the year ended December 31,
2016, we sold two single-tenant net lease properties resulting in a net gain on sale of $1.2 million.
During the year ended December 31, 2017, income from sales of residential condominiums totaled $11.6 million. We sold 46
residential condominium units from Veer Towers in Las Vegas, NV, resulting in a net gain on sale of $9.3 million, and 40
residential condominium units from Terrazas River Park Village in Miami, FL, resulting in a net gain on sale of $2.3 million.
We expect to substantially complete the sale of the remaining Veer units in 2018 and the remaining Terrazas units in less than
18 months which would result in reduced profit on condominium sales in future periods. During the year ended December 31,
2016, income from sales of residential condominiums totaled $19.4 million. We sold 73 residential condominium units from
Veer Towers in Las Vegas, NV, resulting in a net gain on sale of $15.1 million, and 65 residential condominium units from
Terrazas River Park Village in Miami, FL, resulting in a net gain on sale of $4.3 million.
Fee and other income
Fee and other income totaled $18.3 million for the year ended December 31, 2017, compared to $21.4 million for the year
ended December 31, 2016. We generated fee income from origination fees, exit fees and other fees on the loans we originate
and in which we invest, HOA fees, dividend income on our investment in FHLB stock and the management of our institutional
partnership and our managed account, both of which were terminated during 2015. The $3.1 million decrease in fee and other
income year-over-year was primarily due to $3.3 million receivable, which is more fully discussed in Note 16, Income Taxes,
from an indemnity counterparty received during the year ended December 31, 2016.
Net result from derivative transactions
Net result from derivative transactions represented a loss of $12.6 million for the year ended December 31, 2017, which was
comprised of an unrealized loss of $3.4 million and a realized loss of $9.2 million, compared to a loss of $1.4 million which
was comprised of an unrealized gain of $4.2 million and a realized loss of $5.6 million, for the year ended December 31, 2016,
a negative change of $11.2 million. The derivative positions that generated these results were a combination of interest rate
swaps, and futures that we employed in an effort to hedge the interest rate risk on the financing of our fixed rate assets and the
net interest income we earn against the impact of changes in interest rates. The loss in 2017 was primarily related to movement
in interest rates during the year ended December 31, 2017. The total net result from derivative transactions is comprised of
hedging interest expense, realized gains/losses related to hedge terminations and unrealized gains/losses related to changes in
the fair value of asset hedges. The hedge positions were related to fixed rate conduit loans and securities investments.
80
Earnings (loss) from investment in unconsolidated joint ventures
Total earnings (loss) from investment in unconsolidated joint ventures totaled $0.1 million for the year ended December 31,
2017 and 2016. Earnings from our investment in Grace Lake LLC totaled $1.2 million for the year ended December 31, 2017,
compared to $1.0 million for the year ended December 31, 2016. Earnings (loss) from our investment in 24 Second Avenue
totaled $(1.1) million and $(1.4) million for the years ended December 31, 2017 and 2016, respectively. We made our
investment in 24 Second Avenue on August 7, 2015 and incurred $1.1 million and $1.4 million in construction costs and pre-
completion sales and marketing costs during the construction period for the years ended December 31, 2017 and 2016,
respectively.
Gain (loss) on extinguishment of debt
Gain (loss) on extinguishment of debt totaled $(0.1) million for the year ended December 31, 2017, compared to $5.4 million
for the year ended December 31, 2016. During the year ended December 31, 2017, the Company retired the remaining $297.7
million of principal of the 2017 Notes for a repurchase price of $297.7 million, recognizing a $(0.1) million net loss on
extinguishment of debt. During the year ended December 31, 2016, the Company retired $21.9 million of principal of the 2017
Notes for a repurchase price of $21.4 million, recognizing a $0.3 million net gain on extinguishment of debt after recognizing
$(0.2) million of unamortized debt issuance costs associated with the retired debt, and the Company retired $33.8 million of
principal of the 2021 Notes for a repurchase price of $28.2 million, recognizing a $5.1 million net gain on extinguishment of
debt after recognizing $(0.4) million of unamortized debt issuance costs associated with the retired debt.
Salaries and employee benefits
Salaries and employee benefits totaled $70.5 million for the year ended December 31, 2017, compared to $64.3 million for the
year ended December 31, 2016. Salaries and employee benefits are comprised primarily of salaries, bonuses, equity based
compensation and other employee benefits. The increase of $6.2 million in compensation expense was attributable to the
increase in equity based compensation expense in the year ended December 31, 2017 compared to the year ended
December 31, 2016 due to vesting of grants in the year ended December 31, 2017.
Operating expenses
Operating expenses totaled $21.4 million for the year ended December 31, 2017, compared to $20.6 million for the year ended
December 31, 2016. Operating expenses are primarily composed of professional fees, lease expense, and technology expenses.
The increase of $0.8 million represents increased technology expenses and franchise and other non-income taxes, partially
offset by a decrease in insurance expense.
Real estate operating expenses
Real estate operating expenses totaled $33.2 million for the year ended December 31, 2017, compared to $30.5 million for the
year ended December 31, 2016. The increase of $2.7 million in real estate operating expense was in part due to the increase in
real estate in 2016 and 2017, partially offset by a decrease in operating expenses for the condominiums.
Fee expense
Fee expense totaled $5.0 million for the year ended December 31, 2017, compared to $3.7 million for the year ended
December 31, 2016. Fee expense is comprised primarily of custodian fees, financing costs and servicing fees related to loans.
The increase of $1.3 million in fee expense was primarily attributable to the increase in the balance of of our mortgage loan
receivables held for investment, net, at amortized cost at December 31, 2017, as compared to December 31, 2016.
Depreciation and amortization
Depreciation and amortization totaled $40.3 million for the year ended December 31, 2017, compared to $39.4 million for the
year ended December 31, 2016. The $0.9 million increase in depreciation and amortization is primarily attributable to
acquisitions, which increased real estate assets to $1.0 billion at December 31, 2017 versus $822.3 million at December 31,
2016, as well as a full period of depreciation and amortization related to properties acquired in 2016, partially offset by an out-
of-period adjustment recorded in the first quarter of 2017, reducing depreciation expense by $0.8 million, relating to prior
periods and certain intangible assets approaching the end of their useful lives in 2017.
81
Income tax (benefit) expense
Most of our consolidated income tax provision relates to the business units held in our TRSs. Income tax (benefit) expense
totaled $7.7 million for the year ended December 31, 2017, compared to $6.3 million for the year ended December 31, 2016.
The increase of $1.4 million is primarily attributable to increased income in our TRSs, the recently enacted Tax Cuts and Jobs
Act and certain other one-time adjustments.
Year ended December 31, 2016 compared to the year ended December 31, 2015
Investment overview
Investment activity in the year ended December 31, 2016 focused on loan and security activities. We originated and funded
$2.1 billion in principal value of commercial mortgage loans, which was offset by $1.4 billion of sales and $651.7 million of
principal repayments in the year ended December 31, 2016. We acquired $977.5 million of new securities, which was offset by
$539.3 million of sales and $684.1 million of amortization in the portfolio, which partially contributed to a net decrease in our
securities portfolio of $306.3 million. We also invested $62.5 million in real estate and received proceeds from the sale of real
estate of $66.5 million.
Investment activity in the year ended December 31, 2015 focused on loan originations and securities investments. We
originated and funded $3.6 billion in principal value of commercial mortgage loans in the year ended December 31, 2015. We
acquired $725.9 million of new securities, which was offset by $845.7 million of sales and $186.9 million of amortization in
the portfolio, which partially contributed to a net decrease in our securities portfolio of $408.3 million. We also invested $219.5
million in real estate and received proceeds from the sale of real estate of $172.1 million.
Operating overview
Net income (loss) attributable to Class A common shareholders totaled $66.7 million for the year ended December 31, 2016,
compared to $73.8 million for the year ended December 31, 2015. The most significant drivers of the $7.1 million decrease are
as follows:
•
•
•
•
a decrease in total other income (loss) of $37.9 million, primarily as a result of a decrease of $45.1 million in sales of
loans, net, a $19.8 million decrease in profits on sale of real estate and a decrease of $16.3 million in realized gains on
securities, partially offset by a $37.5 million increase in net results from derivative transactions and a $6.2 million
increase in fee income;
a decrease in total costs and expenses of $9.6 million compared to the prior year, primarily as a result of a $5.9 million
decrease in real estate operating expenses and a $4.5 million decrease in operating expenses;
a decrease in net interest income of $12.7 million, primarily as a result of an increase in lower yielding mortgage loans
receivable, available for sale, a decrease in higher yielding subordinated debt and mezzanine debt and a decrease in the
weighted average coupon on mortgage loans receivable, available for sale portfolio year-over-year; and
a decrease in income tax expense (benefit) of $8.2 million compared to the prior year, primarily as a result of
decreased income in our TRSs and certain other one-time adjustments.
Core Earnings, a non-GAAP financial measure, totaled $158.2 million for the year ended December 31, 2016, compared to
$191.5 million for the year ended December 31, 2015. The significant components of the $33.3 million decrease in Core
Earnings are a decrease in total other income (loss) of $44.5 million, primarily as a result of a decrease of $46.3 million in sale
of loans, net, a decrease of $19.8 million in sale of real estate, net and a decrease of $16.3 million in gain (loss) on securities,
partially offset by an increase of $36.6 million in net results from derivative transactions and a decrease in total costs and
expenses discussed in the preceding paragraph. See “—Reconciliation of Non-GAAP Financial Measures” for our definition of
Core Earnings and a reconciliation to income (loss) before taxes.
Net interest income
Interest income totaled $236.4 million for the year ended December 31, 2016, compared to $241.5 million for the year ended
December 31, 2015. The $5.1 million decrease in interest income was primarily attributable to the lower weighted average
yield on new loans originated compared to the higher weighted average yield on loans that were securitized or paid off as well
as lower average interest rates in 2016 compared to 2015.
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Interest expense totaled $120.8 million for the year ended December 31, 2016, compared to $113.3 million for the year ended
December 31, 2015. The $7.5 million increase in interest expense was primarily attributable to the increase in LIBOR rates
throughout 2016. As of December 31, 2016, we had $1.5 billion of floating rate debt, or 38.0% of our total debt obligations,
compared to $1.3 billion of floating rate debt, or 31.4% of our total debt obligations as of December 31, 2015. The increase of
$153.7 million of floating rate debt was primarily due to a $282.3 million increase in FHLB floating rate debt and a $25.0
million increase in our revolving credit facility, partially offset by a decrease in amounts due pursuant to repurchase
agreements. The increase in percentage of floating rate debt is due both to an increase in floating rate debt as discussed above,
as well as a $479.0 million decrease in FHLB fixed rate debt and a $55.7 million decrease in our senior unsecured notes,
partially offset by an increase in mortgage loan financing.
Net interest income after provision for loan losses totaled $115.2 million for the year ended December 31, 2016, compared to
$127.6 million for the year ended December 31, 2015. The $12.4 million decrease in net interest income after provision for
loan losses was primarily attributable to the decrease in net interest income, increase in interest expense discussed above and
increase in debt obligations.
Cost of funds, a non-GAAP financial measure, totaled $150.7 million for the year ended December 31, 2016, compared to
$140.1 million for the year ended December 31, 2015. The $10.6 million increase in cost of funds was primarily attributable to
the extension of FHLB borrowings at higher interest rates and an increase in hedging losses.
We present cost of funds, which is a non-GAAP financial measure, as a supplemental measure of the Company’s cost of debt
financing. We define cost of funds as interest expense as reported on our consolidated statements of income adjusted to include
the net interest expense component resulting from our hedging activities, which is currently included in net results from
derivative transactions on our consolidated statements of income. See “—Reconciliation of Non-GAAP Financial Measures”
for our definition of cost of funds and a reconciliation to interest expense.
Interest spreads
As of December 31, 2016, the weighted average yield on our mortgage loan receivables was 6.7%, compared to 6.8% as of
December 31, 2015 as the weighted average yield on new loans originated was lower than the weighted average yield on loans
that were securitized or paid off. As of December 31, 2016, the weighted average interest rate on borrowings against our
mortgage loan receivables was 2.3%, compared to 2.4% as of December 31, 2015. The decrease in the rate on borrowings
against our mortgage loan receivables was primarily due to the utilization of a higher proportion of lower-cost borrowings from
the FHLB as of December 31, 2016 compared to December 31, 2015. As of December 31, 2016, we had outstanding
borrowings secured by our mortgage loan receivables equal to 43.3% of the carrying value of our mortgage loan receivables,
compared to 46.3% as of December 31, 2015.
As of December 31, 2016, the weighted average yield on our real estate securities was 2.9%, compared to 2.8% as of
December 31, 2015. As of December 31, 2016, the weighted average interest rate on borrowings against our real estate
securities was 1.3%, compared to 1.0% as of December 31, 2015. The increase in the rate on borrowings against our real estate
securities from December 31, 2015 to December 31, 2016 was primarily due to higher prevailing market borrowing rates as of
December 31, 2016 versus December 31, 2015. As of December 31, 2016, we had outstanding borrowings secured by our real
estate securities equal to 83.2% of the carrying value of our real estate securities, compared to 85.0% as of December 31, 2015.
Our real estate is comprised of non-interest bearing assets; however, interest incurred on mortgage financing collateralized by
such real estate is included in interest expense. As of December 31, 2016 and 2015, the weighted average interest rate on
mortgage borrowings against our real estate was 4.9%. As of December 31, 2016, we had outstanding borrowings secured by
our real estate equal to 71.8% of the carrying value of our real estate, compared to 65.5% as of December 31, 2015.
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Provision for loan losses
We had a $0.3 million and $0.6 million provision for loan losses for the years ended December 31, 2016 and 2015, respectively.
We invest primarily in loans with high credit quality, and we sell our conduit loans in the ordinary course of business. We
estimate our loan loss provision based on our historical loss experience and our expectation of losses inherent in the investment
portfolio but not yet realized. As our loan portfolio grew and matured, the related risk as assets approached maturity and
ultimately refinancing grew. During 2016, our loan portfolio was relatively stable in size and remaining duration and we
discontinued building our reserve on a quarterly basis. We will continue to monitor our portfolio and provide for loan losses
based on expected losses in the portfolio using industry based loss experience. As of December 31, 2016, two of the Company’s
loans, which were originated simultaneously as part of a single transaction, with a carrying value of $26.9 million were in
default. The borrower is currently in bankruptcy court; however, the Company determined that no impairment was necessary
due to the property’s liquidation value and continues to accrue interest on these loans and pursue its legal remedies.
Operating lease income and tenant recoveries
Operating lease income totaled $77.3 million for the year ended December 31, 2016, compared to $80.5 million for the year
ended December 31, 2015. The decrease of $3.2 million was primarily attributable to the sale of an office property in
November 2015 as well as the sales of net lease and residential real estate in 2016 and 2015. Typically, office properties
produce higher operating income compared to net lease properties.
Tenant recoveries totaled $6.0 million for the year ended December 31, 2016, compared to $9.9 million for the year ended
December 31, 2015. The decrease of $3.9 million primarily reflects the sale of the office property mentioned in the previous
paragraph as well as the sales of net lease and residential real estate in 2016 and 2015.
Sale of loans, net
Income (loss) from sale of loans, net, which includes all loan sales, whether by securitization, whole loan sales or other means,
totaled $26.0 million for the year ended December 31, 2016, compared to $71.1 million for the year ended December 31, 2015,
a decrease of $45.1 million. In the year ended December 31, 2016, we participated in six separate securitization transactions,
selling 104 loans with an aggregate outstanding principal balance of $1.3 billion. In the year ended December 31, 2015, we
participated in ten separate securitization transactions, selling 210 loans with an aggregate outstanding principal balance of $2.6
billion. Income from sales of loans, net is subject to market conditions impacting timing, size and pricing and as such may vary
significantly quarter to quarter. The increase in income from sales of securitized loans, net of hedging of $38.4 million for the
year ended December 31, 2016 compared to $64.6 million for the year ended December 31, 2015 was due to a decline in the
aggregate outstanding principal balance of loans sold, period over period, as well as increasing competition in the market and
lower prevailing lending credit spreads for conduit loans.
Income (loss) from sale of loans, net, represents gross proceeds received from the sale of loans, less the book value of those
loans at the time they were sold, less any costs, such as legal and closing costs, associated with the sale. Income from sales of
securitized loans, net of hedging, a non-GAAP financial measure, represents the portion of income (loss) from sale of loans, net
related to the sale of loans into securitization trusts. See “—Reconciliation of Non-GAAP Financial Measures” for our
definition of income from sales of securitized loans, net of hedging and a reconciliation to income (loss) from sale of loans, net.
Realized gain (loss) on securities
Realized gain (loss) on securities totaled $7.7 million for the year ended December 31, 2016, compared to $24.0 million for the
year ended December 31, 2015, a decrease of $16.3 million. Other than temporary impairment on U.S. Agency Securities,
which is included in realized gain (loss) on securities totaled $(4.7) million of that decrease. For the year ended December 31,
2016, we sold $539.3 million of securities, comprised of $538.1 million of CMBS and $1.2 million U.S. Agency Securities. For
the year ended December 31, 2015, we sold $845.7 million of securities, comprised of $829.4 million of CMBS and $16.2
million U.S. Agency Securities. The decrease in sales of securities reflects lower transaction volume and lower profit margins
in 2016 as compared to 2015.
Unrealized gain (loss) on Agency interest-only securities
Unrealized gain (loss) on Agency interest-only securities represented a loss of $56,456 for the year ended December 31, 2016,
compared to a loss of $1.2 million for the year ended December 31, 2015. The positive change of $1.2 million in unrealized
gain (loss) on Agency interest-only securities was due to an increase in interest rates and amortization and sales of the portfolio
during the year ended December 31, 2016.
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Income from sales of real estate, net
For the year ended December 31, 2016, income from sales of real estate, net totaled $20.6 million, compared to $40.4 million
for the year ended December 31, 2015. The decrease of $19.8 million was a result of the commercial real estate and residential
condominium sales discussed below.
During the year ended December 31, 2016, we sold two single-tenant net lease property resulting in a net gain on sale of $1.2
million. During the year ended December 31, 2015, we sold four single-tenant net lease properties resulting in a net gain on
sale of $2.6 million and one office building in Minneapolis, MN, resulting in a net gain on sale of $13.1 million.
During the year ended December 31, 2016, income from sales of residential condominiums totaled $19.4 million. We sold 73
residential condominium units from Veer Towers in Las Vegas, NV, resulting in a net gain on sale of $15.1 million, and 65
residential condominium units from Terrazas River Park Village in Miami, FL, resulting in a net gain on sale of $4.3 million.
During the year ended December 31, 2015, income from sales of residential condominiums totaled $23.5 million. We sold 88
residential condominium units from Veer Towers in Las Vegas, NV, resulting in a net gain on sale of $16.5 million, and 99
residential condominium units from Terrazas River Park Village in Miami, FL, resulting in a net gain on sale of $7.0 million.
Fee and other income
Fee and other income totaled $21.4 million for the year ended December 31, 2016, compared to $15.2 million for the year
ended December 31, 2015. We generated fee income from origination fees, exit fees and other fees on the loans we originate
and in which we invest, HOA fees, dividend income on our investment in FHLB stock and the management of our institutional
partnership and our managed account, both of which were terminated during 2015. The $6.2 million increase in fee and other
income year-over-year was primarily due to a $3.3 million receivable from an indemnity counterparty, which is more fully
discussed in Note 16, Income Taxes, an increase in exit fees, HOA fee income and dividend income on our investment in FHLB
stock, partially offset by a decrease in management fees due to the termination of our institutional partnership and our managed
account and lower origination fees due to lower origination volume in 2016.
Net result from derivative transactions
Net result from derivative transactions represented a loss of $1.4 million for the year ended December 31, 2016, which was
comprised of an unrealized gain of $4.2 million and a realized loss of $5.6 million, compared to a loss of $38.9 million which
was comprised of an unrealized gain of $10.2 million and a realized loss of $49.1 million, for the year ended December 31,
2015, a positive change of $37.5 million. The derivative positions that generated these results were a combination of interest
rate swaps, caps, and futures that we employed in an effort to hedge the interest rate risk on the financing of our fixed rate
assets and the net interest income we earn against the impact of changes in interest rates. The loss in 2016 was primarily related
to movement in interest rates during the year ended December 31, 2016. The total net result from derivative transactions is
comprised of hedging interest expense, realized gains/losses related to hedge terminations and unrealized gains/losses related to
changes in the fair value of asset hedges. The hedge positions were related to fixed rate conduit loans and securities
investments.
Earnings (loss) from investment in unconsolidated joint ventures
Total earnings (loss) from investment in unconsolidated joint ventures totaled $0.4 million for the year ended December 31,
2016 and 2015. Earnings from our investment in LCRIP I totaled $0.9 million for the year ended December 31, 2016,
compared to $0.1 million for the year ended December 31, 2015. The increase of $0.8 million primarily reflects additional
earnings from our investment in LCRIP I of $0.9 million recorded in 2016, predominately relating to prior years. Refer to “Out-
of-Period Adjustments” in Note 2. Significant Accounting Policies. LCRIP I held no loans as of December 31, 2016, as the last
loan held by LCRIP I was repaid during the quarter ended June 30, 2015. The term of LCRIP I expired on April 15, 2016. At
that time, LCRIP I made distributions to the partners in the aggregate amounts determined by the general partner in accordance
with the Limited Partnership Agreement. Earnings from our investment in Grace Lake LLC totaled $1.0 million for the year
ended December 31, 2016, compared to $0.8 million for the year ended December 31, 2015. Earnings (loss) from our
investment in 24 Second Avenue totaled $(1.4) million for the year ended December 31, 2016, compared to $(0.6) million for
the year ended December 31, 2015. We made our investment in 24 Second Avenue on August 7, 2015 and incurred $1.4 million
and $0.6 million in construction costs and pre-completion sales and marketing costs during the construction period for the years
ended December 31, 2016 and 2015, respectively.
85
Gain (loss) on extinguishment of debt
Gain (loss) on extinguishment of debt totaled $5.4 million for the year ended December 31, 2016, compared to none for the
year ended December 31, 2015. During the year ended December 31, 2016, the Company retired $21.9 million of principal of
the 2017 Notes for a repurchase price of $21.4 million, recognizing a $0.3 million net gain on extinguishment of debt after
recognizing $(0.2) million of unamortized debt issuance costs associated with the retired debt, and the Company retired $33.8
million of principal of the 2021 Notes for a repurchase price of $28.2 million, recognizing a $5.1 million net gain on
extinguishment of debt after recognizing $(0.4) million of unamortized debt issuance costs associated with the retired debt.
Salaries and employee benefits
Salaries and employee benefits totaled $64.3 million for the year ended December 31, 2016, compared to $61.6 million for the
year ended December 31, 2015. Salaries and employee benefits are comprised primarily of salaries, bonuses, equity based
compensation and other employee benefits. The increase of $2.7 million in compensation expense was attributable to the
increase in equity based compensation expense in the year ended December 31, 2016 compared to the year ended
December 31, 2015 due to vesting of grants in the year ended December 31, 2016.
Operating expenses
Operating expenses totaled $20.6 million for the year ended December 31, 2016, compared to $25.1 million for the year ended
December 31, 2015. Operating expenses are primarily composed of professional fees, lease expense, and technology expenses.
The decrease of $4.5 million represents REIT transaction costs incurred in 2015 and cost cutting initiatives in 2016.
Real estate operating expenses
Real estate operating expenses totaled $30.0 million for the year ended December 31, 2016, compared to $35.9 million for the
year ended December 31, 2015. The decrease of $5.9 million in real estate operating expense was in part due to the increase in
net lease properties, where expenses are paid directly by the tenant and the decrease in office and residential properties, where
the operating expenses are incurred by the Company and reimbursed by the tenants.
Real estate acquisition costs
There were $0.6 million of real estate acquisition costs for the year ended December 31, 2016, compared to $2.0 million for the
year ended December 31, 2015. The decrease of $1.4 million in real estate acquisition costs was due to $62.5 million of real
estate acquisitions during the year ended December 31, 2016, compared to $219.5 million of real estate acquisitions during the
year ended December 31, 2015. On October 1, 2016, the Company early adopted ASU 2017-01, Business Combinations (Topic
805): Clarifying the Definition of a Business (“ASU 2017-01”). As a result of this adoption, acquisitions of real estate generally
do not meet the revised definition of a business and are treated as asset acquisitions rather than business combinations. Real
estate acquisition costs are no longer expensed as incurred and will now be capitalized as a component of the cost of the assets
acquired.
Fee expense
Fee expense totaled $3.7 million for the year ended December 31, 2016, compared to $4.5 million for the year ended
December 31, 2015. Fee expense is comprised primarily of custodian fees, financing costs and servicing fees related to loans.
The decrease of $0.8 million in fee expense was primarily attributable to the decrease in loan originations. There were $2.1
billion in principal value of commercial mortgage loans originated for the year ended December 31, 2016, compared to $3.6
billion for the year ended December 31, 2015.
Depreciation and amortization
Depreciation and amortization totaled $39.4 million for the year ended December 31, 2016, compared to $39.1 million for the
year ended December 31, 2015. The $0.3 million increase in depreciation and amortization is attributable to a partial period of
depreciation on 2016 acquisitions and a full period of depreciation on acquisitions made in 2015.
86
Income tax (benefit) expense
Most of our consolidated income tax provision relates to the business units held in our TRSs. Income tax (benefit) expense
totaled $6.3 million for the year ended December 31, 2016, compared to $14.6 million for the year ended December 31, 2015.
The decrease of $8.2 million is primarily attributable to decreased income in our TRSs.
Liquidity and Capital Resources
Our financing strategies are critical to the success and growth of our business. We manage our financing to complement our
asset composition and to diversify our exposure across multiple capital markets and counterparties.
We require substantial amounts of capital to support our business. The management team, in consultation with our board of
directors, establishes our overall liquidity and capital allocation strategies. A key objective of those strategies is to support the
execution of our business strategy while maintaining sufficient ongoing liquidity throughout the business cycle to service our
financial obligations as they become due. When making funding and capital allocation decisions, members of our senior
management consider business performance; the availability of, and costs and benefits associated with, different funding
sources; current and expected capital markets and general economic conditions; our balance sheet and capital structure; and our
targeted liquidity profile and risks relating to our funding needs.
To ensure that Ladder Capital can effectively address the funding needs of the Company on a timely basis, we maintain a
diverse array of liquidity sources including (1) cash and cash equivalents; (2) cash generated from operations; (3) borrowings
under repurchase agreements; (4) principal repayments on investments including mortgage loans and securities; (5) borrowings
under our credit agreement; (6) borrowings under our revolving credit facility; (7) proceeds from securitizations and sales of
loans; (8) proceeds from the sale of securities; (9) proceeds from the sale of real estate; (10) proceeds from the issuance of the
Notes; and (11) proceeds from the issuance of equity capital. We use these funding sources to meet our obligations on a timely
basis.
Our primary uses of liquidity are for (1) the funding of loan and real estate-related investments; (2) the repayment of short-term
and long-term borrowings and related interest; (3) the funding of our operating expenses; and (4) distributions to our equity
investors to comply with the REIT distribution requirements and the terms of LCFH’s LLLP Agreement. We require short-term
liquidity to fund loans that we originate and hold on our consolidated balance sheet pending sale, including through whole loan
sale, participation, or securitization. We generally require longer-term funding to finance the loans and real estate-related
investments that we hold for investment. We have historically used the aforementioned funding sources to meet the operating
and investment needs as they have arisen and have been able to do so by applying a rigorous approach to long and short-term
cash and debt forecasting.
In addition, as a REIT, we are also required to make sufficient dividend payments to our shareholders (and equivalent
distributions to the Continuing LCFH Limited Partners) in amounts at least sufficient to maintain out REIT status. Under IRS
guidance, we may elect to pay a portion of our dividends in stock, subject to a cash/stock election by our shareholders, to
optimize our level of capital retention. Accordingly, our cash requirement to pay dividends to maintain REIT status could be
substantially reduced at the discretion of the board.
A summary of our financial obligations is provided below in our Contractual Obligations table. All our existing financial
obligations due within the following year are either extendable for one or more additional years at our discretion or are incurred
in the normal course of business (i.e., interest payments/loan funding obligations).
We generally seek to maintain a debt-to-equity ratio, excluding non-recourse liabilities for transfers not considered sales, of
approximately 3.0:1.0 or below. This ratio typically fluctuates during the course of a fiscal year due to the normal course of
business in our conduit lending operations, in which we generally securitize our inventory of loans at intervals, and also
because of changes in our asset mix, due in part to such securitizations. We generally seek to match fund our assets according to
their liquidity characteristics and expected hold period. We believe that the defensive positioning of our predominantly senior
secured assets and our financing strategy has allowed us to maintain financial flexibility to capitalize on an attractive range of
market opportunities as they have arisen.
87
We and our subsidiaries may incur substantial additional debt in the future. However, we are subject to certain restrictions on
our ability to incur additional debt in the indentures governing the Notes (the “Indentures”) and our other debt agreements.
Under the Indentures, we may not incur certain types of indebtedness unless our consolidated non-funding debt to equity ratio
(as defined in the Indentures) is less than or equal to 1.75 to 1.00 or if the unencumbered assets of the Company and its
subsidiaries is less than 120% of their unsecured indebtedness, although our subsidiaries are permitted to incur indebtedness
where recourse is limited to the assets and/or the general credit of such subsidiary. Our borrowings under certain financing
agreements and our committed loan facilities are subject to maximum consolidated leverage ratio limits (currently ranging from
3.50 to 1.00 to 4.00 to 1.00), including maximum consolidated leverage ratio limits weighted by asset composition that change
based on our asset base at the time of determination, and, in the case of one provider, a minimum interest coverage ratio
requirement of 1.50 to 1.00 if certain liquidity thresholds are not satisfied. These restrictions, which would permit us to incur
substantial additional debt, are subject to significant qualifications and exceptions.
Our principal debt financing sources include: (1) committed secured funding provided by banks, (2) uncommitted secured
funding sources, including asset repurchase agreements with a number of banks, (3) long term non-recourse mortgage
financing, (4) long term senior unsecured notes in the form of corporate bonds and (5) borrowings on both a short- and long-
term committed basis, made by Tuebor from the FHLB.
As of December 31, 2017, we had unrestricted cash and cash equivalents of $76.7 million, unencumbered loans of $1.0 billion,
unencumbered securities of $158.5 million, unencumbered real estate of $128.7 million and $199.5 million of other assets not
secured by any portion of secured indebtedness.
To maintain our qualification as a REIT under the Code, we were required to distribute our accumulated earnings and profits
attributable to taxable periods ending prior to January 1, 2015 and we must annually distribute at least 90% of our taxable
income. Consistent with the terms of an IRS private letter ruling, we paid our fourth quarter 2016 and 2015 dividends in a
combination of cash and stock and may pay future distributions in such a manner; however, the REIT distribution requirements
limit our ability to retain earnings and thereby replenish or increase capital for operations. We believe that our significant
capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and
anticipated capital requirements, including funding new investment opportunities, paying distributions to our shareholders and
servicing our debt obligations.
Our captive insurance company subsidiary, Tuebor, is subject to state regulations which require that dividends may only be
made with regulatory approval. Largely as a result of this restriction, $1.2 billion of Tuebor’s member’s capital was restricted
from transfer via dividend to Tuebor’s parent without prior approval of state insurance regulators at December 31, 2017. To
facilitate intercompany cash funding of operations and investments, Tuebor and its parent maintain regulator-approved
intercompany borrowing/lending agreements.
The Company established a broker-dealer subsidiary, LCS, which was initially licensed and capitalized to do business in
July 2010. LCS is required to be compliant with FINRA and SEC regulations, which require that dividends may only be made
with regulatory approval. Largely as a result of this restriction, $5.1 million of LCS’s member’s capital was restricted from
transfer to LCS’s parent without prior approval of regulators at December 31, 2017.
Cash, cash equivalents and restricted cash
We held unrestricted cash and cash equivalents of $76.7 million and $44.6 million at December 31, 2017 and 2016,
respectively. We held restricted cash of $106.0 million and $44.8 million at December 31, 2017 and 2016, respectively. We
elected to early adopt ASU 2016-18 effective January 1, 2017. ASU 2016-18 requires the inclusion of restricted cash with cash
and cash equivalents when reconciling the beginning-of-the-period and end-of-period total amounts show on the statement of
cash flows. We held cash, cash equivalents and restricted cash of $182.7 million and $89.4 million at December 31, 2017 and
2016, respectively.
Cash generated from (used in) operations
Our operating activities were a net provider (user) of cash of $12.0 million and $338.4 million during the years ended
December 31, 2017 and 2016, respectively. Cash from operations includes the origination of loans held for sale, net of the
proceeds from sale of loans and gains from sales of loans, which was the predominant driver of the $0.3 billion decrease in cash
generated from operations for the year ended December 31, 2017, compared to the year ended December 31, 2016.
88
Borrowings under various financing arrangements
Our financing strategies are critical to the success and growth of our business. We manage our leverage policies to complement
our asset composition and to diversify our exposure across multiple counterparties. Our borrowings under various financing
arrangements as of December 31, 2017 and 2016 are set forth in the table below ($ in thousands):
Committed loan repurchase facilities
Committed securities repurchase facility
Uncommitted securities repurchase facilities
Total repurchase facilities
Revolving credit facility
Mortgage loan financing
CLO debt(1)
Participation financing - mortgage loan receivable
Borrowings from the FHLB
Senior unsecured notes(2)
Total debt obligations
December 31, 2017 December 31, 2016
$
398,653
$
—
74,757
473,410
—
692,696
688,479
3,107
1,370,000
1,152,134
4,379,826
$
$
567,163
228,317
311,705
1,107,185
25,000
590,106
—
—
1,660,000
559,847
3,942,138
(1)
(2)
Presented net of unamortized debt issuance costs of $6.0 million as of December 31, 2017.
Presented net of unamortized debt issuance costs of $14.1 million and $4.0 million at December 31, 2017 and
December 31, 2016, respectively.
The Company’s repurchase facilities include covenants covering minimum net worth requirements (ranging from $300.0
million to $780.0 million), maximum reductions in net worth over stated time periods, minimum liquidity levels (typically
$30.0 million of cash or a higher standard that often allows for the inclusion of different percentages of liquid securities in the
determination of compliance with the requirement), maximum leverage ratios (calculated in various ways based on specified
definitions of indebtedness and net worth) and a fixed charge coverage ratio of 1.25x, and, in the instance of one lender, an
interest coverage ratio of 1.50x, in each case, if certain liquidity thresholds are not satisfied. We were in compliance with all
covenants as of December 31, 2017 and 2016. Further, certain of our financing arrangements and loans on our real property are
secured by the assets of the Company, including pledges of the equity of certain subsidiaries or the assets of certain
subsidiaries. From time to time, certain of these financing arrangements and loans may prohibit certain of our subsidiaries from
paying dividends to the Company, from making distributions on such subsidiary’s capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary’s property or other
assets to the Company or other subsidiaries of the Company.
Committed loan facilities
We are parties to multiple committed loan repurchase agreement facilities, totaling $1.7 billion of credit capacity. As of
December 31, 2017, the Company had $398.7 million of borrowings outstanding, with an additional $1.3 billion of committed
financing available. As of December 31, 2016, the Company had $567.2 million of borrowings outstanding, with an additional
$1.1 billion of committed financing available. Assets pledged as collateral under these facilities are generally limited to whole
mortgage loans collateralized by first liens on commercial real estate. Our repurchase facilities include covenants covering net
worth requirements, minimum liquidity levels, and maximum debt/equity ratios. We believe we were in compliance with all
covenants as of December 31, 2017 and 2016.
89
We have the option to extend some of our existing facilities subject to a number of customary conditions. The lenders have sole
discretion with respect to the inclusion of collateral in these facilities, to determine the market value of the collateral on a daily
basis, and, if the estimated market value of the included collateral declines, the lenders have the right to require additional
collateral or a full and/or partial repayment of the facilities (margin call), sufficient to rebalance the facilities. Typically, the
facilities are established with stated guidelines regarding the maximum percentage of the collateral asset’s market value that can
be borrowed. We often borrow at a lower percentage of the collateral asset’s value than the maximum leaving us with excess
borrowing capacity that can be drawn upon at a later date and/or applied against future margin calls so that they can be satisfied
on a cashless basis.
Committed securities facility
We are a party to a term master repurchase agreement with a major U.S. banking institution for CMBS, totaling $400.0 million
of credit capacity. As we do in the case of borrowings under committed loan facilities, we often borrow at a lower percentage of
the collateral asset’s value than the maximum leaving us with excess borrowing capacity that can be drawn upon a later date
and/or applied against future margin calls so that they can be satisfied on a cashless basis. As of December 31, 2017, the
Company had no borrowings outstanding, with an additional $400.0 million of committed financing available. As of
December 31, 2016, the Company had $228.3 million of borrowings outstanding, with an additional $171.7 million of
committed financing available.
Uncommitted securities facilities
We are party to multiple master repurchase agreements with several counterparties to finance our investments in CMBS and
U.S. Agency Securities. The securities that served as collateral for these borrowings are highly liquid and marketable assets that
are typically of relatively short duration. As we do in the case of other secured borrowings, we often borrow at a lower
percentage of the collateral asset’s value than the maximum leaving us with excess borrowing capacity that can be drawn upon
a later date and/or applied against future margin calls so that they can be satisfied on a cashless basis.
Collateralized borrowings under repurchase agreement
The following table presents the amount of collateralized borrowings outstanding as of the end of each quarter, the average
amount of collateralized borrowings outstanding during the quarter and the monthly maximum amount of collateralized
borrowings outstanding during the quarter ($ in thousands):
Total
Collateralized Borrowings Under
Repurchase Agreements (1)
Other Collateralized Borrowings (2)
Quarter-
end
balance
Average
quarterly
balance
Maximum
balance of
any
month-
end
Quarter-
end
balance
Average
quarterly
balance
Maximum
balance of
any
month-
end
Quarter-
end
balance
Average
quarterly
balance
Maximum
balance of
any
month-
end
Quarter Ended
December 31, 2014
1,489,416
1,394,674
1,603,206
1,431,666
1,340,924
1,545,456
March 31, 2015
June 30, 2015
1,456,163
1,481,913
1,506,723
1,409,413
1,427,496
1,447,973
1,178,130
1,308,066
1,492,066
1,056,380
1,216,316
1,370,316
September 30, 2015
1,241,326
1,420,356
1,653,179
1,191,326
1,347,523
1,556,429
December 31, 2015
1,260,755
1,296,608
1,344,330
1,260,755
1,283,008
1,323,930
March 31, 2016
June 30, 2016
1,104,339
1,162,008
1,240,778
1,104,339
1,162,008
1,240,778
1,139,615
1,108,263
1,139,615
1,139,615
1,108,263
1,139,615
September 30, 2016
1,458,327
1,393,122
1,468,013
1,458,327
1,393,122
1,468,013
December 31, 2016
1,107,185
1,397,061
1,555,941
1,107,185
1,397,061
1,555,941
March 31, 2017
June 30, 2017
1,039,356
1,073,893
1,119,863
1,039,356
1,073,893
1,119,863
1,149,605
1,264,948
1,373,953
1,149,605
1,264,948
1,373,953
September 30, 2017
913,137
1,126,201
1,301,334
913,137
1,126,201
1,301,334
December 31, 2017
473,410
739,721
892,081
473,410
739,721
892,081
57,750
46,750
121,750
50,000
—
—
—
—
—
—
—
—
—
53,750
54,417
91,750
72,833
13,600
57,750
58,750
121,750
96,750
20,400
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
Collateralized borrowings under repurchase agreements include all securities and loan financing under repurchase
agreements.
90
(2)
Other collateralized borrowings include borrowings under credit agreement and borrowings under credit and security
agreement.
As of December 31, 2017, we had repurchase agreements with seven counterparties, with total debt obligations outstanding of
$0.5 billion. As of December 31, 2017, two counterparties, Deutsche Bank and J.P. Morgan, held collateral that exceeded the
amounts borrowed under the related repurchase agreements by more than $74.4 million, or 5% of our total equity. As of
December 31, 2017, the weighted average haircut, or the percent of collateral value in excess of the loan amount, under our
repurchase agreements was 37.3%. There have been no significant fluctuations in haircuts across asset classes on our
repurchase facilities.
Revolving Credit Facility
On February 11, 2014, the Company entered into a revolving credit facility (the “Revolving Credit Facility”), which was
subsequently amended on February 26, 2016, March 1, 2017, March 23, 2017, September 29, 2017 and October 27, 2017, to
add additional banks to our syndicate, add two additional one-year extension options and increase its maximum funding
capacity. The Revolving Credit Facility provides for an aggregate maximum borrowing amount of $241.4 million, including a
$25.0 million sublimit for the issuance of letters of credit. The Revolving Credit Facility is available on a revolving basis to
finance the Company’s working capital needs and for general corporate purposes. The Revolving Credit Facility has a maturity
date of February 11, 2018, which may be extended by three 12-month periods subject to the satisfaction of customary
conditions, including the absence of default. Interest on the Revolving Credit Facility is one-month LIBOR plus 3.50% per
annum payable monthly in arrears.
The obligations under the Revolving Credit Facility are guaranteed by the Company and certain of its subsidiaries. The
Revolving Credit Facility is secured by a pledge of the shares of (or other ownership or equity interests in) certain subsidiaries
to the extent the pledge is not restricted under existing regulations, law or contractual obligations.
LCFH is subject to customary affirmative covenants and negative covenants, including limitations on the incurrence of
additional debt, liens, restricted payments, sales of assets and affiliate transactions under the Revolving Credit Facility. In
addition, under the Revolving Credit Facility, LCFH is required to comply with financial covenants relating to minimum net
worth, maximum leverage, minimum liquidity, and minimum fixed charge coverage, consistent with our other credit facilities.
Our ability to borrow under the Revolving Credit Facility will be dependent on, among other things, LCFH’s compliance with
the financial covenants. The Revolving Credit Facility contains customary events of default, including non-payment of
principal or interest, fees or other amounts, failure to perform or observe covenants, cross-default to other indebtedness, the
rendering of judgments against the Company or certain of our subsidiaries to pay certain amounts of money and certain events
of bankruptcy or insolvency.
Mortgage loan financing
We generally finance our real estate using long-term non-recourse mortgage financing. During the year ended December 31,
2017, we executed 28 term debt agreements to finance real estate. These non-recourse debt agreements are fixed rate financing
at rates ranging from 4.25% to 6.75%, maturing between 2018 - 2027 and totaling $692.7 million and $590.1 million at
December 31, 2017 and 2016, respectively. These long-term non-recourse mortgages include net unamortized premiums of $6.6
million and $5.6 million at December 31, 2017 and 2016, respectively, representing proceeds received upon financing greater
than the contractual amounts due under the agreements. The premiums are being amortized over the remaining life of the
respective debt instruments using the effective interest method. We recorded $1.0 million and $0.9 million of premium
amortization, which decreased interest expense, for the years ended December 31, 2017 and 2016, respectively. The loans are
collateralized by real estate and related lease intangibles, net, of $911.0 million and $757.5 million as of December 31, 2017
and 2016, respectively.
CLO Debt
The Company completed its inaugural CLO issuances in the two transactions described below. As of December 31, 2017, the
Company had a total of $688.5 million of floating rate, non-recourse CLO debt included in debt obligations on its consolidated
balance sheets. Unamortized debt issuance costs of $6.0 million are included in CLO Debt as of December 31, 2017, in
accordance with GAAP. As of December 31, 2017, the CLO debt has interest rates of 2.36% to 5.08% (with a weighted average
of 3.40%). As of December 31, 2017, collateral for the CLO debt comprised $880.4 million of first mortgage commercial
mortgage real estate loans.
91
On October 17, 2017, a subsidiary of the Company consummated a securitization of floating-rate commercial mortgage loans
through a static CLO structure. Over $456.9 million of balance sheet loans (“Contributed Loans”) were contributed into the
CLO. Certain of the Contributed Loans have future funding components that were not contributed to the CLO and that are
retained by a subsidiary of the Company in the form of a participation interest or separate note. However, for a limited period of
time, to the extent loans in the CLO are repaid, the CLO may acquire portions of the future fundings from the Company’s
affiliate. An affiliate of the Company retained an approximately 18.5% interest in the CLO by retaining the most subordinate
classes of notes issued by the CLO, retains control over major decisions made with respect to the administration of the
Contributed Loans and appoints the special servicer under the CLO. The CLO is a VIE and the Company is the primary
beneficiary and, therefore, consolidates the VIE.
On December 21, 2017, a subsidiary of the Company consummated a securitization of fixed and floating-rate commercial
mortgage loans through a static CLO structure. Over $431.5 million of Contributed Loans were contributed into the
CLO. Certain of the Contributed Loans have future funding components that were not contributed to the CLO and that are
retained by a subsidiary of the Company in the form of a participation interest or separate note. However, for a limited period of
time, to the extent loans in the CLO are repaid, the CLO may acquire portions of the future fundings from the Company’s
affiliate. An affiliate of the Company retained an approximately 25% interest in the CLO by retaining the most subordinate
classes of notes issued by the CLO, retains control over major decisions made with respect to the administration of the
Contributed Loans and appoints the special servicer under the CLO. The CLO is a VIE and the Company is the primary
beneficiary and, therefore, consolidates the VIE.
Participation Financing - Mortgage Loan Receivable
During the year ended December 31, 2017, the Company sold a participating interest in a first mortgage loan receivable to a
third party. The sales proceeds of $4.0 million are considered non-recourse secured borrowings and are recognized in debt
obligations on the Company’s consolidated balance sheets with $3.1 million outstanding as of December 31, 2017. The
Company recorded $0.5 million of interest expense for the year ended December 31, 2017.
FHLB financing
On July 11, 2012, Tuebor became a member of the FHLB. As of December 31, 2017, Tuebor had $1.4 billion of borrowings
outstanding (with an additional $630.0 million of committed term financing available from the FHLB), with terms of overnight
to six years, interest rates of 0.87% to 2.74%, and advance rates of 49.6% to 100% of the collateral. As of December 31, 2017,
collateral for the borrowings was comprised of $861.7 million of CMBS and U.S. Agency Securities and $915.9 million of first
mortgage commercial real estate loans. The weighted-average borrowings outstanding were $1.5 billion for the year ended
December 31, 2017. On December 6, 2017, Tuebor’s advance limit was updated by the FHLB to the lowest of a Set Dollar
Limit (currently $2.0 billion), 40% of Tuebor’s total assets or 150% of the Company’s total equity. Beginning April 1, 2020
through December 31, 2020, the Set Dollar Limit will be $1.5 billion. Beginning January 1, 2021 through February 19, 2021,
the Set Dollar Limit will be $750.0 million. Tuebor is well-positioned to meet its obligations and pay down its advances in
accordance with the scheduled reduction in the Set Dollar Limit, which remains subject to revision by the FHLB or as a result
of any future changes in applicable regulations.
As of December 31, 2016, Tuebor had $1.7 billion of borrowings outstanding (with an additional $338.9 million of committed
term financing available from the FHLB), with terms of overnight to seven years, interest rates of 0.43% to 2.74%, and advance
rates of 49.6% to 95.2% of the collateral. As of December 31, 2016, collateral for the borrowings was comprised of $1.4 billion
of CMBS and U.S. Agency Securities and $724.0 million of first mortgage commercial real estate loans. The weighted-average
borrowings outstanding were $1.9 billion for the year ended December 31, 2016.
Effective February 19, 2016, the FHFA, regulator of the FHLB, adopted a final rule amending its regulation regarding the
eligibility of captive insurance companies for FHLB membership.
Pursuant to the final rule, Tuebor may remain a member of the FHLB through February 19, 2021 (the “Transition Period”).
During the Transition Period, Tuebor is eligible to continue to draw new additional advances, extend the maturities of existing
advances, and pay off outstanding advances on the same terms as non-captive insurance company FHLB members with the
following two exceptions:
1. New advances (including any existing advances that are extended during the Transition Period) will have maturity
dates on or before February 19, 2021; and
92
2. The FHLB will make new advances to Tuebor subject to a requirement that Tuebor’s total outstanding advances do not
exceed 40% of Tuebor’s total assets. As of December 31, 2017, the Company is in compliance with this requirement.
Tuebor has executed new advances since the effective date of the new rule in the ordinary course of business.
FHLB advances amounted to 31.3% of the Company’s outstanding debt obligations as of December 31, 2017. The Company
does not anticipate that the FHFA’s final regulation will materially impact its operations as it will continue to access FHLB
advances during the five-year Transition Period and it has multiple, diverse funding sources for financing its portfolio in the
future. In the latter stages of the five-year Transition Period, the Company expects to adjust its financing activities by gradually
making greater use of alternative sources of funding of types currently used by the Company including secured and unsecured
borrowings from banks and other counterparties, the issuance of corporate bonds and equity, and the securitization or sale of
assets. Future moves to alternative funding sources could result in higher or lower advance rates from secured funding sources
but also the incurrence of higher funding and operating costs than would have been incurred had FHLB funding continued to be
available. In addition, the Company may find it more difficult to obtain committed secured funding for multiple year terms as it
has been able to obtain from the FHLB.
The Transition Period allows time for events to occur that may impact Tuebor’s long-term membership in the FHLB, including
further regulatory changes, the enactment of legislation, or the filing of litigation challenging the validity of the final rule.
During this period, a combination of these external events and/or Tuebor’s own actions could result in the emergence of feasible
alternative approaches for it to retain its FHLB membership.
There is no assurance that the FHFA or the FHLB will not take actions that could adversely impact Tuebor’s membership in the
FHLB and continuing access to new or existing advances prior to February 19, 2021.
Tuebor is subject to state regulations which require that dividends (including dividends to the Company as its parent) may only
be made with regulatory approval. However, there can be no assurance that we would obtain such approval if sought. Largely as
a result of this restriction, $1.2 billion of the member’s capital was restricted from transfer via dividend to Tuebor’s parent
without prior approval of state insurance regulators at December 31, 2017. To facilitate intercompany cash funding of
operations and investments, Tuebor and its parent maintain regulator-approved intercompany borrowing/lending agreements.
Senior Unsecured Notes
LCFH issued the 2025 Notes, the 2022 Notes, the 2021 Notes and the 2017 Notes (each as defined below, and collectively, the
“Notes”) with Ladder Capital Finance Corporation (“LCFC”), as co-issuers on a joint and several basis. LCFC is a 100%
owned finance subsidiary of Series TRS of LCFH with no assets, operations, revenues or cash flows other than those related to
the issuance, administration and repayment of the Notes. The Company and certain subsidiaries of LCFH currently guarantee
the obligations under the Notes and the indenture. The Company is the general partner of LCFH and, through LCFH and its
subsidiaries, operates the Ladder Capital business. As of December 31, 2017, the Company has a 84.1% economic and voting
interest in LCFH and controls the management of LCFH as a result of its ability to appoint board members. Accordingly, the
Company consolidates the financial results of LCFH and records noncontrolling interest for the economic interest in LCFH held
by the Continuing LCFH Limited Partners. In addition, the Company, through certain subsidiaries which are treated as TRSs, is
indirectly subject to U.S. federal, state and local income taxes. Other than the noncontrolling interest in the Operating
Partnership and federal, state and local income taxes, there are no material differences between the Company’s consolidated
financial statements and LCFH’s consolidated financial statements. Unamortized debt issuance costs of $14.1 million and $4.0
million are included in senior unsecured notes as of December 31, 2017 and 2016, respectively, in accordance with GAAP.
2017 Notes
On September 19, 2012, LCFH issued $325.0 million in aggregate principal amount of 7.375% senior notes due October 1,
2017 (the “2017 Notes”). The 2017 Notes require interest payments semi-annually in cash in arrears on April 1 and October 1
of each year, beginning on September 19, 2012. The 2017 Notes were unsecured and subject to incurrence-based covenants,
including limitations on the incurrence of additional debt, restricted payments, liens, sales of assets, affiliate transactions and
other covenants typical for financings of this type. At any time on or after April 1, 2017, the 2017 Notes were redeemable at the
option of the Company, in whole or in part, upon not less than 30 nor more than 60 days’ notice, without penalty. On November
5, 2014, the board of directors authorized the Company to make up to $325.0 million in repurchases of the 2017 Notes from
time to time without further approval.
93
On December 17, 2014, the Company retired $5.4 million of principal of the 2017 Notes for a repurchase price of $5.6 million
recognizing a $0.2 million loss on extinguishment of debt. During the year ended December 31, 2016, the Company retired
$21.9 million of principal of the 2017 Notes for a repurchase price of $21.4 million, recognizing a $0.3 million net gain on
extinguishment of debt after recognizing $(0.2) million of unamortized debt issuance costs associated with the retired debt.
On March 1, 2017, the Company delivered a notice of conditional full redemption to holders of the 2017 Notes, pursuant to
which the Company redeemed all outstanding 2017 Notes at 100% of the principal amount thereof (plus any accrued and
unpaid interest to the redemption date) as of April 1, 2017. The redemption was conditioned on the completion by the Company
of a senior notes offering with gross proceeds of not less than $500 million. The Company’s offering of the 2022 Notes,
described below, satisfied this condition. On April 3, 2017, the Company retired the remaining $297.7 million of principal of
the 2017 Notes for a repurchase price of $297.7 million, recognizing a $53,547 net loss on extinguishment of debt after
recognizing $(22,847) of unamortized debt issuance costs associated with the retired debt.
2021 Notes
On August 1, 2014, LCFH issued $300.0 million in aggregate principal amount of 5.875% senior notes due August 1, 2021 (the
“2021 Notes”). The 2021 Notes require interest payments semi-annually in cash in arrears on February 1 and August 1 of each
year, beginning on February 1, 2015. The 2021 Notes will mature on August 1, 2021. The 2021 Notes are unsecured and are
subject to incurrence-based covenants, including limitations on the incurrence of additional debt, restricted payments, liens,
sales of assets, affiliate transactions and other covenants typical for financings of this type. At any time on or after August 1,
2020, the 2021 Notes are redeemable at the option of the Company, in whole or in part, upon not less than 30 nor more than 60
days’ notice, without penalty. On February 24, 2016, the board of directors authorized the Company to make up to $100.0
million in repurchases of the 2021 Notes from time to time without further approval.
During the year ended December 31, 2016, the Company retired $33.8 million of principal of the 2021 Notes for a repurchase
price of $28.2 million, recognizing a $5.1 million net gain on extinguishment of debt after recognizing $(0.4) million of
unamortized debt issuance costs associated with the retired debt. As of December 31, 2017, the remaining $266.2 million in
aggregate principal amount of the 2021 Notes is due August 1, 2021.
2022 Notes
On March 16, 2017, LCFH issued $500.0 million in aggregate principal amount of 5.250% senior notes due March 15, 2022
(the “2022 Notes”). The 2022 Notes require interest payments semi-annually in cash in arrears on March 15 and September 15
of each year, beginning on September 15, 2017. The 2022 Notes will mature on March 15, 2022. The 2022 Notes are unsecured
and are subject to an unencumbered assets to unsecured debt covenant. At any time on or after September 15, 2021, the 2022
Notes are redeemable at the option of the Company, in whole or in part, upon not less than 15 nor more than 60 days’ notice,
without penalty.
2025 Notes
On September 25, 2017, LCFH issued $400.0 million in aggregate principal amount of 5.250% senior notes due October 1,
2025 (the “2025 Notes”). The 2025 Notes require interest payments semi-annually in cash in arrears on April 1 and October 1
of each year, beginning on April 1, 2018. The 2025 Notes will mature on October 1, 2025. The 2025 Notes are unsecured and
are subject to an unencumbered assets to unsecured debt covenant. The Company may redeem the 2025 Notes, in whole, at any
time, or from time to time, prior to their stated maturity. The 2025 Notes are redeemable at the option of the Company, in whole
or in part, upon not less than 15 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of
the 2025 Notes plus the Applicable Premium (as defined in the indenture governing the 2025 Notes) as of, and accrued and
unpaid interest, if any, to the redemption date.
Stock Repurchases
On October 30, 2014, the board of directors authorized the Company to make up to $50.0 million in repurchases of the
Company’s Class A common stock from time to time without further approval. Stock repurchases by the Company are generally
made for cash in open market transactions at prevailing market prices but may also be made in privately negotiated transactions
or otherwise. The timing and amount of purchases are determined based upon prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors. As of December 31, 2017, the Company has a remaining amount
available for repurchase of $41.8 million, which represents 3.5% in the aggregate of its outstanding Class A common stock,
based on the closing price of $13.78 per share on such date.
94
The following table is a summary of the Company’s repurchase activity of its Class A common stock during the year ended
December 31, 2017 and 2016 ($ in thousands):
Authorizations remaining as of December 31, 2016
Additional authorizations
Repurchases paid
Repurchases unsettled
Authorizations remaining as of December 31, 2017
(1) Amount excludes commissions paid associated with share repurchases.
Authorizations remaining as of December 31, 2015
Additional authorizations
Repurchases paid
Repurchases unsettled
Authorizations remaining as of December 31, 2016
(1) Amount excludes commissions paid associated with share repurchases.
Dividends
Shares
Amount(1)
189,897
Shares
424,317
$
$
$
$
44,353
—
(2,584)
—
41,769
Amount(1)
49,006
—
(4,653)
—
44,353
To maintain our qualification as a REIT under the Code, we must annually distribute at least 90% of our taxable income and,
for 2015, we had to distribute our undistributed accumulated earnings and profits attributable to taxable periods prior to January
1, 2015 (the “E&P Distribution”). The Company made the E&P Distribution on January 21, 2016 and has paid and in the future
intend to declare regular quarterly distributions to our shareholders in an amount approximating our net taxable income.
Consistent with IRS guidance we may, subject to a cash/stock election by our shareholders, pay a portion of our dividends in
stock, to provide for meaningful capital retention; however, the REIT distribution requirements limit our ability to retain
earnings and thereby replenish or increase capital for operations. The timing and amount of future distributions is based on a
number of factors, including, among other things, our future operations and earnings, capital requirements and surplus, general
financial condition and contractual restrictions. All dividend declarations are subject to the approval of our board of directors.
Generally, we expect the distributions to be taxable as ordinary dividends to our shareholders, whether paid in cash or a
combination of cash and common stock, and not as a tax-free return of capital or a capital gain. We believe that our significant
capital resources and access to financing will provide the financial flexibility at levels sufficient to meet current and anticipated
capital requirements, including funding new investment opportunities, paying distributions to our shareholders and servicing
our debt obligations.
95
The following table presents dividends declared (on a per share basis) of Class A common stock for the year ended
December 31, 2017 and 2016:
Declaration Date
March 1, 2017
June 1, 2017
September 1, 2017
November 7, 2017
Total
March 1, 2016
June 1, 2016
September 1, 2016
December 2, 2016
Total
Dividend per
Share
$
$
$
$
0.300
0.300
0.300
0.315
1.215
0.275
0.275
0.275
0.460
1.285
Principal repayments on investments
We receive principal amortization on our loans and securities as part of the normal course of our business. Repayment of
mortgage loan receivables provided net cash of $406.7 million for the year ended December 31, 2017 and $651.7 million for
the year ended December 31, 2016. Repayment of real estate securities provided net cash of $138.4 million for the year ended
December 31, 2017 and $684.1 million for the year ended December 31, 2016.
Proceeds from securitizations and sales of loans
We sell our conduit mortgage loans to securitization trusts and to other third parties as part of our normal course of business.
There were $1.4 billion proceeds from sales of mortgage loans for the year ended December 31, 2017 and $1.4 billion for the
year ended December 31, 2016.
Proceeds from the sale of securities
We invest in CMBS and U.S. Agency Securities. Proceeds from sales of securities provided net cash of $1.0 billion for the year
ended December 31, 2017 and $539.3 million for the year ended December 31, 2016.
Proceeds from the sale of real estate
We own a portfolio of commercial real estate properties as well as residential condominium units. Proceeds from sales of real
estate provided net cash of $29.5 million for the year ended December 31, 2017 and $66.5 million for the year ended
December 31, 2016.
Proceeds from the issuance of equity
For the year ended December 31, 2017 and 2016, there were no proceeds realized in connection with the issuance of equity. We
may issue additional equity in the future.
Other potential sources of financing
In the future, we may also use other sources of financing to fund the acquisition of our assets, including credit facilities,
warehouse facilities, repurchase facilities and other secured and unsecured forms of borrowing. These financings may be
collateralized or non-collateralized, may involve one or more lenders and may accrue interest at either fixed or floating rates.
We may also seek to raise further equity capital or issue debt securities in order to fund our future investments.
96
Contractual obligations
Contractual obligations as of December 31, 2017 were as follows ($ in thousands):
Less than 1
Year
1-3 Years
3-5 Years
More than 5
Years
Total
Contractual Obligations
Secured financings
Senior unsecured notes
Interest payable(2)
Other funding obligations(3)
Payments pursuant to tax
receivable agreement
Operating lease obligations
Total
$
1,083,235 (1)
$
773,422
$
495,614
$
874,834
$
3,227,105
—
120,561
157,017
110
1,205
1,362,128
$
—
226,009
—
221
766,201
80,737
—
221
400,000
130,869
—
1,104
2,361
1,002,013
$
1,279
1,344,052
$
—
1,406,807
$
$
1,166,201
558,176
157,017
1,656
4,845
5,115,000
(1) As more fully disclosed in Note 8, Debt Obligations, Net, these obligations are subject to existing Company controlled
extension options for one or more additional one-year periods or could be refinanced by other existing facilities.
(2) Composed of interest on secured financings and on senior unsecured notes. For borrowings with variable interest rates,
we used the rates in effect as of December 31, 2017 to determine the future interest payment obligations.
(3) Comprised of our off-balance sheet unfunded commitment to provide additional first mortgage loan financing as of
December 31, 2017.
The tables above do not include amounts due under our derivative agreements as those contracts do not have fixed and
determinable payments. Our contractual obligations will be refinanced and/or repaid from earnings as well as amortization and
sales of our liquid collateral.
Off-Balance Sheet Arrangements
We have made investments in various unconsolidated joint ventures. See Note 7, Investment in Unconsolidated Joint Ventures
for further details of our unconsolidated investments. Our maximum exposure to loss from these investments is limited to the
carrying value of our investments.
Unfunded Loan Commitments
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial
needs of our borrowers. As of December 31, 2017, our off-balance sheet arrangements consisted of $157.0 million of unfunded
commitments of mortgage loan receivables held for investment, which was composed of $157.0 million to provide additional
first mortgage loan financing. As of December 31, 2016, our off-balance sheet arrangements consisted of $147.7 million of
unfunded commitments of mortgage loan receivables held for investment, which was comprised of $146.3 million to provide
additional first mortgage loan financing and $1.4 million to provide additional mezzanine loan financing. Such commitments
are subject to our borrowers’ satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated balance sheets and are not reflected on our
consolidated balance sheets.
Critical Accounting Policies
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in
certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed
policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such
methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical
corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. The
Company’s critical accounting policies are those which require assumptions to be made about matters that are highly
uncertain. Different estimates could have a material effect on the Company’s financial results. For all of these estimates, we
caution that future events rarely develop exactly as forecasted, and therefore, routinely require adjustment.
97
During 2017, management reviewed and evaluated these critical accounting estimates and believes they are appropriate. Our
significant accounting policies are described in Item 8—“Financial Statements and Supplemental Data—Note 2.” The
following is a list of accounting policies that require more significant estimates and judgments:
Impairment of Property Held for Use
Investments in Unconsolidated Joint Ventures
• Mortgage Loans Receivable Held for Investment
• Real Estate Securities
• Real Estate
• Allocation of Purchase Price for Acquired Real Estate
•
•
• Capitalization of Interest
• Valuation of Financial Instruments
• Derivative Instruments
• Deferred Tax Asset and Amount Due Pursuant to Tax Receivable Agreement
•
Stock Based Compensation Plan
Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements
Our recently adopted accounting pronouncements and recent accounting pronouncements are described in Item 8—“Financial
Statements and Supplemental Data—Note 2.”
Reconciliation of Non-GAAP Financial Measures
Core Earnings
We present Core Earnings, which is a non-GAAP financial measure, as a supplemental measure of our performance. We believe
Core Earnings assists investors in comparing our performance across reporting periods on a consistent basis by excluding non-
cash expenses and unrecognized results from derivatives and Agency interest-only securities, which we believe makes
comparisons across reporting periods more relevant by eliminating timing differences related to changes in the values of assets
and derivatives. In addition, we use Core Earnings: (i) to evaluate our earnings from operations and (ii) because management
believes that it may be a useful performance measure for us. Core Earnings is also used as a factor in determining the annual
incentive compensation of our senior managers and other employees.
We consider the Class A common shareholders of the Company and Continuing LCFH Limited Partners to have fundamentally
equivalent interests in our pre-tax earnings. Accordingly, for purposes of computing Core Earnings we start with pre-tax
earnings and adjust for other noncontrolling interest in consolidated joint ventures but we do not adjust for amounts attributable
to noncontrolling interest held by Continuing LCFH Limited Partners.
We define Core Earnings as income before taxes adjusted for: (i) real estate depreciation and amortization; (ii) the impact of
derivative gains and losses related to the hedging of assets on our balance sheet as of the end of the specified accounting period;
(iii) unrealized gains/(losses) related to our investments in Agency interest-only securities; (iv) Economic Gains on
Securitization transactions not recognized under GAAP accounting for which risk has substantially transferred during the
period and the exclusion of resultant GAAP recognition of the related economics during the subsequent periods; (v) non-cash
stock-based compensation; and (vi) certain one-time transactional items. As more fully described in Notes 2, 4 and 20, in the
fourth quarter of 2017, the Company changed its method of accounting for transfers of financial assets subject to certain
transfer restrictions on the Third Party Purchasers of risk retention securities in securitizations imposed by the Dodd-Frank Act.
Because such transactions are now treated as sales for purposes of net income, the Company no longer makes an adjustment to
net income for purposes of core earnings. The Company reflected this change in accounting principle retrospectively to prior
interim periods within 2017.
98
For Core Earnings, we include adjustments for Economic Gains on Securitization transactions not recognized under GAAP
accounting for which risk has substantially transferred during the period and exclusion of resultant GAAP recognition of the
related economics during the subsequent periods. This adjustment is reflected in Core Earnings when there is a true risk transfer
on the mortgage loan transfer and settlement. Historically, this has represented the impact of economic gains on (discounts) on
intercompany loans secured by our own real estate which we had not previously recognized because such gains were eliminated
in consolidation. Conversely, if the economic risk was not substantially transferred, no adjustments to net income would be
made relating to those transactions for Core Earnings purposes. Management believes recognizing these amounts for Core
Earnings purposes in the period of transfer of economic risk is a reasonable supplemental measure of our performance.
As discussed in Note 2 to the consolidated financial statements included elsewhere in this Annual Report, we do not designate
derivatives as hedges to qualify for hedge accounting and therefore any net payments under, or fluctuations in the fair value of,
our derivatives are recognized currently in our income statement. However, fluctuations in the fair value of the related assets
are not included in our income statement. We consider the gain or loss on our hedging positions related to assets that we still
own as of the reporting date to be “open hedging positions.” While recognized for GAAP purposes, we exclude the results on
the hedges from Core Earnings until the related asset is sold and the hedge position is considered “closed,” whereupon they
would then be included in Core Earnings in that period. These are reflected as “Adjustments for unrecognized derivative
results” for purposes of computing Core Earnings for the period. We believe that excluding these specifically identified gains
and losses associated with the open hedging positions adjusts for timing differences between when we recognize changes in the
fair values of our assets and changes in the fair value of the derivatives used to hedge such assets.
As more fully discussed in Note 2 to the consolidated financial statements included elsewhere in this Annual Report, our
investments in Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period
earnings. We believe that excluding these specifically identified gains and losses associated with the Agency interest-only
securities adjusts for timing differences between when we recognize changes in the fair values of our assets.
Set forth below is a reconciliation of income (loss) before taxes to Core Earnings ($ in thousands):
Year Ended December 31,
2017
2016
2015
Income (loss) before taxes
$
133,591
$
120,040
$
160,691
Net (income) loss attributable to noncontrolling interest in consolidated
joint ventures and operating partnership (GAAP) (1)
Our share of real estate depreciation, amortization and gain adjustments (2)
Adjustments for unrecognized derivative results (3)
Unrealized (gain) loss on Agency IO securities
Adjustment for economic gain on securitization transactions not recognized
under GAAP for which risk has been substantially transferred, net of
reversal/amortization
Non-cash stock-based compensation
One-time transactional adjustments
Core Earnings
(258)
35,891
(10,139)
(1,405)
1,026
20,043
—
109
33,828
(11,105)
56
(482)
19,039
(1,568)
28,704
(10,213)
1,249
802
10,277
(3,272) (4)
1,509 (5)
$
178,749
$
158,213
$
191,451
(1)
Includes $32 thousand and $29 thousand of net income attributable to noncontrolling interest in consolidated joint ventures which are
included in net (income) loss attributable to noncontrolling interest in operating partnership on the consolidated statements of income
for the years ended December 31, 2017 and 2016, respectively.
99
(2) The following is a reconciliation of GAAP depreciation and amortization to our share of real estate depreciation, amortization and gain
adjustments presented in the computation of Core Earnings in the preceding table ($ in thousands):
Year Ended December 31,
2017
2016
2015
Total GAAP depreciation and amortization
$
40,332
$
39,447
$
Less: Depreciation and amortization related to non-rental property fixed assets
(93)
(114)
Less: Non-controlling interest in consolidated joint ventures’ share of
accumulated depreciation and amortization
Our share of real estate depreciation and amortization
(1,290)
38,949
(2,519)
36,814
$
39,061
(108)
(2,830)
36,123
Realized gain from accumulated depreciation and amortization on real estate
sold (see below)
Less: Non-controlling interest in consolidated joint ventures’ share of
accumulated depreciation and amortization on real estate sold
Our share of accumulated depreciation and amortization on real estate sold
(2,277)
(3,007) $
(7,965)
17
(2,260)
21
(2,986) $
546
(7,419)
Less: Operating lease income on above/below market lease intangible
amortization
(798)
— $
—
Our share of real estate depreciation, amortization and gain adjustments
$
35,891
$
33,828
$
28,704
GAAP gains/losses on sales of real estate include the effects of previously recognized real estate depreciation and amortization. For
purposes of Core Earnings, our share of real estate depreciation and amortization is eliminated and, accordingly, the resultant gain/
losses also must be adjusted. Following is a reconciliation of the related consolidated GAAP amounts to the amounts reflected in Core
Earnings:
Year Ended December 31,
2017
2016
2015
GAAP realized gain on sale of real estate, net
$
Adjusted gain/loss on sale of real estate for purposes of Core Earnings
Our share of accumulated depreciation and amortization on real estate sold $
11,423
(9,163)
2,260
$
$
20,636
(17,650)
2,986
$
$
40,386
(32,967)
7,419
(3) The following is a reconciliation of GAAP net results from derivative transactions to our unrecognized derivative result presented in
the computation of Core Earnings in the preceding table ($ in thousands):
Net results from derivative transactions
Hedging interest expense
Hedging realized result
Adjustments for unrecognized derivative results
Year Ended December 31,
2017
2016
2015
$
$
(12,641) $
(1,409) $
(38,937)
15,320
7,460
29,870
(17,356)
10,139
$
11,105
$
26,820
22,330
10,213
(4) As more fully discussed in Note 16, Income Taxes, to the Company’s Consolidated Financial Statements, the Company recorded an
additional $3.3 million income tax expense for a proposed tax settlement for pre-acquisition liabilities on certain corporate entities
acquired in the IPO Reorganization Transactions. The Company also recorded other income of $3.3 million relating to the expected
recovery of these amounts pursuant to indemnification. While these items are presented on a gross basis, there was no impact to either
net income or Core Earnings. Accordingly, since pre-tax income excludes the tax effect but includes the recovery of $3.3 million
pursuant to the indemnification, the recovery amount has been excluded from Core Earnings.
(5) One-time transactional adjustment for costs related to restructuring the Company for REIT related operations. All costs were expensed
and accrued for in the period incurred.
100
Core Earnings has limitations as an analytical tool. Some of these limitations are:
• Core Earnings does not reflect the impact of certain cash charges resulting from matters we consider not to be
indicative of our ongoing operations and is not necessarily indicative of cash necessary to fund cash needs; and
•
other companies in our industry may calculate Core Earnings differently than we do, limiting its usefulness as a
comparative measure.
Because of these limitations, Core Earnings should not be considered in isolation or as a substitute for net income (loss)
attributable to shareholders or any other performance measures calculated in accordance with GAAP, or as an alternative to
cash flows from operations as a measure of our liquidity.
In the future we may incur gains and losses that are the same as or similar to some of the adjustments in this presentation. Our
presentation of Core Earnings should not be construed as an inference that our future results will be unaffected by unusual or
non-recurring items.
Income from sales of securitized loans, net of hedging
We present income from sales of securitized loans, net of hedging, a non-GAAP financial measure, as a supplemental measure
of the performance of our loan securitization business. Since our loans sold into securitizations to date are comprised of long-
term fixed-rate loans, the result of hedging those exposures prior to securitization represents a substantial portion of our
securitization profitability. Therefore, we view these two components of our profitability together when assessing the
performance of this business activity and find it a meaningful measure of the Company’s performance as a whole. When
evaluating the performance of our sale of loans into securitization business, we generally consider the income from sales of
securitized loans, net, in conjunction with other income statement items that are directly related to such securitization
transactions, including portions of the realized net result from derivative transactions that are specifically related to hedges on
the securitized or sold loans, which we reflect as hedge gain/(loss) related to loans securitized, a non-GAAP financial measure,
in the table below.
Set forth below is an unaudited reconciliation of income from sale of securitized loans, net to income (loss) from sale of loans,
net as reported in our consolidated financial statements included herein and an unaudited reconciliation of hedge gain/(loss)
relating to loans securitized to net results from derivative transactions as reported in our consolidated financial statements
included herein ($ in thousands except for number of loans and securitizations):
Number of loans
Face amount of loans sold into securitizations
Number of securitizations
Income from sales of securitized loans, net (2)
Hedge gain/(loss) related to loans securitized (3)
Income from sales of securitized loans, net of hedging
Adjustment for economic gain on securitization transactions not
recognized under GAAP for which risk has been substantially transferred
Core gain on sale of securitized loans
Year Ended December 31,
2017
2016
2015
114
1,476,741
7
55,220
(5,929)
49,291
2,051
51,342
$
$
$
$
$
$
104
1,327,856 (1) $
210
2,584,939
6
10
23,098
15,271
38,369
413
38,782
$
$
$
71,066
(6,475)
64,591
3,133
67,724
(1) Excludes one $21.7 million loan acquired from a third party and sold into a securitization at equal values.
101
(2) The following is a reconciliation of income (loss) from sale of loans, net, which is the closest GAAP measure, as reported
in our consolidated financial statements included herein to the non-GAAP financial measure of income from sales of
securitized loans, net ($ in thousands):
Year Ended December 31,
2017
2016
2015
Income from sales of loans, net
Unrealized losses on loans related to lower of cost or market adjustments
(Income) loss from sale of loans (non-securitized), net
Income from sales of securitized loans, net
$
$
54,046
$
1,779
(605)
55,220
$
26,009
—
(2,911)
23,098
$
$
71,066
—
—
71,066
(3) The following is a reconciliation of net results from derivative transactions, which is the closest GAAP measure, as
reported in our consolidated financial statements included herein to the non-GAAP financial measure of hedge gain/(loss)
related to loans securitized ($ in thousands):
Year Ended December 31,
2017
2016
2015
Net results from derivative transactions
Hedge gain/(loss) related to lending and securities positions
Hedge gain/(loss) related to loans (non-securitized)
Hedge gain/(loss) related to loans securitized
$
$
(12,641) $
8,130
(1,418)
(5,929) $
(1,409)
15,971
709
15,271
$
$
(38,937)
32,462
—
(6,475)
Adjusted leverage
We present adjusted leverage, which is a non-GAAP financial measure, as a supplemental measure of our performance. We define
adjusted leverage as the ratio of debt obligations, net of deferred financing costs, adjusted for non-recourse indebtedness related
to securitizations that is consolidated on our GAAP balance sheet. We believe adjusted leverage assists investors in comparing our
leverage across reporting periods on a consistent basis by excluding non-recourse debt related to securitized loans.
Set forth below is an unaudited computation of adjusted leverage ($ in thousands):
Debt obligations, net
Less: CLO Debt
Adjusted debt obligations
Total equity
Adjusted leverage
December 31, 2017
December 31, 2016
$
$
4,379,826
(688,479) (1)
3,691,347
1,488,146
2.5
3,942,138
—
3,942,138
1,509,554
2.6
(1) As more fully discussed in Note 8 to our consolidated financial statements, we contributed over $888.4 million of balance
sheet loans into two CLO securitizations that remain on our balance sheet for accounting purposes, but should be excluded
from debt obligations for adjusted leverage calculation purposes.
102
Cost of funds
We present cost of funds, which is a non-GAAP financial measure, as a supplemental measure of the Company’s cost of debt
financing. We define cost of funds as interest expense as reported on our consolidated statements of income adjusted to exclude
interest expense related to liabilities for transfers not considered sales and include the net interest expense component resulting
from our hedging activities, which is currently included in net results from derivative transactions on our consolidated
statements of income. Interest income, net of cost of funds which is a non-GAAP financial measure, is defined as interest
income, less interest income related to mortgage loans transferred but not considered sold less cost of funds.
Set forth below is an unaudited reconciliation of interest expense to cost of funds ($ in thousands):
Interest expense
Net interest expense component of hedging activities (1)
Cost of funds
Interest income
Cost of funds
Interest income, net of cost of funds
(1) Net result from derivative transactions
Hedging realized result
Hedging unrecognized result
Net interest expense component of hedging activities
Year Ended December 31,
2017
2016
2015
(146,118) $
(15,320)
(161,438) $
(120,827) $
(29,870)
(150,697) $
(113,303)
(26,820)
(140,123)
263,667
(161,438)
102,229
$
$
236,372
(150,697)
85,675
$
$
241,539
(140,123)
101,416
Year Ended December 31,
2017
2016
2015
(12,641) $
7,460
(10,139)
(15,320) $
(1,409) $
(17,356)
(11,105)
(29,870) $
(38,937)
22,330
(10,213)
(26,820)
$
$
$
$
$
$
103
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The nature of the Company’s business exposes it to market risk arising from changes in interest rates. Changes, both increases
and decreases, in the rates the Company is able to charge its borrowers, the yields the Company is able to achieve in its
securities investments, and the Company’s cost of borrowing directly impacts its net income. The Company’s interest income
stream from loans and securities is generally fixed over the life of its assets, whereas it uses floating-rate debt to finance a
significant portion of its investments. Another component of interest rate risk is the effect changes in interest rates will have on
the market value of the assets the Company acquires. The Company faces the risk that the market value of its assets will
increase or decrease at different rates than that of its liabilities, including its hedging instruments. The Company mitigates
interest rate risk through utilization of hedging instruments, primarily interest rate swap and futures agreements. Interest rate
swap and futures agreements are utilized to hedge against future interest rate increases on the Company’s borrowings and
potential adverse changes in the value of certain assets that result from interest rate changes. The Company generally seeks to
hedge assets that have a duration longer than five years, including newly originated conduit first mortgage loans, securities in
the Company’s CMBS portfolio if long enough in duration, and most of its U.S. Agency Securities portfolio.
The following table summarizes the change in net income for a 12-month period commencing December 31, 2017 and the
change in fair value of our investments and indebtedness assuming an increase or decrease of 100 basis points in the LIBOR
interest rate on December 31, 2017, both adjusted for the effects of our interest rate hedging activities ($ in thousands):
Change in interest rate:
Decrease by 1.00%
Increase by 1.00%
Projected change
in net income(1)
Projected change
in portfolio
value
$
(15,143) $
17,042
23,003
(22,768)
(1)
Subject to limits for floors on our floating rate investments and indebtedness.
Market Value Risk
The Company’s securities investments are reflected at their estimated fair value. The change in estimated fair value of
securities available-for-sale is reflected in accumulated other comprehensive income. The change in estimated fair value of
Agency interest-only securities is recorded in current period earnings. The estimated fair value of these securities fluctuates
primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair
value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair
value of these securities would be expected to increase. As market volatility increases or liquidity decreases, the market value
of the Company’s assets may be adversely impacted. The Company’s fixed rate mortgage loan portfolio is subject to the same
risks. However, to the extent those loans are classified as held for sale, they are reflected at the lower of cost or market.
Otherwise, held for investment mortgage loans are reflected at values equal to the unpaid principal balances net of certain fees,
costs and loan loss allowances.
104
Liquidity Risk
Market disruptions may lead to a significant decline in transaction activity in all or a significant portion of the asset classes in
which the Company invests and may at the same time lead to a significant contraction in short-term and long-term debt and
equity funding sources. A decline in liquidity of real estate and real estate-related investments, as well as a lack of availability
of observable transaction data and inputs, may make it more difficult to sell the Company’s investments or determine their fair
values. As a result, the Company may be unable to sell its investments, or only be able to sell its investments at a price that may
be materially different from the fair values presented. Also, in such conditions, there is no guarantee that the Company’s
borrowing arrangements or other arrangements for obtaining leverage will continue to be available or, if available, will be
available on terms and conditions acceptable to the Company. In addition, a decline in market value of the Company’s assets
may have particular adverse consequences in instances where it borrowed money based on the fair value of its assets. A
decrease in the market value of the Company’s assets may result in the lender requiring it to post additional collateral or
otherwise sell assets at a time when it may not be in the Company’s best interest to do so. The Company’s captive insurance
company subsidiary, Tuebor, is subject to state regulations which require that dividends may only be made with regulatory
approval. The Company’s broker-dealer subsidiary, LCS, is also required to be compliant with FINRA and SEC regulations
which require that dividends may only be made with regulatory approval.
Credit Risk
The Company is subject to varying degrees of credit risk in connection with its investments. The Company seeks to manage
credit risk by performing deep credit fundamental analyses of potential assets and through ongoing asset management. The
Company’s investment guidelines do not limit the amount of its equity that may be invested in any type of its assets; however,
investments greater than a certain size are subject to approval by the Risk and Underwriting Committee of the board of
directors.
Credit Spread Risk
Credit spread risk is the risk that interest rate spreads between two different financial instruments will change. In general, fixed-
rate commercial mortgages and CMBS are priced based on a spread to Treasury or interest rate swaps. The Company generally
benefits if credit spreads narrow during the time that it holds a portfolio of mortgage loans or CMBS investments, and the
Company may experience losses if credit spreads widen during the time that it holds a portfolio of mortgage loans or CMBS
investments. The Company actively monitors its exposure to changes in credit spreads and the Company may enter into credit
total return swaps or take positions in other credit related derivative instruments to moderate its exposure against losses
associated with a widening of credit spreads.
Risks Related to Real Estate
Real estate and real estate-related assets, including loans and commercial real estate-related securities, are subject to volatility
and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic
conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or
continued weakness in specific industry segments; construction quality, age and design; demographic factors; environmental
conditions; competition from comparable property types or properties; changes in tenant mix or performance and retroactive
changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay the underlying loans, which could also cause the Company to suffer losses.
Covenant Risk
In the normal course of business, the Company enters into loan and securities repurchase agreements and credit facilities with
certain lenders to finance its real estate investment transactions. These agreements contain, among other conditions, events of
default and various covenants and representations. If such events are not cured by the Company or waived by the lenders, the
lenders may decide to curtail or limit extension of credit, and the Company may be forced to repay its advances or loans. In
addition, the Company’s Notes are subject to covenants, including limitations on the incurrence of additional debt, restricted
payments, liens, sales of assets, affiliate transactions and other covenants typical for financings of this type. The Company’s
failure to comply with these covenants could result in an event of default, which could result in the Company being required to
repay these borrowings before their due date. As of December 31, 2017, the Company believes it was in compliance with all
covenants.
105
Diversification Risk
The assets of the Company are concentrated in the real estate sector. Accordingly, the investment portfolio of the Company may
be subject to more rapid change in value than would be the case if the Company were to maintain a wide diversification among
investments or industry sectors. Furthermore, even within the real estate sector, the investment portfolio may be relatively
concentrated in terms of geography and type of real estate investment. This lack of diversification may subject the investments
of the Company to more rapid change in value than would be the case if the assets of the Company were more widely
diversified.
Concentrations of Market Risk
Concentrations of market risk may exist with respect to the Company’s investments. Market risk is a potential loss the
Company may incur as a result of change in the fair values of its investments. The Company may also be subject to risk
associated with concentrations of investments in geographic regions and industries.
Regulatory Risk
The Company established a broker-dealer subsidiary, LCS, which was initially licensed and capitalized to do business in
July 2010. LCS is required to be compliant with FINRA and SEC requirements on an ongoing basis and is subject to multiple
operating and reporting requirements to which all broker-dealer entities are subject. Additionally, Ladder Capital Asset
Management LLC (“LCAM”) is a registered investment adviser. LCAM is required to be compliant with SEC requirements on
an ongoing basis and is subject to multiple operating and reporting requirements to which all registered investment advisers are
subject. In addition, Tuebor is subject to state regulation as a captive insurance company. If LCS, the Adviser or Tuebor fail to
comply with regulatory requirements, they could be subject to loss of their licenses and registration and/or economic penalties.
106
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Ladder Capital Corp and the notes related to the foregoing consolidated financial
statements are included in this Item.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Organization and Operations
Note 2. Significant Accounting Policies
Note 3. Consolidated Variable Interest Entities
Note 4. Mortgage Loan Receivables
Note 5. Real Estate Securities
Note 6. Real Estate and Related Lease Intangibles, Net
Note 7. Investment in Unconsolidated Joint Ventures
Note 8. Debt Obligations, Net
Note 9. Fair Value of Financial Instruments
Note 10. Derivative Instruments
Note 11. Offsetting Assets and Liabilities
Note 12. Equity Structure and Accounts
Note 13. Noncontrolling Interests
Note 14. Earnings Per Share
Note 15. Stock Based and Other Compensation Plans
Note 16. Income Taxes
Note 17. Related Party Transactions
Note 18. Commitments and Contingencies
Note 19. Segment Reporting
Note 20. Quarterly Financial Data (Unaudited)
Note 21. Subsequent Events
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2017
Schedule IV-Mortgage Loans on Real Estate as of December 31, 2017
108
110
111
113
114
117
120
120
122
141
141
146
149
158
161
169
175
177
178
185
186
188
198
201
202
204
207
209
210
220
All other schedules are omitted because they are not required or the required information is shown in the consolidated financial
statements or notes thereto.
107
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Ladder Capital Corp:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, as listed in the index appearing under Item
15(1), and the financial statement schedules listed in the index appearing under Item 15(2), of Ladder Capital Corp and its
subsidiaries (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
transfers of financial assets in 2017.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management’s annual report on internal control over financial reporting appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
108
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 28, 2018
We have served as the Company’s or its predecessor’s auditor since 2009.
109
Ladder Capital Corp
Consolidated Balance Sheets
(Dollars in Thousands)
Assets
Cash and cash equivalents
Restricted cash
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loans held by consolidated subsidiaries
Provision for loan losses
Mortgage loan receivables held for sale
Real estate securities
Real estate and related lease intangibles, net
Investments in unconsolidated joint ventures
FHLB stock
Derivative instruments
Due from brokers
Accrued interest receivable
Other assets
Total assets
Liabilities and Equity
Liabilities
Debt obligations, net:
Secured and unsecured debt obligations
Due to brokers
Derivative instruments
Amount payable pursuant to tax receivable agreement
Dividends payable
Accrued expenses
Other liabilities
Total liabilities
Commitments and contingencies (Note 18)
Equity
Class A common stock, par value $0.001 per share, 600,000,000 shares authorized;
96,258,847 and 72,681,218 shares issued and 93,641,260 and 71,586,170 shares
outstanding
Class B common stock, par value $0.001 per share, 100,000,000 shares authorized;
17,667,251 and 38,002,344 shares issued and outstanding
Additional paid-in capital
Treasury stock, 2,617,587 and 1,095,048 shares, at cost
Dividends in Excess of Earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Noncontrolling interest in operating partnership
Noncontrolling interest in consolidated joint ventures
Total equity
December 31, 2017(1)
December 31, 2016
$
76,674
106,009
$
44,615
44,813
$
$
3,282,462
(4,000)
230,180
1,106,517
1,032,041
35,441
77,915
888
—
25,875
55,613
6,025,615
4,379,826
14
2,606
1,656
30,528
59,619
63,220
4,537,469
—
$
$
2,000,095
(4,000)
357,882
2,100,947
822,338
34,025
77,915
5,018
10
24,439
70,240
5,578,337
3,942,138
394
3,446
2,520
24,682
66,597
29,006
4,068,783
—
94
72
18
1,306,136
(31,956)
(39,112)
(212)
1,234,968
240,861
12,317
1,488,146
38
992,307
(11,244)
(11,148)
1,365
971,390
533,246
4,918
1,509,554
Total liabilities and equity
$
6,025,615
$
5,578,337
(1)
Includes amounts relating to consolidated variable interest entities. See Note 3.
The accompanying notes are an integral part of these consolidated financial statements.
110
Ladder Capital Corp
Consolidated Statements of Income
(Dollars in Thousands, Except Per Share and Dividend Data)
Net interest income
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Operating lease income
Tenant recoveries
Sale of loans, net
Realized gain (loss) on securities
Unrealized gain (loss) on Agency interest-only securities
Realized gain on sale of real estate, net
Fee and other income
Net result from derivative transactions
Earnings (loss) from investment in unconsolidated joint ventures
Gain (loss) on extinguishment of debt
Total other income
Costs and expenses
Salaries and employee benefits
Operating expenses
Real estate operating expenses
Fee expense
Depreciation and amortization
Total costs and expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Year Ended December 31,
2016
2015
2017
$
263,667
$
146,118
117,549
—
117,549
89,492
7,179
54,046
17,209
1,405
11,423
18,341
(12,641)
89
(73)
186,470
70,463
21,421
33,216
4,996
40,332
170,428
133,591
7,712
125,879
236,372
120,827
115,545
300
115,245
77,277
5,958
26,009
7,724
(56)
20,636
21,365
(1,409)
426
5,382
163,312
64,270
20,552
30,545
3,703
39,447
158,517
120,040
6,320
113,720
241,539
113,303
128,236
600
127,636
80,465
9,907
71,066
24,007
(1,249)
40,386
15,205
(38,937)
371
—
201,221
61,612
25,103
37,869
4,521
39,061
168,166
160,691
14,557
146,134
Net (income) loss attributable to noncontrolling interest in
consolidated joint ventures
(226)
138
(1,568)
Net (income) loss attributable to noncontrolling interest in operating
partnership
Net income (loss) attributable to Class A common shareholders
$
(30,377)
95,276
$
(47,131)
66,727
$
(70,745)
73,821
The accompanying notes are an integral part of these consolidated financial statements.
111
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Year Ended December 31,
2016
2015
2017
$
$
1.16
1.13
$
$
1.08
1.06
$
$
1.43
1.42
81,902,524
61,998,089
109,704,880
107,638,788
51,702,188
51,870,808
Dividends per share of Class A common stock (Note 12)
$
1.215
$
1.285
$
2.225
The accompanying notes are an integral part of these consolidated financial statements.
112
Ladder Capital Corp
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
Year Ended December 31,
2016
2015
2017
Net income (loss)
$
125,879
$
113,720
$
146,134
Other comprehensive income (loss)
Unrealized gain (loss) on securities, net of tax:
Unrealized gain (loss) on real estate securities, available for sale(1)
Reclassification adjustment for (gains) included in net income(2)
18,515
(20,735)
20,947
(12,428)
(11,403)
(25,142)
Total other comprehensive income (loss)
(2,220)
8,519
(36,545)
Comprehensive income
123,659
122,239
109,589
Comprehensive (income) loss attributable to noncontrolling interest in
consolidated joint ventures
Comprehensive income of combined Class A common shareholders
and Operating Partnership unitholders
Comprehensive (income) attributable to noncontrolling interest in
operating partnership
Comprehensive income attributable to Class A common
shareholders
$
$
(226)
138
(1,568)
123,433
$
122,377
$
108,021
(31,072)
(52,230)
(54,247)
92,361
$
70,147
$
53,774
(1) Amounts are net of provision for (benefit from) income taxes of $0.5 million for the year ended December 31, 2015 and
none for the years ended December 31, 2017 and 2016.
(2) Amounts are net of (provision for) benefit from income taxes of $(0.5) million for the year ended December 31, 2015 and
none for the years ended December 31, 2017 and 2016.
The accompanying notes are an integral part of these consolidated financial statements.
113
Ladder Capital Corp
Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)
Class A Common Stock Class B Common Stock
Shareholders’ Equity
Retained
Earnings/
Accumulated
(Dividends in
Other
Noncontrolling Interests
Total Shareholders’
Shares
Par
Shares
Par
in-Capital
Stock
Additional Paid-
Treasury
Excess of
Earnings)
Comprehensive
Operating
Consolidated
Equity/Partners
Income (Loss)
Partnership
Joint Ventures
Capital
Balance, December 31, 2016
71,586
$ 72
38,003
$ 38
$
992,307
$ (11,244) $
(11,148) $
1,365
$
533,246
$
4,918
$
1,509,554
—
(42,218)
7,479
(306)
Contributions
Distributions
Equity based compensation
Grants of restricted stock
Purchase of treasury stock
—
—
—
1,997
(190)
—
—
—
1
—
Shares acquired to satisfy minimum required
federal and state tax withholding on
vesting restricted stock and units
(1,323)
(1)
Forfeitures
1
1
4
Dividends declared
Stock dividends
Exchange of noncontrolling interest for
common stock
Net income (loss)
Other comprehensive income (loss)
Rebalancing of ownership percentage
between Company and Operating
Partnership
(10)
—
814
20,767
—
—
—
—
1
21
—
—
—
—
—
—
—
—
—
—
432
—
—
—
—
—
—
—
—
1
—
—
18,965
(1)
—
—
—
—
—
(2,588)
— (18,124)
—
—
17,317
(20,767)
(21)
280,714
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(105,921)
(17,319)
—
95,276
—
—
—
—
—
—
(3,166)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,696
—
(2,915)
(284,763)
30,377
695
(358)
3,524
7,479
(42,524)
18,965
—
(2,588)
(18,125)
—
(105,921)
—
(2,353)
125,879
(2,220)
—
—
—
—
—
—
—
—
—
226
—
—
Balance, December 31, 2017
93,641
$ 94
17,668
$ 18
$ 1,306,136
$ (31,956) $
(39,112) $
(212) $
240,861
$
12,317
$
1,488,146
The accompanying notes are an integral part of these consolidated financial statements.
Ladder Capital Corp
Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)
Class A Common Stock Class B Common Stock
Shareholders’ Equity
Retained
Earnings/
Accumulated
(Dividends in
Other
Noncontrolling Interests
Total Shareholders’
Shares
Par
Shares
Par
in-Capital
Stock
Additional Paid-
Treasury
Excess of
Earnings)
Comprehensive
Operating
Consolidated
Equity/Partners
Income (Loss)
Partnership
Joint Ventures
Capital
Balance, December 31, 2015
55,210
$ 55
44,056
$ 44
$
776,866
$ (5,812) $
60,618
$
(3,556) $
657,380
$
5,813
$
1,491,408
Contributions
Distributions
Equity based compensation
Grants of restricted stock
Purchase of treasury stock
Shares acquired to satisfy minimum required
federal and state tax withholding on
vesting restricted stock and units
1
1
5
Forfeitures
Dividends declared
Stock dividends
Exchange of noncontrolling interest for
common stock
Adjustment for deferred taxes/tax receivable
agreement as a result of the exchange of
Class B shares
Net income (loss)
Other comprehensive income (loss)
Rebalancing of ownership percentage
between Company and Operating
Partnership
—
—
—
794
(424)
(73)
(48)
—
5,606
10,521
—
—
—
—
—
—
1
—
—
—
—
6
10
—
—
—
—
—
—
—
—
(1)
—
—
4,469
—
—
—
—
—
—
—
—
4
—
—
516
(1)
—
—
—
—
64,090
(10,521)
(10)
144,629
—
—
—
—
—
—
(1,590)
—
—
—
—
—
—
7,797
—
—
—
—
(4,652)
(780)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(74,393)
(64,100)
—
—
66,727
—
—
—
—
—
—
—
—
—
—
—
250
(39,805)
17,124
—
—
(6)
—
—
—
1,202
(145,831)
—
—
3,420
—
47,131
5,099
—
(757)
—
—
—
—
—
—
—
—
—
(138)
—
250
(40,562)
17,640
—
(4,652)
(786)
—
(74,393)
—
—
(1,590)
113,720
8,519
299
(8,096)
—
—
Balance, December 31, 2016
71,586
$ 72
38,003
$ 38
$
992,307
$ (11,244) $
(11,148) $
1,365
$
533,246
$
4,918
$
1,509,554
The accompanying notes are an integral part of these consolidated financial statements.
Ladder Capital Corp
Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)
Class A Common Stock Class B Common Stock
Shareholders’ Equity
Retained
Earnings/
Accumulated
(Dividends in
Other
Noncontrolling Interests
Total Shareholders’
Shares
Par
Shares
Par
in-Capital
Stock
Additional Paid-
Treasury
Excess of
Earnings)
Comprehensive
Operating
Consolidated
Equity/Partners
Income (Loss)
Partnership
Joint Ventures
Capital
Balance, December 31, 2014
51,432
$ 51
47,647
$ — $
725,538
$
— $
44,187
$
15,656
$
711,674
$
8,101
$
1,505,207
Contributions
Distributions
Amendment of the par value of the Class B
shares from no par value per share to
$0.001 per share
Equity based compensation
Grants of restricted stock
Purchase of treasury stock
Re-issuance of treasury stock
1
1
6
Shares acquired to satisfy minimum required
federal and state tax withholding on
vesting restricted stock and units
Forfeitures
Dividends declared
Exchange of noncontrolling interest for
common stock
Adjustment for deferred taxes/tax receivable
agreement as a result of the exchange of
Class B shares
Net income (loss)
Other comprehensive income (loss)
Rebalancing of ownership percentage
between Company and Operating
Partnership
—
—
—
—
700
(84)
26
(262)
(188)
—
3,586
—
—
—
—
—
—
—
1
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
(5)
—
—
—
—
47
—
—
—
—
—
—
—
—
—
—
417
(1)
—
—
—
—
—
(3,586)
(3)
53,011
—
—
—
—
—
—
(1,366)
—
—
—
—
—
—
(733)
—
—
—
—
—
(994)
—
(4,818)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(57,390)
—
—
73,821
—
—
—
74
74
(68,673)
(3,930)
(72,603)
—
—
—
—
—
—
—
—
—
—
(47)
13,371
—
—
—
(79)
—
—
645
(53,656)
—
—
(20,046)
—
70,745
(16,499)
—
1,568
—
—
—
—
—
—
—
—
—
—
—
13,788
—
(994)
—
(4,897)
—
(57,390)
—
(1,366)
146,134
(36,545)
Balance, December 31, 2015
55,210
$ 55
44,056
$ 44
$
776,866
$ (5,812) $
60,618
$
(3,556) $
657,380
$
5,813
$
1,491,408
The accompanying notes are an integral part of these consolidated financial statements.
189
544
—
—
Ladder Capital Corp
Consolidated Statements of Cash Flows
(Dollars in Thousands)
2017
Year Ended December 31,
2016
2015
$
125,879
$
113,720
$
146,134
73
40,332
3,432
(1,405)
(300)
—
18,965
7,856
(1,025)
(786)
(11,180)
5,241
(54,046)
—
(17,209)
(11,423)
199
(1,465,635)
—
2,083
(5,382)
39,447
(4,224)
56
14
300
17,640
7,459
(894)
(108)
(8,941)
6,422
(26,009)
—
(7,724)
(20,636)
24
(1,128,651)
(73,421)
1,768
—
39,061
(10,182)
1,249
—
600
13,788
5,757
(902)
(249)
(12,241)
8,774
(71,066)
(820)
(24,007)
(40,386)
—
(2,594,141)
—
2,308
1,375,733 (1)
1,440,195
2,509,090
(89)
—
5,591
(1,013)
(1,437)
(3,275)
(4,576)
11,985
(426)
1,017
1,868
—
(1,662)
(4,340)
(9,085)
338,427
(371)
294
2,900
—
621
(1,533)
(12,985)
(38,307)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
(Gain) loss on extinguishment of debt
Depreciation and amortization
Unrealized (gain) loss on derivative instruments
Unrealized (gain) loss on Agency interest-only securities
Unrealized (gain) loss on investment in mutual fund
Provision for loan losses
Amortization of equity based compensation
Amortization of deferred financing costs included in interest
expense
Amortization of premium on mortgage loan financing
Amortization of above- and below-market lease intangibles
Amortization of premium/(accretion) of discount and other
fees on loans
Amortization of premium/(accretion) of discount and other
fees on securities
Realized (gain) loss on sale of mortgage loan receivables
held for sale
Realized gain on disposition of loan
Realized (gain) loss on real estate securities
Realized gain on sale of real estate, net
Realized gain on sale of derivative instruments
Origination of mortgage loan receivables held for sale
Purchases of mortgage loan receivables held for sale
Repayment of mortgage loan receivables held for sale
Proceeds from sales of mortgage loan receivables held for
sale
(Income) loss from investments in unconsolidated joint
ventures in excess of distributions received
Distributions from operations of investment in
unconsolidated joint ventures
Deferred tax asset (liability)
Payments pursuant to tax receivable agreement
Changes in operating assets and liabilities:
Accrued interest receivable
Other assets
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
117
2017
Year Ended December 31,
2016
2015
(300)
—
(210,903)
138,413
1,025,710
—
—
(1,407,669)
(94,079)
404,584
51,989
—
—
(1,327)
—
(236,932)
(5,640)
29,519
(306,635)
(26,330)
10,080,341
(9,510,272)
(100,076)
(73)
39
(977,062)
684,143
539,295
—
—
(919,023)
—
649,914
70,053
—
48
(867)
(10,001)
(62,495)
(10,640)
72,953 (2)
36,284
—
—
(725,888)
186,902
845,648
(7,984)
2,409
(963,023)
—
752,452
79,131
(31,085)
3,747
(341)
—
(197,501)
(8,375)
98,558
34,650
(5,927)
12,359,830
(12,689,064)
(67,166)
(2,330)
16,280,023
(16,137,339)
(39,934)
—
250
—
(42,218)
(39,805)
(68,673)
7,479
(306)
(18,125)
(2,588)
387,905
93,255
89,428
182,683
$
—
(757)
(786)
(4,652)
(448,077)
(73,366)
162,794
89,428
$
74
(3,930)
(4,897)
(994)
22,000
18,343
144,451
162,794
Cash flows from investing activities:
Purchase of derivative instruments
Sale of derivative instruments
Purchases of real estate securities
Repayment of real estate securities
Proceeds from sales of real estate securities
Purchase of FHLB stock
Sale of FHLB stock
Origination of mortgage loan receivables held for investment
Purchases of mortgage loan receivables held for investment
Repayment of mortgage loan receivables held for investment
Basis recovery of Agency interest-only securities
Capital contributions to investment in unconsolidated joint
ventures
Distributions received from investments in unconsolidated joint
ventures in excess of income
Capitalization of interest on investment in unconsolidated joint
ventures
Capital contributions to investment in mutual fund
Purchases of real estate
Capital improvements of real estate
Proceeds from sale of real estate
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Deferred financing costs paid
Proceeds from borrowings under debt obligations
Repayment of borrowings under debt obligations
Cash dividends paid to Class A common shareholders
Capital contributed by noncontrolling interests in operating
partnership
Capital distributed to noncontrolling interests in operating
partnership
Capital contributed by noncontrolling interests in consolidated
joint ventures
Capital distributed to noncontrolling interests in consolidated
joint ventures
Payment of liability assumed in exchange for shares for the
minimum withholding taxes on vesting restricted stock
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
$
118
Supplemental information:
Cash paid for interest, net of amounts capitalized
Cash paid (received) for income taxes
$
130,795
(214)
$
115,246
$
107,362
8,775
7,306
2017
Year Ended December 31,
2016
2015
Non-cash investing and financing activities:
Origination of mortgage loans receivable held for investment
Repayment of mortgage loans receivable held for investment
—
—
Proceeds from sales of mortgage loan receivables held for sale
115,359
50,378
(70,678)
—
Settlement of mortgage loan receivable held for investment by
real estate
Transfer from mortgage loans receivable held for sale to
mortgage loans receivable held for investment, at amortized
cost
Like-kind exchange of real estate:
Acquisitions
Dispositions
Receivable from qualified intermediary - other assets
Real estate acquired in settlement of mortgage loan receivable
held for investment
Net settlement of sale of real estate, subject to debt - real estate
Net settlement of sale of real estate, subject to debt - debt
obligations
Repayment of borrowings under debt obligations
Exchange of noncontrolling interest for common stock
Change in deferred tax asset related to exchanges of
noncontrolling interest for common stock
Increase in amount payable pursuant to tax receivable
agreement
Rebalancing of ownership percentage between Company and
Operating Partnership
Dividends declared, not paid
Stock dividends
—
153,722
—
—
—
—
—
—
(115,359)
284,783
2,203
149
3,524
30,528
17,319
—
—
—
—
—
—
—
—
—
145,841
980
610
(8,096)
23,364
64,100
—
—
—
4,620
—
15,249
(62,093)
6,483
6,700
(11,310)
51,060
—
53,659
(320)
1,048
544
17,456
—
(1) Includes cash proceeds received in the current year that relate to prior year sales of loans of $20.3 million.
(2) Includes cash proceeds received in the current year that relate to prior year sales of real estate of $6.5 million.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated
balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows ($ in
thousands):
December 31,
2017
December 31,
2016
December 31,
2015
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in the
consolidated statement of cash flows
$
$
$
76,674
106,009
$
44,615
44,813
108,959
53,835
182,683
$
89,428
$
162,794
The accompanying notes are an integral part of these consolidated financial statements.
119
Ladder Capital Corp
Notes to Consolidated Financial Statements
1. ORGANIZATION AND OPERATIONS
Ladder Capital Corp is an internally-managed real estate investment trust (“REIT”) that is a leader in commercial real
estate finance. Ladder Capital Corp, as the general partner of Ladder Capital Finance Holdings LLLP (“LCFH,”
“Predecessor” or the “Operating Partnership”), operates the Ladder Capital business through LCFH and its subsidiaries.
As of December 31, 2017, Ladder Capital Corp has a 84.1% economic interest in LCFH and controls the management of
LCFH as a result of its ability to appoint its board members. Accordingly, Ladder Capital Corp consolidates the financial
results of LCFH and records noncontrolling interest for the economic interest in LCFH held by the Continuing LCFH
Limited Partners (as defined below). In addition, Ladder Capital Corp, through certain subsidiaries which are treated as
taxable REIT subsidiaries (each a “TRS”), is indirectly subject to U.S. federal, state and local income taxes. Other than
the noncontrolling interest in the Operating Partnership and such indirect U.S. federal, state and local income taxes, there
are no material differences between Ladder Capital Corp’s consolidated financial statements and LCFH’s consolidated
financial statements.
Ladder Capital Corp was formed as a Delaware corporation on May 21, 2013. The Company conducted an initial public
offering (“IPO”) which closed on February 11, 2014. The Company used the net proceeds from the IPO to purchase
newly issued limited partnership units (“LP Units”) from LCFH. In connection with the IPO, Ladder Capital Corp also
became a holding corporation and the general partner of, and obtained a controlling interest in, LCFH. Ladder Capital
Corp’s only business is to act as the general partner of LCFH, and, as such, Ladder Capital Corp indirectly operates and
controls all of the business and affairs of LCFH and its subsidiaries through its ability to appoint the LCFH board. The
proceeds received by LCFH in connection with the sale of the LP Units have been and will be used for loan origination
and related real estate business lines and for general corporate purposes. The IPO transactions described herein are
referred to as the “IPO Transactions.”
Ladder Capital Corp consolidates the financial results of LCFH and its subsidiaries. The ownership interest of certain
existing owners of LCFH, who owned LP Units and an equivalent number of shares of Ladder Capital Corp Class B
common stock as of the completion of the IPO (the “Continuing LCFH Limited Partners”) and continue to hold
equivalent units in the Series of LCFH (as described below) and Ladder Capital Corp Class B common stock, is reflected
as a noncontrolling interest in Ladder Capital Corp’s consolidated financial statements.
Pursuant to LCFH’s amended and restated Limited Liability Limited Partnership Agreement (the “Amended and
Restated LLLP Agreement”), and subject to the applicable minimum retained ownership requirements and certain other
restrictions, including notice requirements, from time to time, Continuing LCFH Limited Partners (or certain transferees
thereof) have the right to exchange their LP Units for shares of Ladder Capital Corp’s Class A common stock on a one-
for-one basis. In connection with an exchange, a corresponding number of shares of Ladder Capital Corp Class B
common stock are required to be provided and canceled. However, the exchange of LP Units for shares of Ladder
Capital Corp Class A common stock will not affect the exchanging owners’ voting power since the votes represented by
the canceled shares of Ladder Capital Corp Class B common stock will be replaced with the votes represented by the
shares of Class A common stock for which such LP Units will be exchanged.
As a result of the Company’s acquisition of LP Units of LCFH and LCFH’s election under Section 754 of the Internal
Revenue Code of 1986, as amended (the “Code”), the Company expects to benefit from depreciation and other tax
deductions reflecting LCFH’s tax basis for its assets. Those deductions will be allocated to the Company and will be
taken into account in reporting the Company’s taxable income.
120
The REIT Structuring Transactions
In anticipation of the Company’s election to be subject to tax as a REIT under the Code beginning with its 2015 taxable
year (the “REIT Election”), the Company effected an internal realignment as of December 31, 2014 that it believes
permits it to operate as a REIT, subject to the risk factors described in this Annual Report (see “Risk Factors—Risks
Related to Our Taxation as a REIT”). As part of this realignment, LCFH and certain of its wholly-owned subsidiaries
were serialized in order to segregate our REIT-qualified assets and income from the Company’s non-REIT-qualified
assets and income. Pursuant to such serialization, all assets and liabilities of LCFH and each such subsidiary were
identified as TRS assets and liabilities (e.g., conduit securitization and condominium sales businesses) and REIT assets
and liabilities (e.g., balance sheet loans, real estate and most securities), and were allocated on the Company’s internal
books and records into two pools within LCFH or such subsidiary, Series TRS and Series REIT (collectively, the
“Series”), respectively.
In connection with this serialization, the Amended and Restated LLLP Agreement was amended and restated, effective
as of December 5, 2014 and again as of December 31, 2014 (the “Third Amended and Restated LLLP Agreement”).
Pursuant to the Third Amended and Restated LLLP Agreement, as of December 31, 2014:
•
all assets and liabilities of LCFH were allocated on LCFH’s internal books and records to either Series REIT or
Series TRS of LCFH;
•
the Company serves as general partner of LCFH and of Series REIT of LCFH;
• LC TRS I LLC (“LC TRS I”), a Delaware limited liability company wholly-owned by Series REIT of LCFH,
serves as the general partner of Series TRS of LCFH;
•
•
•
•
•
•
•
•
each outstanding LP Unit was exchanged for one Series REIT limited partnership unit (“Series REIT LP Unit”),
which is entitled to receive profits and losses derived from REIT assets and liabilities, and one Series TRS limited
partnership unit (“Series TRS LP Unit”), which is entitled to receive profits and losses derived from TRS assets
and liabilities (Series REIT LP Units and Series TRS LP Units are collectively referred to as “Series Units”);
as a result, Ladder Capital Corp owned, directly and indirectly, an aggregate of 51.9% of Series REIT of LCFH,
and, through such ownership, the right to receive 51.9% of the profits and distributions of Series TRS;
the limited partners of LCFH owned the remaining 48.1% of each of Series REIT and Series TRS of LCFH;
Series REIT of LCFH, in turn, owns, directly or indirectly, 100% of the REIT series of each of its serialized
subsidiaries as well as certain wholly-owned REIT subsidiaries;
Series TRS of LCFH owns, directly or indirectly, 100% of the TRS series of each of its serialized subsidiaries, as
well as certain wholly-owned TRSs;
Series TRS LP Units are exchangeable for an equal number of shares (“TRS Shares”) of LC TRS I (a “TRS
Exchange”);
in order to effect the exchange of Series Units for shares of Class A common stock of the Company on a one-for-
one basis (the “Class A Exchange”), holders are required to surrender (i) one share of the Company’s Class B
common stock, (ii) one Series REIT LP Unit, and (iii) either one Series TRS LP Unit or one TRS Share; and
Series REIT and Series TRS have separate boards, officers, books and records, bank accounts, and tax
identification numbers.
Each Series of LCFH also signed a separate joinder agreement, agreeing, effective as of 11:59:59 pm on December 31,
2014 (the “Effective Time”), to assume and pay when due (i) any and all liabilities of LCFH incurred or accrued by
LCFH as of the Effective Time and (ii) any and all obligations of LCFH arising under contracts, bonds, notes,
guarantees, leases or other agreements to which LCFH was a party as of the Effective Time (collectively, the
“Agreements”), regardless of whether such obligations arise under the applicable Agreement at, prior to, or after the
Effective Time, in each case, with the same force and effect as if each Series had been a signatory to such Agreements on
the date thereof.
121
Also in connection with the REIT Election, the Company’s certificate of incorporation was amended and restated,
effective as of February 27, 2015, following approval by our shareholders (the “Charter Amendment”), to, among other
things, impose ownership limitations and transfer restrictions to facilitate our compliance with the REIT requirements.
To qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (other than the first year
for which an election to be a REIT has been made). Also, not more than 50% of the value of the outstanding shares of
our capital stock may be owned, directly or indirectly, by five or fewer “individuals” (as defined to include certain
entities such as private foundations) during the last half of a taxable year (other than the first taxable year for which an
election to be a REIT has been made). Finally, a person actually or constructively owning 10% or more of the vote or
value of the outstanding shares of our capital stock could lead to a level of affiliation between the Company and one or
more of its tenants that could disqualify our revenues from the affiliated tenants and possibly jeopardize or otherwise
adversely impact our qualification as a REIT.
To facilitate satisfaction of these requirements for qualification as a REIT, the Charter Amendment contains provisions
restricting the ownership and transfer of shares of all classes or series of its capital stock. Including ownership
limitations in a REIT’s charter is the most effective mechanism to monitor compliance with the above-described
provisions of the Code. The Charter Amendment provides that, subject to certain exceptions and the constructive
ownership rules, no person may own, or be deemed to own by virtue of the attribution provisions of the Code, in excess
of (i) 9.8% in value of the outstanding shares of all classes or series of its capital stock or (ii) 9.8% in value or number
(whichever is more restrictive) of the outstanding shares of any class of its common stock.
In addition, the Company’s Tax Receivable Agreement with the Continuing LCFH Limited Partners (the “TRA
Members”) was amended and restated in connection with its REIT Election, effective as of December 31, 2014 (the
“TRA Amendment”), in order to preserve a portion of the potential tax benefits currently existing under the Tax
Receivable Agreement that would otherwise be reduced in connection with its REIT Election. The TRA Amendment
provides that, in lieu of the existing tax benefit payments under the Tax Receivable Agreement for the 2015 taxable year
and beyond, LC TRS I will pay to the TRA Members 85% of the amount of the benefits, if any, that LC TRS I realizes or
under certain circumstances (such as a change of control) is deemed to realize as a result of (i) the increases in tax basis
resulting from the TRS Exchanges by the TRA Members, (ii) any incremental tax basis adjustments attributable to
payments made pursuant to the TRA Amendment, and (iii) any deemed interest deductions arising from payments made
by LC TRS I under the TRA Amendment. Under the TRA Amendment, LC TRS I may benefit from the remaining 15%
of cash savings in income tax that it realizes, which is in the same proportion realized by the Company under the existing
Tax Receivable Agreement. The purpose of the TRA Amendment was to preserve the benefits of the Tax Receivable
Agreement to the extent possible in a REIT, although, as a result, the amount of payments made to the TRA Members
under the TRA Amendment is expected to be less than would be made under the prior Tax Receivable Agreement. The
TRA Amendment continues to share such benefits in the same proportions and otherwise has substantially the same
terms and provisions as the prior Tax Receivable Agreement. See Note 2 and Note 16 for further discussion of the Tax
Receivable Agreement.
As of March 4, 2015, the Company made the necessary TRS and check-the-box elections began to elect to be taxed as a
REIT starting with its tax return for the year ended December 31, 2015, filed in September 2016.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”).
The consolidated financial statements include the Company’s accounts and those of its subsidiaries which are majority-
owned and/or controlled by the Company and variable interest entities for which the Company has determined itself to
be the primary beneficiary, if any. All significant intercompany transactions and balances have been eliminated.
122
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 —
Consolidation (“ASC 810”), provides guidance on the identification of entities for which control is achieved through
means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business
enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when
either: (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest;
(2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial
support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the
activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is the
entity that has both of the following characteristics: (1) the power to direct the activities that, when taken together, most
significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from
the VIE that would be significant to the VIE. See Note 3 for further information on the Company’s consolidated variable
interest entities.
Noncontrolling interests in consolidated subsidiaries are defined as “the portion of the equity (net assets) in the
subsidiaries not attributable, directly or indirectly, to a parent.” Noncontrolling interests are presented as a separate
component of capital in the consolidated balance sheets. In addition, the presentation of net income attributes earnings to
shareholders/unitholders (controlling interest) and noncontrolling interests.
Emerging Growth Company Status
Since our IPO, the Company was an “emerging growth company,” as defined in the Jumpstart Our Business Startups
Act (“JOBS Act”), and was eligible to take advantage of certain exemptions from various reporting requirements that are
applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as
amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in the
Company’s periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised
accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. However, the Company chose to “opt out”
of such extended transition period, and as a result, it complied with new or revised accounting standards on the relevant
dates on which adoption of such standards was required for non-emerging growth companies. Section 107 of the JOBS
Act provides that the Company’s decision to opt out of the extended transition period for complying with new or revised
accounting standards is irrevocable.
The Company could have remained an “emerging growth company” for up to five years from the date of the IPO, or
until the earliest of (i) the last day of the first fiscal year in which its annual gross revenues exceed $1.07 billion; (ii) the
date that the Company becomes a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which
would occur if the market value of its common stock that is held by nonaffiliates exceeds $700 million as of the last
business day of its most recently completed second fiscal quarter; or (iii) the date on which the Company has issued
more than $1 billion in nonconvertible debt during the preceding three-year period.
However, because the market value of the Company’s common stock held by non-affiliates exceeded $700 million as of
June 30, 2017, as of December 31, 2017, the Company has been deemed to be a large accelerated filer and it no longer
qualifies as an emerging growth company. Accordingly, the Company is subject to certain disclosure and compliance
requirements that apply to other public companies but have not previously applied to it due to the Company’s prior status
as an emerging growth company. These requirements include:
•
•
•
compliance with the auditor attestation requirements on the assessment of our internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002;
compliance with any requirement that may be adopted by the Public Company Accounting Oversight
Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional
information about the audit and the financial statements;
full disclosure obligations regarding executive compensation; and
123
•
compliance with the requirements of holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved.
As a large accelerated filer, the Company is required to file its Form 10-K with the Securities and Exchange Commission
within 60 days after the Company’s fiscal year end. As an accelerated filer, the Company was only required to file its
Form 10-K within 75 days after the Company’s fiscal year end. There has been no change to the Form 10-Q filing due
dates.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the balance sheets and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and
assumptions are reviewed periodically, and the effects of resulting changes are reflected in the consolidated financial
statements in the period the changes are deemed to be necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
valuation of real estate securities;
allocation of purchase price for acquired real estate;
impairment, and useful lives, of real estate;
useful lives of intangible assets;
valuation of derivative instruments;
valuation of deferred tax asset (liability);
amounts payable pursuant to the Tax Receivable Agreement;
determination of effective yield for recognition of interest income;
adequacy of provision for loan losses;
determination of other than temporary impairment of real estate securities and investments in unconsolidated joint
ventures;
certain estimates and assumptions used in the accrual of incentive compensation and calculation of the fair value
of equity compensation issued to employees;
determination of the effective tax rate for income tax provision; and
certain estimates and assumptions used in the allocation of revenue and expenses for our segment reporting.
Cash and Cash Equivalents
The Company considers all investments with original maturities of three months or less, at the time of acquisition, to be
cash equivalents. The Company maintains cash accounts at several financial institutions, which are insured up to a
maximum of $250,000 per account as of December 31, 2017 and 2016. At December 31, 2017 and 2016, and at various
times during the years, the balances exceeded the insured limits.
Restricted Cash
Restricted cash is comprised of accounts the Company maintains with brokers to facilitate financial derivative and
repurchase agreement transactions in support of its loan and securities investments and risk management activities.
Based on the value of the positions in these accounts and the associated margin requirements, the Company may be
required to deposit additional cash into these broker accounts. The cash collateral held by broker is considered restricted
cash. Restricted cash also includes tenant security deposits, deposits related to real estate sales and acquisitions and
required escrow balances on credit facilities. Prior to January 1, 2017, these amounts were previously recorded in other
assets on the Company’s consolidated balance sheets. Prior period amounts have been reclassified to conform to current
period presentation.
124
Mortgage Loan Receivables Held for Investment
Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are
reported at their outstanding principal balances net of any unearned income, unamortized deferred fees or costs,
premiums or discounts and an allowance for loan losses. Loan origination fees and direct loan origination costs are
deferred and recognized in interest income over the estimated life of the loans using the interest method, adjusted for
actual prepayments. Upon the decision to sell such loans, the Company will transfer the loan from mortgage loan
receivables held for investment to mortgage loan receivables held for sale at the lower of carrying value or fair value less
cost to sell on the consolidated balance sheets.
The Company evaluates each loan classified as a mortgage loan receivable held for investment for impairment at least
quarterly. Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan. If the loan is considered to be impaired, an allowance is recorded to
reduce the carrying value of the loan to the present value of the expected future cash flows discounted at the loan’s
contractual effective rate or the fair value of the collateral, if recovery of the Company’s investment is expected solely
from the collateral.
The Company’s loans are typically collateralized by real estate. As a result, the Company regularly evaluates the extent
and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property
as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. The Company also
evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and
operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and
geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset
management personnel, who utilize various data sources, including (i) periodic financial data such as property
occupancy, tenant profile, rental rates, operating expenses, the borrowers exit plan, and capitalization and discount rates,
(ii) site inspections, and (iii) current credit spreads and other market data.
Upon the completion of the process above, the Company concluded that no loans originated by the Company were
impaired as of December 31, 2017 and 2016. Significant judgment is required when evaluating loans for impairment,
therefore actual results over time could be materially different.
In addition, the Company assesses a portfolio-based loan loss provision. The Company estimates its loan loss provision
based on its historical loss experience and expectation of losses inherent in the investment portfolio but not yet realized.
Since inception, the Company has had no events of impairment on any of the loans it has originated, however, to ensure
that the risk exposures are properly measured and the appropriate reserves are taken, the Company assesses a loan loss
provision balance that will grow over time with its portfolio and the related risk as the assets are aged and approach
maturity and ultimate refinancing where applicable.
Mortgage Loan Receivables Held for Sale
Mortgage loan receivables held for sale are first mortgage loans that are secured by cash-flowing commercial real estate
and are available for sale to securitizations. Mortgage loan receivables held for sale are recorded at lower of cost or
market value.
Real Estate Securities
The Company classifies its real estate securities investments on the date of acquisition of the investment. Real estate
securities that the Company does not hold for the purpose of selling in the near-term, but may dispose of prior to
maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or
losses on all securities, except for Government National Mortgage Association (“GNMA”) interest-only and Federal
Home Loan Mortgage Corp (“FHLMC”) interest-only securities (collectively, “Agency interest-only securities”),
recorded as a component of other comprehensive income (loss) in shareholders’ equity. As more fully described in Note
4, certain securities which were purchased from the LCCM LC-26 securitization trust are designated as risk retention
securities under the Dodd-Frank Act which are subject to transfer restrictions over the term of the securitization trust and
are classified as held-to-maturity and reported at amortized cost.
125
The Company’s Agency interest-only securities are considered to be hybrid financial instruments that contain embedded
derivatives. As a result, the Company accounts for them as hybrid instruments in their entirety at fair value with changes
in fair value recognized in earnings in the consolidated statements of income in accordance with ASC 815. The
Company’s recognition of interest income from its Agency interest-only and all other securities, including effective
interest from amortization of premiums, follows the Company’s Revenue Recognition policy, as disclosed within this
Note for recognizing interest income on its securities. The interest income recognized from the Company’s Agency
interest-only securities is recorded in interest income on the consolidated statements of income. The Company uses the
specific identification method when determining the cost of securities sold and the amount of gain (loss) on securities
recognized in earnings. The Company accounts for the changes in the fair value of the unfunded portion of its GNMA
Construction securities, which are included in real estate securities, available-for-sale, on the consolidated balance sheet,
as available for sale securities. Unrealized losses on securities that, in the judgment of management, are other than
temporary are charged against earnings as a loss in the consolidated statements of income.
When the estimated fair value of an available-for-sale security is less than amortized cost, the Company will consider
whether there is an other-than-temporary impairment in the value of the security. An impairment will be considered
other-than-temporary based on consideration of several factors, including (i) if the Company intends to sell the security,
(ii) if it is more likely than not that the Company will be required to sell the security before recovering its cost, or (iii)
the Company does not expect to recover the security’s cost basis (i.e., a credit loss). A credit loss will have occurred if
the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis. If the
Company intends to sell an impaired debt security or it is more likely than not that it will be required to sell the security
before recovery of its amortized cost basis less any current period credit loss, the impairment is other-than-temporary
and will be recognized currently in earnings equal to the entire difference between fair value and amortized cost. If a
credit loss exists, but the Company does not intend to, nor is it more likely than not that it will be required to sell before
recovery, the impairment is other-than-temporary and will be separated into (i) the estimated amount relating to the
credit loss, and (ii) the amount relating to all other factors. Only the estimated credit loss amount is recognized currently
in earnings, with the remainder of the loss recognized in other comprehensive income. Estimating cash flows and
determining whether there is other-than-temporary impairment require management to exercise judgment and make
significant assumptions, including, but not limited to, assumptions regarding estimated prepayments, loss assumptions,
and assumptions regarding changes in interest rates. As a result, actual impairment losses, and the timing of income
recognized on these securities, could differ from reported amounts.
The Company utilizes an internal model as its primary pricing source to develop its prices for its commercial mortgage-
backed securities (“CMBS”) and other commercial real estate securities guaranteed by a U.S. governmental agency or by
a government sponsored entity (together, “U.S. Agency Securities”). Different judgments and assumptions could result in
materially different estimates of fair value. To confirm its own valuations, the Company requests prices for each of its
CMBS and U.S. Agency Securities investments from three different sources, including third parties that provide pricing
services and brokers, although since broker quotes for the same or similar securities in which Ladder has invested are
non-binding, the Company does not consider them to be a primary source for valuation. The Company may also develop
a price for a security based on its direct observations of market activity and other observations. Typically, at least two
prices per security are obtained.
Prior to using a third-party pricing service for valuation, the Company develops an understanding of the valuation
methodologies used by such pricing services through discussions with their representatives and review of their valuation
methodologies used for different types of securities. The Company understands that the pricing services develop
estimates of fair value for CMBS and U.S. Agency Securities using various techniques, including discussion with their
internal trading desks, proprietary models and matrix pricing approaches. The Company does not have access to, and is
therefore not able to review in detail, the inputs used by the pricing services in developing their estimates of fair value.
However, on at least a monthly basis as part of our closing process, the Company evaluates the fair value information
provided by the pricing services by comparing this information for reasonableness against its direct observations of
market activity for similar securities and anecdotal information obtained from market participants that, in its assessment,
is relevant to the determination of fair value. This process may result in the Company “challenging” the estimate of fair
value for a security if it is unable to reconcile the estimate provided by the pricing service with its assessment of fair
value for the security. Accordingly, in following this approach, the Company’s objective is to ensure that the information
used by pricing services in their determination of fair value of securities is reasonable and appropriate.
Since inception, the Company has not encountered significant variation in the values obtained from the various pricing
sources. In the extremely limited occasions where the prices received were challenged, the challenge resulted in the
prices provided by the pricing services being updated to reflect current market updates or cash flow assumptions.
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Real Estate
The Company generally acquires real estate assets through cash purchases. Based on the Company’s strategic plan to
realize the maximum value from the real estate acquired, properties are classified as Real estate, net or Real estate held
for sale in the consolidated balance sheets. When the Company intends to hold, operate or develop the property for a
period of at least 12 months, assets are classified as Real estate, net, and when the Company intends to market these
properties for sale in the near term, assets are classified as Real estate held for sale in the consolidated balance sheets.
The Company records acquired real estate at cost and makes assessments as to the useful lives of depreciable assets. The
Company considers the period of future benefit of the asset to determine its appropriate useful lives. Depreciation is
computed using a straight-line method over the estimated useful life of 20 to 47 years for buildings, four to 15 years for
building fixtures and improvements and the remaining lease term for acquired intangible lease assets.
The Company classifies most of its investments in real estate as held and used. The Company measures and records a
property that is classified as held and used at its carrying amount, adjusted for any depreciation expense and
impairments, as applicable and are included in Real estate, net in the consolidated balance sheets.
Certain of the Company’s real estate is leased to others on a net lease basis where the tenant is generally responsible for
payment of real estate taxes, property, building and general liability insurance and property and building maintenance.
These leases are for fixed terms of varying length and provide for annual rentals. Rental income from leases is
recognized on a straight-line basis over the term of the respective leases. The cumulative excess of rents recognized over
amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable within other assets
in the consolidated balance sheets.
Allocation of Purchase Price for Acquired Real Estate
In accordance with the guidance for business combinations, the Company determines whether a transaction or other
event is a business combination. If the transaction is determined to be a business combination, the Company determines
if the transaction should be considered to be between entities under common control. The acquisition of an entity under
common control is accounted for on the carryover basis of accounting whereby the assets and liabilities of the companies
are recorded on the same basis as they were carried by the company under common control. All other business
combinations, including rental property, are accounted for by applying the acquisition method of accounting. The
Company will immediately expense acquisition related costs and fees associated with such acquisitions.
Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land,
building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value
of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Company allocates the
purchase price to the assets acquired and liabilities assumed based on their fair values. The Company records goodwill or
a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a
transaction. In estimating the fair value of the tangible and intangible assets acquired, the Company considers
information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes
various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization
rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible
assets of an acquired property considers the value of the property as if it were vacant.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value
(using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates
for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market
leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market
leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining
terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental
revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective
leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken
into income at that time.
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Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are
based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall
relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values
include an estimate of carrying costs during hypothetical expected lease-up periods considering current market
conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods,
depending on local market conditions. In estimating costs to execute similar leases, management considers leasing
commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships
include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for
developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-
place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant
relationship intangibles are amortized to expense over the anticipated life of the relationships but in no event do the
amortization periods for intangible assets exceed the depreciable lives of the buildings. If a tenant terminates its lease,
the unamortized portion of the in-place lease value and tenant relationship intangibles are charged to expense.
The fair value of other investments and debt assumed are valued using techniques consistent with those disclosed in Note
9, depending on the nature of the investments or debt. The fair value of other assumed assets and liabilities are based on
best information available at the time of the acquisition.
Impairment of Property Held for Use
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s properties
classified as held for use may be impaired. In addition to identifying any specific circumstances which may affect a
property or properties, management considers other criteria for determining which properties may require assessment for
potential impairment. The criteria considered by management include reviewing low leased percentages, significant
near-term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near-
term mortgage debt maturities or other factors that might impact the Company’s intent and ability to hold the property. A
property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without
debt service charges) to be generated by the property is less than the carrying value of the property. To the extent
impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair
value of the property. The Company’s estimates of aggregate future cash flows expected to be generated by each
property are based on a number of assumptions. These assumptions are generally based on management’s experience in
its local real estate markets and the effects of current market conditions. The assumptions are subject to economic and
market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates,
and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter
management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be
achieved, and actual losses or impairments may be realized in the future.
Real Estate Held for Sale
In accordance with accounting guidance found in ASC Topic 360 - Property, Plant, and Equipment (“ASC 360”), when
assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the
sales price, net of selling costs, of such assets. If, in management’s opinion, the estimated net sales price of the assets
which have been identified as held for sale is less than the net book value of the assets, an impairment charge will be
recorded in the consolidated statements of income.
If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a
property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified
is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held
for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been
continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.
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Sales of Real Estate
Gains on sales of real estate are recognized pursuant to the provisions included in ASC 360-20, Real Estate Sales (“ASC
360-20”). The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the
transaction and any continuing involvement in the form of management or financial assistance associated with the
properties. If the sales criteria for the full accrual method are not met, depending on the circumstances, the Company
may not record a sale or it may record a sale but may defer some or all of the gain recognition. If the criteria for full
accrual are not met, the Company may account for the transaction by applying the finance, leasing, profit sharing,
deposit, installment or cost recovery methods, as appropriate, until the sales criteria for the full accrual method are met.
Investments in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting. The
Company applies the equity method by initially recording these investments at cost, as investments in unconsolidated
joint ventures, subsequently adjusted for equity in earnings and cash contributions and distributions. The outside basis
portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’
tangible and intangible assets acquired and liabilities assumed. Generally, the Company would discontinue applying the
equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses
unless the Company has guaranteed obligations of the venture or is otherwise committed to providing further financial
support for the investee. If the venture subsequently generates income, the Company only recognizes its share of such
income to the extent it exceeds its share of previously unrecognized losses. The Company classifies distributions
received from its investments in unconsolidated joint ventures using the nature of the distribution approach.
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments
in unconsolidated joint ventures may be impaired. An investment is impaired only if management’s estimate of the value
of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than
temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the
investment over the value of the investment. The Company’s estimates of value for each investment (particularly in
commercial real estate joint ventures) are based on a number of assumptions that are subject to economic and market
uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and
operating costs. As these factors are difficult to predict and are subject to future events that may alter management’s
assumptions, the values estimated by management in its impairment analyses may not be realized, and actual losses or
impairment may be realized in the future. See Note 7, Investment in Unconsolidated Joint Ventures.
Capitalization of Interest
Capitalization of costs begins when the activities necessary to get the development project ready for its intended use
begins, which include costs incurred before the beginning of construction. Capitalization of costs ceases when the
development project is substantially complete and ready for its intended use. Determining when a development project
commences, and when it is substantially complete and ready for its intended use involves a degree of judgment. We
generally consider a development project to be substantially complete and ready for its intended use upon receipt of a
certificate of occupancy. We cease cost capitalization if activities necessary for the development of the property have
been suspended. Capitalized costs are allocated to the specific components of a project that are benefited.
Interest shall be capitalized for investments accounted for by the equity method while the investee has activities in
progress necessary to commence its planned principal operations, provided that the investee’s activities include the use
of funds to acquire qualifying assets for its operations. The investor’s investment in the investee, not the individual assets
or projects of the investee, is the qualifying asset for purposes of interest capitalization.
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Valuation of Financial Instruments
Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values
are not necessarily indicative of the amounts the Company could realize upon disposition of the financial instruments.
Financial instruments with readily available active quoted prices, or for which fair value can be measured from actively
quoted prices, generally will have a higher degree of pricing observability and will therefore require a lesser degree of
judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will
generally have less, or no, pricing observability and will require a higher degree of judgment in measuring fair value.
Pricing observability is generally affected by such items as the type of financial instrument, whether the financial
instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market
conditions. The use of different market assumptions and/or estimation methodologies may have a material effect on
estimated fair value amounts.
For a further discussion regarding the measurement of financial instruments see Note 9, Fair Value of Financial
Instruments.
Valuation Hierarchy
In accordance with the authoritative guidance on fair value measurements and disclosures under ASC 820, Fair Value
Measurement, the methodologies used for valuing such instruments have been categorized into three broad levels as
follows:
Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on other observable market parameters, including:
• Quoted prices in active markets for similar instruments,
• Quoted prices in less active or inactive markets for identical or similar instruments,
• Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit
risks and default rates), and
• Market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations based significantly on unobservable inputs.
• Valuations based on third-party indications (broker quotes, counterparty quotes or pricing services) which were, in
turn, based significantly on unobservable inputs or were otherwise not supportable as Level 2 valuations, and
• Valuations based on internal models with significant unobservable inputs.
Pursuant to the authoritative guidance, these levels form a hierarchy. The Company follows this hierarchy for its
financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of
input that is significant to the fair value measurement.
It is the Company’s policy to determine when transfers between levels of the fair value hierarchy are deemed to have
occurred at the end of the reporting period.
Tuebor/Federal Home Loan Bank Membership
Tuebor Captive Insurance Company LLC (“Tuebor”), was licensed in Michigan and approved to operate as a captive
insurance company as well as being approved to become a member of the Federal Home Loan Bank (“FHLB”), with
membership finalized with the purchase of stock, in the FHLB on July 11, 2012. That approval allowed Tuebor to
purchase capital stock in the FHLB, the prerequisite to obtaining financing on eligible collateral. Refer to Note 8, Debt
Obligations, Net.
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Each member of the FHLB must purchase and hold FHLB stock as a condition of initial and continuing membership, in
proportion to their borrowings from the FHLB and levels of certain assets. Members may need to purchase additional
stock to comply with these capital requirements from time to time. FHLB stock is redeemable by Tuebor upon five (5)
years’ prior written notice, subject to certain restrictions and limitations. Under certain conditions, the FHLB may also,
at its sole discretion, repurchase FHLB stock from its members. The Company records its investment in FHLB stock at
its par value and the FHLB stock is expected to be repurchased by the FHLB at its par value.
Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. Beginning April 1, 2015, the Company elected to early adopt ASU 2015-03 and
appropriately retrospectively applied the guidance to its senior unsecured notes, to all periods presented. Unamortized
debt issuance costs of $14.1 million are included in senior unsecured notes as of December 31, 2017, and unamortized
debt issuance costs of $4.0 million are included in senior unsecured notes as of December 31, 2016. This new guidance
is framed around how to account for costs related to term debt and it does not address how to present fees paid to lenders
or other costs to secure revolving lines of credit, which are, at the outset, not associated with an outstanding borrowing.
In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which amends ASC 835-30, Interest - Imputation of
Interest. This update clarifies the presentation and subsequent measurement of debt issuance costs associated with lines
of credit. These costs may be deferred and presented as an asset and subsequently amortized ratably over the term of the
revolving debt arrangement. The Company considers its committed loan master repurchase facilities, borrowings under
credit agreement and revolving credit facility to be revolving debt arrangements. Refer to Note 8, Debt Obligations, Net.
Derivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate changes and may undertake a
strategy to limit these risks through the use of derivatives. To address exposure to interest rates, the Company uses
derivatives primarily to economically hedge the fair value variability of fixed rate assets caused by interest rate
fluctuations and overall portfolio market risk. The Company may use a variety of derivative instruments that are
considered conventional, or “plain vanilla” derivatives, including interest rate swaps, futures, caps, collars and floors, to
manage interest rate risk.
To determine the fair value of derivative instruments, the Company uses a variety of methods and assumptions that are
based on market conditions and risks existing at each balance sheet date. Standard market conventions and techniques
such as discounted cash flow analysis, option-pricing models, and termination cost may be used to determine fair value.
All such methods of measuring fair value for derivative instruments result in an estimate of fair value, and such value
may never actually be realized.
The Company recognizes all derivatives on the consolidated balance sheets at fair value. The Company does not
generally designate derivatives as hedges to qualify for hedge accounting for financial reporting purposes and therefore
any net payments under, or fluctuations in the fair value of, these derivatives have been recognized currently in net result
from derivative transactions in the accompanying consolidated statements of income. The Company records derivative
asset and liability positions on a gross basis with any collateral posted with or received from counterparties recorded
separately on the Company’s consolidated balance sheets.
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Repurchase Agreements
The Company finances certain of its mortgage loan receivables held for sale, a portion of its mortgage loan receivables
held for investment and the majority of its real estate securities using repurchase agreements. Under a repurchase
agreement, an asset is sold to a counterparty to be repurchased at a future date at a predetermined price, which represents
the original sales price plus interest. The Company accounts for these repurchase agreements as financings under ASC
860-10-40. Under this standard, for these transactions to be treated as financings, they must be separate transactions and
not linked. If the Company finances the purchase of its mortgage loan receivables held for sale, mortgage loan
receivables held for investment and real estate securities with repurchase agreements with the same counterparty from
which the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each
other, the transactions are presumed under GAAP to be part of the same arrangement, or a “Linked Transaction,” unless
certain criteria are met. As of December 31, 2017 and 2016, none of the Company’s repurchase agreements are
accounted for as linked transactions.
Income Taxes
The Company has elected to be taxed as a REIT under the Code effective January 1, 2015. The Company is subject to
federal income taxation at corporate rates on its REIT taxable income; however, the Company is allowed a deduction for
the amount of dividends paid to its stockholders, thereby subjecting the distributed net income of the Company to
taxation at the stockholder level only. Any income associated with a TRS is fully taxable because a TRS is subject to
federal and state income taxes as a domestic C corporation based upon its net income. The Company is also subject to
U.S. federal income tax (and possibly state and local taxes) to the extent it recognizes any “built-in gains” that existed as
of the date of the REIT Election for the five year period following the REIT Election. The Company intends to continue
to operate in a manner consistent with and to elect to be treated as a REIT for tax purposes.
Prior to electing REIT status, a portion of the Company’s income was subject to U.S. federal, state and local corporate
income taxes and taxed at the prevailing corporate tax rates in addition to being subject to NYC UBT. Prior to
February 11, 2014, the Company’s predecessor had not been subject to U.S. federal income taxes as the predecessor
entity is a Limited Liability Limited Partnership, but had been subject to the New York City Unincorporated Business
Tax (“NYC UBT”).
As part of the recently enacted Tax Cuts and Jobs Act, the federal income tax rate applicable to TRS activities has been
reduced. The Company has adjusted its deferred tax positions at the TRSs (including those resulting from the TRA) to
reflect the reduced tax rate as part of its 2017 tax provision.
The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes (“ASC 740”), which
requires the recognition of tax benefits or expenses on the temporary differences between financial reporting and tax
bases of assets and liabilities. The Company determines whether a tax position of the Company is more likely than not
to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement which could result in
the Company recording a tax liability that would reduce shareholders’ equity.
The Company’s policy is to classify interest and penalties associated with underpayment of U.S. federal and state income
taxes, if any, as a component of general and administrative expense on its consolidated statements of income. For the
years ended December 31, 2017 and 2016, the Company did not have material interest or penalties associated with the
underpayment of any income taxes. The last three tax years remain open and subject to examination by tax jurisdictions.
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Deferred Tax Asset and Amount Due Pursuant to Tax Receivable Agreement
In conjunction with the IPO, the Company is treated for U.S. federal income tax purposes as having directly purchased
LP Units in LCFH from the existing unitholders. In the future, additional Series REIT LP Units, LC TRS I Shares (or
Series TRS LP Units in lieu of such LC TRS I Shares) and shares of our Class B common stock may be exchanged for
shares of Class A common stock in the Company. The initial purchase and these future exchanges may result in an
increase in the tax basis of LCFH’s assets attributable to the Company’s interest in LCFH. These increases in the tax
basis of LCFH’s assets attributable to the Company’s interest in LCFH would not have been available but for this initial
purchase and future exchanges. Such increases in tax basis may increase (for tax purposes) depreciation and amortization
deductions and therefore reduce the amount of income tax the Company would otherwise be required to pay in the
future. The Tax Receivable Agreement provides for the payment by the Company to the TRA Members of 85% of the
amount of cash savings in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as
a result of (a) the increase in tax basis attributable to exchanges by the TRA Members and (b) tax benefits related to
imputed interest deemed to be paid by the Company as a result of this Tax Receivable Agreement. The Company may
benefit from the remaining 15% of cash savings, if any, in income tax that it realizes and record any such estimated tax
benefits as an increase to additional paid-in-capital. For purposes of the Tax Receivable Agreement, cash savings in
income tax will be computed by comparing the Company’s actual income tax liability to the amount of such taxes that it
would have been required to pay had there been no increase to the tax basis of the assets of LCFH as a result of the
exchanges and had it not entered into the Tax Receivable Agreement. The term of the Tax Receivable Agreement
commenced upon consummation of the IPO and will continue until all such tax benefits have been utilized or expired,
unless the Company exercises its right to terminate the Tax Receivable Agreement for an amount based on an agreed
value of payments remaining to be made under the agreement. The Company has recorded the estimated tax benefits
related to the increase in tax basis and imputed interest as a result of the future exchanges described above as a deferred
tax asset in the consolidated statements of financial condition. The amount due to the TRA Members related to the Tax
Receivable Agreement as a result of the future exchanges described above is recorded as amount due pursuant to Tax
Receivable Agreement in the consolidated statements of financial condition.
The Tax Receivable Agreement was amended and restated in connection with our REIT Election, effective as of
December 31, 2014 (the “TRA Amendment”), in order to preserve a portion of the potential tax benefits currently
existing under the Tax Receivable Agreement that would otherwise be reduced in connection with our REIT Election.
The TRA Amendment provides that, in lieu of the existing tax benefit payments under the Tax Receivable Agreement for
the 2015 taxable year and beyond, LC TRS I will pay to the TRA Members 85% of the amount of the benefits, if any,
that LC TRS I realizes or under certain circumstances (such as a change of control) is deemed to realize as a result of
(i) the increases in tax basis resulting from the TRS Exchanges by the TRA Members, (ii) any incremental tax basis
adjustments attributable to payments made pursuant to the TRA Amendment, and (iii) any deemed interest deductions
arising from payments made by LC TRS I under the TRA Amendment. Under the TRA Amendment, LC TRS I may
benefit from the remaining 15% of cash savings in income tax that it realizes, which is in the same proportion realized by
the Company under the existing Tax Receivable Agreement. The purpose of the TRA Amendment was to preserve the
benefits of the Tax Receivable Agreement to the extent possible in a REIT, although, as a result, the amount of payments
made to the TRA Members under the TRA Amendment is expected to be less than would be made under the prior Tax
Receivable Agreement. The TRA Amendment continues to share such benefits in the same proportions and otherwise has
substantially the same terms and provisions as the prior Tax Receivable Agreement. See Note 1 and Note 16 for further
discussion of the Tax Receivable Agreement.
The expected benefits for prior conversions which have not yet been realized have been reduced as a result of the Tax
Cuts and Jobs Act which reduced the corporate federal tax rate in periods subsequent to 2017. The Company adjusted the
expected deferred tax benefits and related payable in 2017 to reflect the impact of this change.
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Interest Income
Interest income is accrued based on the outstanding principal amount and contractual terms of the Company’s loans and
securities. Discounts or premiums associated with the purchase of loans and investment securities are amortized or
accreted into interest income as a yield adjustment on the effective interest method, based on expected cash flows
through the expected recovery period of the investment. On at least a quarterly basis, the Company reviews and, if
appropriate, makes adjustments to its cash flow projections. The Company has historically collected, and expects to
continue to collect, all contractual amounts due on its originated loans. As a result, the Company does not adjust the
projected cash flows to reflect anticipated credit losses for these loans. If the performance of a credit deteriorated
security is more favorable than forecasted, the Company will generally accrete more credit discount into interest income
than initially or previously expected. These adjustments are made prospectively beginning in the period subsequent to
the determination that a favorable change in performance is projected. Conversely, if the performance of a credit
deteriorated security is less favorable than forecasted, an other-than-temporary impairment may be taken, and the amount
of discount accreted into income will generally be less than previously expected.
The effective yield on securities is based on the projected cash flows from each security, which is estimated based on the
Company’s observation of the then current information and events and will include assumptions related to interest rates,
prepayment rates and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if
appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources,
internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses (if
applicable), and other factors. Changes in cash flows from those originally projected, or from those estimated at the last
evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual
maturities of the securities are affected by the contractual lives of the associated mortgage collateral, periodic payments
of scheduled principal, and repayments of principal. Therefore, actual maturities of the securities will generally be
shorter than stated contractual maturities.
For loans classified as held for investment and that the Company has not elected to record at fair value under FASB ASC
825, origination fees and direct loan origination costs are recognized in interest income over the loan term as a yield
adjustment using the effective interest method. For loans classified as held for sale and that the Company has not elected
to record at fair value under FASB ASC 825, origination fees and direct loan origination costs are deferred adjusting the
basis of the loan and are realized as a portion of the gain/(loss) on sale of loans when sold. As of December 31, 2017, the
Company did not hold any loans for which the fair value option was elected.
For our CMBS rated below AA, which represents 4.1% of the Company’s CMBS portfolio as of December 31, 2017,
cash flows from a security are estimated by applying assumptions used to determine the fair value of such security and
the excess of the future cash flows over the investment are recognized as interest income under the effective yield
method. The Company will review and, if appropriate, make adjustments to, its cash flow projections at least quarterly
and monitor these projections based on input and analysis received from external sources and its judgment about interest
rates, prepayment rates, the timing and amount of credit losses and other factors. Changes in cash flows from those
originally projected, or from those estimated at the last evaluation, may result in a prospective change in interest income
recognized and amortization of any premium or discount on, or the carrying value of, such securities.
For investments purchased with evidence of deterioration of credit quality for which it is probable, at acquisition, that the
Company will be unable to collect all contractually required payments receivable, the Company will apply the provisions
of ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” ASC 310-30 addresses
accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s
initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in
part, to credit quality. ASC 310-30 limits the yield that may be accreted (accretable yield) to the excess of the investor’s
estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be
collected) over the investor’s initial investment in the loan. ASC 310-30 requires that the excess of contractual cash
flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield,
loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected generally should be
recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected
to be collected should be recognized as impairment.
134
Recognition of Operating Lease Income and Tenant Recoveries
Operating lease income is recognized on a straight-line basis over the respective lease terms. We classify amounts
currently recognized as income, and expected to be received in later years, as assets in other assets in the accompanying
consolidated balance sheets. Amounts received currently, but recognized as income in future years, are classified in other
liabilities in the accompanying consolidated balance sheets. We commence recognition of operating lease income at the
date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the
property.
Tenant recoveries related to reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, and other
operating expenses are recognized as revenue in the period during which the applicable expenses are incurred.
Sales of Loans
We recognize gains on sale of loans net of any costs related to that sale.
Transfers of Financial Assets
For a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860, which, at the
time of the transfer, require that the transferred assets qualify as recognized financial assets and the Company surrender
control over the assets. Such surrender requires that the assets be isolated from the Company, even in bankruptcy or
other receivership, the purchaser have the right to pledge or sell the assets transferred and the Company not have an
option or obligation to reacquire the assets. If the sale criteria are not met, the transfer is considered to be a secured
borrowing, the assets remain on the Company’s consolidated balance sheets and the sale proceeds are recognized as a
liability. See also Change in Accounting Principle for change accounting relating to transfers of financial assets where
certain restrictions are placed on transferees.
Debt Issued
From time to time, a subsidiary of the Company will originate a loan (each, an “Intercompany Loan,” and collectively,
“Intercompany Loans”) to another subsidiary of the Company to finance the purchase of real estate. The mortgage loan
receivable and the related obligation do not appear in the Company’s consolidated balance sheets as they are eliminated
upon consolidation. Once the Company issues (sells) an Intercompany Loan to a third-party securitization trust (for
cash), the related mortgage note is held for the first time by a creditor external to the Company. The accounting for the
securitization of an Intercompany Loan—a financial instrument that has never been recognized in our consolidated
financial statements as an asset—is considered a financing transaction under ASC 470, Debt, and ASC 835, Interest.
The periodic securitization of the Company’s mortgage loans involves both Intercompany Loans and mortgage loans
made to third parties with the latter recognized as financial assets in the Company’s consolidated financial statements as
part of an integrated transaction. The Company receives aggregate proceeds equal to the transaction’s all-in
securitization value and sales price. In accordance with the guidance under ASC 835, when initially measuring the
obligation arising from an Intercompany Loan’s securitization, the Company allocates the proceeds from each
securitization transaction between the third-party loans and each Intercompany Loan so securitized on a relative fair
value basis determined in accordance with the guidance in ASC 820, Fair Value Measurement. The difference between
the amount allocated to each Intercompany Loan and the loan’s face amount is recorded as a premium or discount, and is
amortized, using the effective interest method, as a reduction or increase in reported interest expense, respectively.
Fee and Other Income
Fee and other income is composed of income from the management of our institutional partnership and managed
accounts, dividend income on our investment in FHLB stock, as well as from origination fees, exit fees and other fees on
the loans we originate and in which we invest. For the year ended December 31, 2015, it also includes a gain on the
disposition of a loan, that was not originated by the Company, through foreclosure of real estate. Such foreclosed loan
was credit impaired at the time of acquisition, which was reflected in Ladder’s purchase price.
Fee Expense
Fee expense is composed primarily of fees related to financing arrangements, transaction related costs and management
fees incurred.
135
Stock Based Compensation Plan
The Company accounts for its equity-based compensation awards using the fair value method, which requires an
estimate of fair value of the award at the time of grant. The Company recognizes the compensation expense related to the
time-based vesting criteria on a straight-line basis over the requisite service period. Accruals of compensation cost for an
award with a performance condition shall be based on the probable outcome of that performance condition. Therefore,
compensation cost shall be accrued if it is probable that the performance condition will be achieved and shall not be
accrued if it is not probable that the performance condition will be achieved. During the year ended December 31, 2016,
the Company made a policy election to account for forfeitures as they occur rather than on an estimated basis.
Out-of-Period Adjustments
During the first quarter of 2017, the Company recorded an out-of-period adjustment to reduce depreciation expense of
$0.8 million related to prior periods. The Company has concluded that this adjustment is not material to the financial
position or results of operations for the three months ended March 31, 2017 or any prior periods; accordingly, the
Company recorded the related adjustment in the three month period ended March 31, 2017.
During the first quarter of 2016, the Company had recorded the following out-of-period adjustments to correct errors
from prior periods: (i) additional deferred financing cost amortization of $0.5 million relating to 2015; (ii) additional
taxes of $1.2 million representing additional state taxes relating to 2015 and (iii) additional return on equity of $0.9
million from the Company’s investment in an unconsolidated joint venture predominately relating to prior years. During
the fourth quarter of 2016, the Company recorded an out-of-period adjustment for additional depreciation of $1.2
million, of which, $0.6 million related to prior years and the remainder related to earlier quarters in 2016. The Company
has concluded that these adjustments were not material to the financial position or results of operations for any annual or
quarterly periods in 2016, or any prior periods; accordingly, the Company recorded the related adjustments when they
were identified.
Change in Accounting Principle
As more fully described in Note 4, on June 29, 2017, the Company completed its first sponsored securitization
transaction whereby it transferred $625.7 million of loans to LCCM 2017-LC26 securitization trust. The Company
initially concluded that the transfer restrictions placed on the Third Party Purchaser (“TPP”) of the risk retention
securities, imposed by the risk retention rules of the Dodd-Frank Act, precluded sale accounting under ASC 860 and,
accordingly, the Company originally accounted for the transaction as a financing in its interim financial statements for
the periods ended June 30, 2017 and September 30, 2017. As a result of industry discussions, in November 2017 the staff
of the Securities and Exchange Commission (the “SEC staff”) indicated that, despite such restrictions, they would not
take exception to a registrant treating such transfers as sales if they otherwise met all the criteria for sale accounting. The
Company believes treatment of such transfers as sales is more consistent with the substance of such transaction and,
accordingly, changed its accounting principle to treat such transfers as sales. In accordance with generally accepted
accounting principles, the Company reflected this change in accounting principle retrospectively to prior interim periods
within 2017.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
136
Recently Adopted Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU
2016-15”). ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement
of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii)
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business
combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned
life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method
investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and
application of the predominance principle. For a public company, ASU 2016-15 is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted in
any interim or annual period. The Company adopted this ASU during the three month period ended December 31, 2017.
The only significant impact was the reclassification of a portion of payments received in Interest Only (“I/O”) securities
previously reflected as operating cash inflows under prevailing industry practice to investing cash inflows. The Company
has reclassified $52.0 million, $70.1 million and $79.1 million between operating and investing activities for the years
ended December 31, 2017, 2016 and 2015, respectively.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties
That Are under Common Control (“ASU 2016-17”). ASU 2016-17 changes how a reporting entity that is a decision
maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must
evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in
the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which the Company adopted on
January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE
as if the decision maker held the interest itself. ASU 2016-17 is effective for public business entities in fiscal years
beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.
The Company adopted this update in the quarter ended March 31, 2017. The adoption did not have a material effect on
the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU
2016-18”). ASU 2016-18 requires the inclusion of restricted cash with cash and cash equivalents when reconciling the
beginning-of-the period and end-of-period total amounts shown on the statement of cash flows. For a public company,
ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods
within that reporting period. The Company elected to early adopt ASU 2016-18 effective January 1, 2017 and the update
was applied on a retrospective basis for all periods presented. As a result of the adoption, the Company no longer
presents the change within restricted cash in the consolidated statements of cash flows.
137
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”),
that outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and superseded most then-current revenue recognition guidance, including industry-specific guidance. ASU
2014-09 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and
assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a
modified retrospective approach for the adoption of the new standard. ASU 2014-09 was initially scheduled to become
effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period; early adoption was not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with
Customers (Topic 606) — Deferral of the Effective Date (“ASU 2015-14”), which deferred the effective date of ASU
2014-09 for one year and permitted early adoption as early as the original effective date of ASU 2014-09. The new
revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative
effect recognized as of the date of adoption. In 2016, the FASB issued additional guidance to clarify the implementation
guidance, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net) (“ASU 2016-08”); ASU 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing (“ASU 2017-10”); ASU 2016-11, Revenue Recognition (Topic
605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force (“EITF”)
Meeting (SEC Update) (“ASU 2016-11”), ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-
Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). In February 2017, the FASB
issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)
(“ASU 2017-05”). In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from
Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs
Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission f Prior SEC Staff Announcements
and Observer Comments (SEC Update) (“ASU 2017-13”). In November 2017, the FASB issued ASU 2017-14, Income
Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from
Contracts with Customers (Topic 606) (SEC Update) (“ASU 2017-14”). These amendments provide additional
clarification and implementation guidance on the previously issued ASU 2014-09.
Under the full retrospective method, a company will apply the rules to contracts in all reporting periods presented,
subject to certain allowable exceptions. Under the modified retrospective method, a company will apply the rules to all
contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative
effect of the change and providing additional disclosures comparing results to previous rules. The Company expects to
adopt the standard using the modified retrospective method. The Company believes the effects on its existing accounting
policies will be associated with its non-leasing revenue components, specifically the amount, timing and presentation of
tenant expense reimbursements revenue. The Company continues to evaluate other areas of the standard and is currently
assessing the impact on its consolidated financial statements. The Company expects to adopt this update beginning
January 1, 2018.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The update provides guidance to improve
certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard is
effective for public companies for fiscal years beginning after December 15, 2017, and for interim periods within those
fiscal years. Early adoption by public companies for fiscal year or interim period financial statements that have not yet
been issued or, by all other entities, that have not yet been made available for issuance of this guidance, is permitted as of
the beginning of the fiscal year of adoption, under certain restrictions. The Company is required to apply the guidance by
means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The
guidance related to equity securities without readily determinable fair values should be applied prospectively to equity
investments that exist at the date of adoption. The Company anticipates adopting this update in the quarter ending March
31, 2018 and is currently evaluating the impact on the Company’s consolidated financial statements.
138
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles
for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and
lessors). The new standard requires lessees to apply a dual approach, classifying leases as either operating leases based
on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will
determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the
term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term
greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for
similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an
approach that is substantially equivalent to existing guidance for sale-type leases, direct financing leases and operating
leases. ASU 2016-02 supersedes the previous lease standard, Leases (Topic 840). The standard is effective for the
Company on January 1, 2019, with an early adoption permitted. The Company continues to evaluate the effect the
adoption of ASU 2016-02 will have on the Company’s financial position and/or results of operations. The Company
currently believes that the adoption of ASU 2016-02 will not have a material impact for operating leases where it is a
lessor and will continue to record revenues from rental properties for its operating leases on a straight-line basis.
However, for leases where the Company is the lessee, primarily for the Company’s corporate headquarters and regional
offices, the Company will measure the present value of the future lease payments and recognize a right-of-use asset and
corresponding lease liability on its balance sheet.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”). The guidance changes the impairment model for most financial
assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of
allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and
early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company must apply
the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the
first reporting period in which the guidance is effective. The Company is currently assessing the impact of this standard
on the consolidated financial statements. In general, the allowance for credit losses is expected to increase when
changing from an incurred loss to expected loss methodology. The models and methodologies that are currently used in
estimating the allowance for credit losses are being evaluated to identify the changes necessary to meet the requirements
of the new standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350) (“ASU 2017-04”). The
ASU simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will
be applied prospectively and is effective for annual or any interim goodwill impairment tests in years beginning after
December 15, 2019 with early adoption permitted. The Company does not currently expect any impact on its
consolidated financial statements as the Company (absent a business combination) has no recorded goodwill.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)
(“ASU 2017-08”). The ASU shortens the amortization period for the premium on certain purchased callable debt
securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security.
The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount
continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning
after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach
under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting
period in which the guidance is adopted. The Company is currently assessing the impact that this guidance will have on
its consolidated financial statements when adopted.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) (“ASU 2017-09”). The
ASU provides clarification on when modification accounting should be used for changes to the terms or conditions of a
share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that
modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award
classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are
effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU
2017-09 is not expected to have an impact on the Company’s consolidated financial statements.
139
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down
Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,
(“ASU 2017-11”). Part I of this update addresses the complexity of accounting for certain financial instruments with
down round features. Down round features are features of certain equity-linked instruments (or embedded features) that
result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance
creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments)
with down round features that require fair value measurement of the entire instrument or conversion option. Part II of
this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the
existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the
result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain
nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update
do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11
on its financial statements and related disclosures.
In January 2018, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842,
(“ASU 2018-01”). This ASU provides an optional transition practical expedient that, if elected, would not require
companies to reconsider their accounting for existing or expired land easements before adoption of Topic 842 and that
were not previously accounted for as leases under Topic 840. This ASU will be effective January 1, 2019, and early
adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2018-01 on its financial
statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220),
(“ASU 2018-02”). This ASU allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and
Jobs Act of 2017 from accumulated other comprehensive income into retained earnings. This ASU will be effective
January 1, 2019, and early adoption is permitted. The Company is currently assessing the potential impact of adopting
ASU 2018-02 on its financial statements and related disclosures.
Any new accounting standards not disclosed above that have been issued or proposed by FASB and that do not require
adoption until a future date are not expected to have a material impact on the consolidated financial statements upon
adoption.
140
3. CONSOLIDATED VARIABLE INTEREST ENTITIES
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 —
Consolidation (“ASC 810”), provides guidance on the identification of entities for which control is achieved through
means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business
enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when
either: (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest;
(2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial
support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the
activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is the
entity that has both of the following characteristics: (1) the power to direct the activities that, when taken together, most
significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from
the VIE that would be significant to the VIE. The Operating Partnership is a VIE and as such, substantially all of the
consolidated balance sheet is a consolidated VIE. In addition, the Operating Partnership consolidates the following VIEs:
December 31, 2017 ($ in thousands)
Mortgage loan receivables held for investment, net, at amortized cost
Accrued interest receivable
Total assets
Senior and unsecured debt obligations
Accrued expenses
Total liabilities
Net equity in VIEs (eliminated in consolidation)
Total equity
CLO
Notes 4 & 8
$
$
$
880,385
4,252
884,637
689,961
794
690,755
193,882
193,882
Total liabilities and equity
$
884,637
4. MORTGAGE LOAN RECEIVABLES
December 31, 2017 ($ in thousands)
Outstanding
Face Amount
Carrying
Value
Weighted
Average
Yield (1)
Remaining
Maturity
(years)
Mortgage loans held by consolidated
subsidiaries(2)
Provision for loan losses
Mortgage loan receivables held for investment,
net, at amortized cost
Mortgage loan receivables held for sale
Total
$
3,300,709
$
N/A
3,282,462
(4,000)
3,300,709
232,527
3,533,236
$
3,278,462
230,180
3,508,642
$
7.18 %
1.61
4.88 %
7.03%
8.17
2.04
(1) December 31, 2017 London Interbank Offered Rate (“LIBOR”) rates are used to calculate weighted average yield
for floating rate loans.
Includes amounts relating to consolidated variable interest entities. See Note 3.
(2)
141
On June 29, 2017, the Company transferred its interests in $625.7 million of loans to the LCCM 2017-LC26
securitization trust. The assets transferred to the trust were comprised of 34 loans to third parties having a combined
outstanding face amount of $549.0 million and a combined carrying value of $547.7 million as well as 23 former
intercompany loans secured by certain of the Company’s real estate assets, having a combined principal balance of $76.7
million (which had not previously been recognized for accounting purposes because they eliminated in consolidation). In
connection with this transaction, pursuant to the 5% risk retention requirement of the Dodd-Frank Act described in Part
I, Item 1A “Risk Factors,” in this Annual Report, the Company (i) retained a $12.9 million restricted “vertical interest”
consisting of approximately 2% in each class of securities issued by the trust, which must be held by the Company until
the principal balance of the pool has been reduced to a level prescribed by the risk retention rules and (ii) sold an
approximately 3% restricted “horizontal interest” in the form of 98% of the controlling classes (excluding the 2%
included in the vertical interest) to a TPP, which must be held by the TPP for at least five years. In addition, the
Company purchased $62.7 million of securities issued by the trust, which are not restricted.
The Company initially concluded that the transfer restrictions placed on the TPP of the risk retention securities, imposed
by the risk retention rules of the Dodd-Frank Act, precluded sale accounting under generally accepted accounting
principles and, accordingly, the Company originally accounted for the transaction as a financing. As a result of industry
discussions, in November 2017, the SEC staff indicated that, despite such restrictions, they would not take exception to a
registrant treating such transfers as sales if they otherwise met all the criteria for sale accounting. The Company believes
treatment of such transfers as sales is more consistent with the substance of such transaction, and accordingly, changed
its accounting principles to treat such transfers as sales. In accordance with generally accepted accounting principles, the
Company reflected this change in accounting principle retrospectively to prior interim periods within 2017.
In connection with the securitization transaction, the former intercompany loans, which are secured by real estate
properties still owned by the Company, will continue to be reported as a financing transaction. As a result of the change
in accounting principle, the Company recognized a gain of $26.1 million on the transaction when it closed on June 29,
2017. In addition, upon consummation, the Company recognized $12.9 million and $62.7 million in restricted and
unrestricted securities, respectively, which are included in real estate securities on the Company’s consolidated balance
sheets. The Company also recognized a liability for $78.8 million for 23 intercompany loans with a combined principal
balance of $76.7 million.
As of December 31, 2017, $0.7 billion, or 22.0%, of the carrying value of our mortgage loan receivables held for
investment, at amortized cost, were at fixed interest rates and $2.6 billion, or 78.0%, of the carrying value of our
mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some
of which include interest rate floors. As of December 31, 2017, $230.2 million, or 100.0%, of the carrying value of our
mortgage loan receivables held for sale were at fixed interest rates.
December 31, 2016 ($ in thousands)
Outstanding
Face Amount
Carrying
Value
Weighted
Average
Yield (1)
Remaining
Maturity
(years)
Mortgage loans held by consolidated
subsidiaries
Provision for loan losses
Mortgage loan receivables held for investment,
net, at amortized cost
Mortgage loan receivables held for sale
Total
$
2,011,309
$
N/A
2,011,309
360,518
2,371,827
2,000,095
(4,000)
1,996,095
357,882
2,353,977
7.17 %
1.66
4.20 %
6.73%
4.55
2.10
(1) December 31, 2016 LIBOR rates are used to calculate weighted average yield for floating rate loans.
As of December 31, 2016, $205.4 million, or 10.3%, of the carrying value of our mortgage loan receivables held for
investment, at amortized cost, were at fixed interest rates and $1.8 billion, or 89.7%, of the carrying value of our
mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some
of which include interest rate floors. As of December 31, 2016, $360.5 million, or 100%, of the carrying value of our
mortgage loan receivables held for sale were at fixed interest rates.
142
The following table summarizes mortgage loan receivables by loan type ($ in thousands):
December 31, 2017
December 31, 2016
Outstanding
Face Amount
Carrying
Value
Outstanding
Face Amount
Carrying
Value
Mortgage loan receivables held for investment,
net, at amortized cost:
First mortgage loans
Mezzanine loans
Mortgage loan receivables held for
investment, net, at amortized cost
Mortgage loan receivables held for sale
$
3,140,788
$
3,123,268
$
1,843,006
$
1,832,626
159,921
159,194
168,303
167,469
3,300,709
3,282,462
2,011,309
2,000,095
First mortgage loans
232,527
230,180
360,518
357,882
Total mortgage loan receivables held for
sale
232,527
230,180
360,518
357,882
Provision for loan losses
Total
N/A
3,533,236
$
(4,000)
3,508,642
$
N/A
2,371,827
$
(4,000)
2,353,977
$
For the years ended December 31, 2017, 2016 and 2015, the activity in our loan portfolio was as follows ($ in
thousands):
Mortgage loan receivables held for
investment, net, at amortized cost:
Mortgage loans held
by consolidated
subsidiaries
Provision for loan
losses
Mortgage loan
receivables held
for sale
Balance, December 31, 2016
Origination of mortgage loan receivables
Purchases of mortgage loan receivables
Repayment of mortgage loan receivables
Proceeds from sales of mortgage loan receivables
Realized gain on sale of mortgage loan receivables(3)
Transfer between held for investment and held for sale(4)
Accretion/amortization of discount, premium and other fees
Loan loss provision
Balance, December 31, 2017
$
2,000,095
$
(4,000) $
1,407,669
94,079
(384,283)
—
—
153,722
11,180
—
—
—
—
—
—
—
—
—
357,882
1,465,635
—
(2,569) (1)
(1,491,092) (2)
54,046
(153,722)
—
—
$
3,282,462
$
(4,000) $
230,180
(1)
(2)
(3)
Includes $0.5 million of non-cash repayment of mortgage loan receivables.
Includes $115.4 million of non-cash proceeds from sales.
Includes $1.8 million of realized losses on loans related to lower of cost or market adjustments for the year ended
December 31, 2017.
143
(4) During the year ended December 31, 2017, the Company reclassified from mortgage loan receivables held for sale
to mortgage loan receivables held for investment, net, at amortized cost, a loan with an outstanding face amount of
$120.0 million, a book value of $119.9 million (fair value at date of reclassification) and a remaining maturity of
three years. The loan had been recorded at lower of cost or market prior to its reclassification. The discount to fair
value is the result of an increase in market interest rates since the loan’s origination and not a deterioration in credit
of the borrower or collateral coverage and the Company expects to collect all amounts due under the loan. In
addition, during the year ended December 31, 2017, the Company reclassified from mortgage loan receivables held
for sale to mortgage loan receivables held for investment, net, at amortized cost, a loan with an outstanding face
amount and book value of $33.8 million, (fair value at date of reclassification) and a remaining maturity of 3.5
years. These transfers have been reflected as non-cash items on the consolidated statement of cash flows for the
year ended December 31, 2017.
Mortgage loan receivables held for investment,
net, at amortized cost:
Mortgage loans held
by consolidated
subsidiaries
Provision for loan
losses
Mortgage loan
receivables held
for sale
Balance, December 31, 2015
Origination of mortgage loan receivables
Purchases of mortgage loan receivables
Repayment of mortgage loan receivables
Proceeds from sales of mortgage loan receivables(3)
Realized gain on sale of mortgage loan receivables
Accretion/amortization of discount, premium and other fees
Loan loss provision
Balance, December 31, 2016
$
1,742,345
$
(3,700) $
969,401 (1)
—
(720,592) (2)
—
—
8,941
—
$
2,000,095
$
—
—
—
—
—
—
(300)
(4,000) $
571,764
1,128,651
73,421
(1,768)
(1,440,195)
26,009
—
—
357,882
(1)
(2)
(3)
Includes $50.4 million of non-cash originations.
Includes $70.7 million of non-cash repayments.
Includes $2.6 million of unrealized losses on loans recorded as other than temporary impairments related to lower
of cost or market adjustments for the year ended December 31, 2016.
Mortgage loan receivables held for investment,
net, at amortized cost:
Mortgage loans held
by consolidated
subsidiaries
Provision for loan
losses
Mortgage loan
receivables held
for sale
Balance, December 31, 2014
Origination of mortgage loan receivables
Repayment of mortgage loan receivables
Proceeds from sales of mortgage loan receivables
Non-cash disposition of loan via foreclosure
Realized gain on sale of mortgage loan receivables
Accretion/amortization of discount, premium and other fees
Loan loss provision
Balance, December 31, 2015
$
1,524,153
$
(3,100) $
963,023
(752,452)
—
(4,620)
—
12,241
—
$
1,742,345
$
—
—
—
—
—
—
(600)
(3,700) $
417,955
2,594,141
(2,308)
(2,509,090)
—
71,066
—
—
571,764
At December 31, 2017 and 2016, there was $0.2 million and $0.6 million, respectively, of unamortized discounts
included in our mortgage loan receivables held for investment, at amortized cost, on our consolidated balance sheets.
144
The Company evaluates each of its loans for potential losses at least quarterly. Its loans are typically collateralized by
real estate directly or indirectly. As a result, the Company regularly evaluates the extent and impact of any credit
deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial
and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed
and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently
and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation
value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s
competency in managing and operating the properties. In addition, the Company considers the overall economic
environment, real estate sector, and geographic sub-market in which the collateral property is located. Such impairment
analyses are completed and reviewed by asset management personnel, who utilize various data sources, including
(i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrowers’
business plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and other market
data. As a result of this analysis, the Company has concluded that none of its loans are individually impaired as of
December 31, 2017 and 2016.
However, based on the inherent risks shared among the loans as a group, it is probable that the loans had incurred an
impairment due to common characteristics and inherent risks in the portfolio. Therefore, the Company has recorded a
reserve, based on a targeted percentage level which it seeks to maintain over the life of the portfolio, as disclosed in the
tables below. Historically, the Company has not incurred losses on any originated loans.
As of December 31, 2017, two of the Company’s loans, which were originated simultaneously as part of a single
transaction, and had a carrying value of $26.9 million, were in default. The borrower is currently in bankruptcy court;
however, the Company determined that no impairment was necessary because of the loans’ liquidation value, however,
the Company has placed the loans on non-accrual status as of July 1, 2017. The Company continues to pursue its legal
remedies on these loans. As of December 31, 2017, accrued but unpaid interest totaled $4.6 million, which included $3.5
million of default interest. As of December 31, 2016, the same two loans mentioned above were in default. As of
December 31, 2016, accrued but unpaid interest totaled $3.5 million, which included $2.2 million of default interest.
These loans were placed on non-accrual status as of July 1, 2017. As of December 31, 2017 there were no other loans on
non-accrual status. As of December 31, 2016 there were no loans on non-accrual status.
Provision for Loan Losses ($ in thousands)
Year Ended December 31,
2017
2016
2015
Provision for loan losses at beginning of period
Provision for loan losses
Provision for loan losses at end of period
$
$
4,000
—
4,000
$
$
3,700
300
4,000
$
$
3,100
600
3,700
145
5. REAL ESTATE SECURITIES
Commercial mortgage backed securities (“CMBS”), CMBS interest-only securities, Agency securities, Government
National Mortgage Association (“GNMA”) construction securities and Government National Mortgage Association
(“GNMA”) permanent securities are classified as available-for-sale and reported at fair value with changes in fair value
recorded in the current period in other comprehensive income. GNMA and Federal Home Loan Mortgage Corp
(“FHLMC”) securities (collectively, “Agency interest-only securities”) are recorded at fair value with changes in fair
value recorded in current period earnings. The following is a summary of the Company’s securities at December 31,
2017 and 2016 ($ in thousands):
December 31, 2017
Asset Type
Outstanding
Face Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value
# of
Securities
Rating (1)
Coupon % Yield %
Gross Unrealized
Weighted Average
CMBS(2)
$
945,167 $ 954,397
$ 2,748
$ (3,646)
$ 953,499 (3)
CMBS interest-
only(2)(4)
GNMA interest-
only(4)(6)
Agency securities(2)
GNMA permanent
securities(2)
3,140,297
112,609
172,916
720
5,245
743
33,745
34,386
796
157
—
595
(334)
113,071 (5)
(925)
(15)
4,477
728
(239)
34,742
96
25
13
2
6
AAA
AAA
AA+
AA+
AA+
Total
$
4,292,845 $ 1,107,380
$ 4,296
$ (5,159)
$ 1,106,517
142
3.28 %
2.79 %
0.81 %
3.16 %
0.58 %
2.82 %
3.98 %
1.37%
6.70 %
1.80 %
3.62 %
2.87%
Remaining
Duration
(years)
2.89
3.08
4.18
2.94
5.66
3.00
(1) Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent
rating. For each security rated by multiple rating agencies, the highest rating is used. Ratings provided were
determined by third-party rating agencies as of a particular date, may not be current and are subject to change
(including the assignment of a “negative outlook” or “credit watch”) at any time.
(2) CMBS, CMBS interest-only securities, Agency securities, and GNMA permanent securities are classified as
available-for-sale and reported at fair value with changes in fair value recorded in the current period in other
comprehensive income.
(3) As more fully described in Note 4, certain securities which were purchased from the LCCM LC-26 securitization
trust are designated as risk retention securities under the Dodd-Frank Act which are subject to transfer restrictions
over the term of the securitization trust and are classified as held-to-maturity and reported at amortized cost.
Includes $11.7 million of such restricted securities.
The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the
interest-only securities participate.
(4)
(5) As more fully described in Note 4, certain securities which were purchased from the LCCM LC-26 securitization
trust are designated as risk retention securities under the Dodd-Frank Act which are subject to transfer restrictions
over the term of the securitization trust and are classified as held-to-maturity and reported at amortized cost.
Includes $1.1 million of such restricted securities.
(6) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period
earnings. The Company’s Agency interest-only securities are considered to be hybrid financial instruments that
contain embedded derivatives. As a result, the Company accounts for them as hybrid instruments in their entirety
at fair value with changes in fair value recognized in unrealized gain (loss) on Agency interest-only securities in
the consolidated statements of income in accordance with ASC 815.
146
December 31, 2016
Asset Type
Outstanding
Face Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value
# of
Securities
Rating (1)
Coupon % Yield %
Gross Unrealized
Weighted Average
CMBS(2)
$
1,676,680 $ 1,698,616
$ 10,880
$ (8,101)
$ 1,701,395
131
AAA
3.26 %
2.81 %
CMBS interest-
only(2)(3)
GNMA interest-
only(3)(4)
Agency securities(2)
GNMA permanent
securities(2)
8,160,458
343,438
1,273
(2,540)
342,171
478,577
774
18,994
802
38,327
39,144
159
—
882
(2,332)
16,821
(22)
780
(246)
39,780
Total
$ 10,354,816 $ 2,100,994
$ 13,194
$(13,241)
$ 2,100,947
AAA
AA+
AA+
AA+
60
17
2
9
219
0.87 %
3.45 %
0.73 %
2.90 %
4.09 %
1.27%
4.19 %
1.29 %
3.80 %
2.94%
Remaining
Duration
(years)
3.55
2.99
4.44
3.27
10.30
3.60
(1) Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent
rating. For each security rated by multiple rating agencies, the highest rating is used. Ratings provided were
determined by third-party rating agencies as of a particular date, may not be current and are subject to change
(including the assignment of a “negative outlook” or “credit watch”) at any time.
(2) CMBS, CMBS interest-only securities, Agency securities, and GNMA permanent securities are classified as
available-for-sale and reported at fair value with changes in fair value recorded in the current period in other
comprehensive income.
The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the
interest-only securities participate.
(3)
(4) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period
earnings. The Company’s Agency interest-only securities are considered to be hybrid financial instruments that
contain embedded derivatives. As a result, the Company accounts for them as hybrid instruments in their entirety
at fair value with changes in fair value recognized in unrealized gain (loss) on Agency interest-only securities in
the consolidated statements of income in accordance with ASC 815.
The following is a breakdown of the carrying value of the Company’s securities by remaining maturity based upon
expected cash flows at December 31, 2017 and 2016 ($ in thousands):
December 31, 2017
Asset Type
CMBS(1)
CMBS interest-only(1)
GNMA interest-only(2)
Agency securities(1)
Within 1 year
1-5 years
5-10 years
After 10 years
Total
$
285,982
$
544,278
$
123,239
$
— $
537
76
—
112,534
3,906
728
—
484
—
953,499
113,071
4,477
728
34,742
1,106,517
$
—
11
—
—
11
GNMA permanent securities(1)
Total
—
286,595
$
1,797
663,243
$
32,945
156,668
$
$
147
December 31, 2016
Asset Type
CMBS(1)
CMBS interest-only(1)
GNMA interest-only(2)
Agency securities(1)
Within 1 year
1-5 years
5-10 years
After 10 years
Total
$
132,730
$
1,156,026
$
412,639
$
— $
1,701,395
11,188
—
—
330,983
15,914
780
—
724
—
—
183
—
342,171
16,821
780
GNMA permanent securities(1)
Total
—
143,918
$
4,488
1,508,191
$
27,675
441,038
$
$
7,617
7,800
$
39,780
2,100,947
(1) CMBS, CMBS interest-only securities, Agency securities, and GNMA permanent securities are classified as
available-for-sale and reported at fair value with changes in fair value recorded in the current period in other
comprehensive income.
(2) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period
earnings.
There were $3.5 million, $4.7 million and $1.6 million realized losses on securities recorded as other than temporary
impairments for the years ended December 31, 2017, 2016 and 2015, respectively. The determination of whether a
security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective
factors. Consideration is given to (i) the length of time and the extent to which the fair value has been less than
amortized cost, (ii) the financial condition and near-term prospects of recovery in fair value of the security, and (iii) the
Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis. The Company has no intention to sell the securities before recovery
of its amortized cost basis. For cash flow statement purposes, all receipts of interest from interest-only real estate
securities are treated as part of cash flows from operations.
148
6. REAL ESTATE AND RELATED LEASE INTANGIBLES, NET
The following tables present additional detail related to our real estate portfolio ($ in thousands):
Land
Building
In-place leases and other intangibles
Less: Accumulated depreciation and amortization
Real estate and related lease intangibles, net
Below market lease intangibles, net (other liabilities)
December 31, 2017
December 31, 2016
$
$
$
213,992
$
789,622
189,490
(161,063)
1,032,041
$
143,286
646,372
154,687
(122,007)
822,338
(42,607) $
(16,506)
The following table presents depreciation and amortization expense on real estate recorded by the Company ($ in
thousands):
Year Ended December 31,
2017
2016
2015
Depreciation expense (1)
Amortization expense
Total real estate depreciation and amortization expense
$
$
28,271
11,968
40,239
$
$
26,031
13,302
39,333
$
$
23,922
15,031
38,953
(1) Depreciation expense on the consolidated statements of income also includes $93 thousand, $114 thousand and
$108 thousand of depreciation on corporate fixed assets for the years ended December 31, 2017, 2016 and 2015,
respectively.
The Company’s intangible assets are comprised of in-place leases, favorable leases compared to market leases and other
intangibles. At December 31, 2017, gross intangible assets totaled $189.5 million with total accumulated amortization of
$60.9 million, resulting in net intangible assets of $128.6 million, including $8.9 million of unamortized favorable lease
intangibles which are included in real estate and related lease intangibles, net on the consolidated balance sheets. At
December 31, 2016, gross intangible assets totaled $154.7 million with total accumulated amortization of $48.1 million,
resulting in net intangible assets of $106.6 million, including $7.0 million of unamortized favorable lease intangibles
which are included in real estate and related lease intangibles, net on the consolidated balance sheets. For the years
ended December 31, 2017, 2016 and 2015, the Company recorded a net reduction in operating lease income of $1.1
million, $1.3 million and $1.4 million, respectively, for amortization of above market lease intangibles acquired. For the
years ended December 31, 2017, 2016 and 2015, the Company recorded a net increase in operating lease income of $1.9
million, $1.4 million and $1.8 million, for amortization of below market lease intangibles acquired, respectively.
149
The following table presents expected amortization expense during the next five years and thereafter related to the
acquired in-place lease intangibles for property owned as of December 31, 2017 ($ in thousands):
Period Ending December 31,
Amount
2018
2019
2020
2021
2022
Thereafter
Total
$
$
10,634
10,317
10,158
9,556
7,277
72,285
120,227
There were $0.9 million and $0.7 million of unbilled rent receivables included in other assets on the consolidated
balance sheets as of December 31, 2017 and 2016, respectively.
There was unencumbered real estate of $128.7 million and $70.3 million as of December 31, 2017 and 2016,
respectively.
The following is a schedule of non-cancellable, contractual, future minimum rent under leases (excluding property
operating expenses paid directly by tenant under net leases or rent escalations under other leases from tenants) at
December 31, 2017 ($ in thousands):
Period Ending December 31,
Amount
2018
2019
2020
2021
2022
Thereafter
Total
$
$
100,409
93,686
88,472
86,216
81,159
1,240,213
1,690,155
150
Acquisitions
During the year ended December 31, 2017, the Company acquired the following properties ($ in thousands):
Acquisition Date
Type
Primary Location(s)
Purchase Price
Ownership
Interest (1)
February 2017
February 2017
March 2017
April 2017
April 2017
May 2017
May 2017
May 2017
May 2017
May 2017
May 2017
June 2017
August 2017
Net Lease
Net Lease
Net Lease
Net Lease
Other(2)
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Other(3)
September 2017
Net Lease
September 2017
Other
October 2017
October 2017
October 2017
Net Lease
Net Lease
Net Lease
December 2017
Net Lease
December 2017
Net Lease
Carmi, IL
Peoria, IL
Ridgedale, MO
Hanna City, IL
El Monte, CA
Jessup, IA
Shelbyville, IL
Jacksonville, FL
Wabasha, MN
Port O'Connor, TX
Denver, IA
Jefferson City, MO
Miami, FL
Milford, IA
Crum Lynne, PA
Kawkawlin, MI
Aroma Park, IL
East Peoria, IL
Winterset, IA
Rockford, MN
$
1,411
1,183
1,298
1,141
54,110
1,163
1,132
115,641
1,280
1,255
1,183
1,241
38,145
1,298
9,196
1,234
1,218
1,350
1,258
1,195
100.0%
100.0%
100.0%
100.0%
70.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Total
$
236,932
(1) Properties were consolidated as of acquisition date.
(2)
(3)
Joint venture partner contributed $5.3 million to partnership.
Joint venture partner contributed $1.6 million to the partnership.
On October 1, 2016, the Company early adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business (“ASU 2017-01”). As a result of this adoption, acquisitions of real estate may not meet the
revised definition of a business and may be treated as asset acquisitions rather than business combinations. The
measurement of assets and liabilities acquired will no longer be recorded at fair value and the Company will now
allocate purchase consideration based on relative fair values. Real estate acquisition costs which are no longer expensed
as incurred, will be capitalized as a component of the cost of the assets acquired. During the year ended December 31,
2017, all acquisitions were determined to be asset acquisitions.
151
The purchase prices were allocated to the asset acquisitions during the year ended December 31, 2017, as follows ($ in
thousands):
Land
Building
Intangibles
Below Market Lease Intangibles
Total purchase price
Purchase Price
Allocation
$
$
71,908
157,921
35,083
(27,980)
236,932
The weighted average amortization period for intangible assets acquired during the year ended December 31, 2017 was
19.0 years. The Company recorded $9.5 million in revenues from its 2017 acquisitions for the year ended December 31,
2017, which is included in its consolidated statements of income. The Company recorded $6.8 million in earnings
(losses) from its 2017 acquisitions for the year ended December 31, 2017, which is included in its consolidated
statements of income.
152
During the year ended December 31, 2016, the Company acquired the following properties ($ in thousands):
Acquisition Date
Type
Primary Location(s)
Purchase Price
Ownership
Interest (1)
April 2016
April 2016
April 2016
April 2016
May 2016
May 2016
June 2016
June 2016
June 2016
June 2016
June 2016
June 2016
June 2016
June 2016
July 2016
July 2016
July 2016
August 2016
October 2016
Land
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Other
Other
St. Paul, MN
Dimmitt, TX
Philo, IL
St. Charles, MN
San Antonio, TX
Borger, TX
Champaign, IL
Decatur-Sunnyside, IL
Flora Vista, NM
Mountain Grove, MO
Rantoul, IL
Decatur-Pershing, IL
Cape Girardeau, MO
Linn, MO
Union, MO
Pawnee, IL
Lamar, MO
Ewing, NJ
Peoria, IL
October 2016
Net Lease
Dryden Township, MI
November 2016
Net Lease
November 2016
Total
Net Lease
Fayetteville, NC
Springfield, IL
(1) Properties were consolidated as of acquisition date.
$
$
200
1,319
1,156
1,198
1,096
978
1,324
1,181
1,305
1,279
1,204
1,365
1,281
1,122
1,227
1,201
1,176
30,640
2,760
1,190
6,971
1,322
62,495
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
The purchase prices were allocated to the net assets acquired, which also include asset acquisitions occurring on or after
October 1, 2016, during the year ended December 31, 2016, as follows ($ in thousands):
Land
Building
Intangibles
Below Market Lease Intangibles
Total purchase price
Purchase Price
Allocation
$
$
9,242
39,609
15,854
(2,210)
62,495
The weighted average amortization period for intangible assets acquired during the year ended December 31, 2016 was
19.5 years. The Company recorded $2.8 million in revenues for the year ended December 31, 2016, which is included in
its consolidated statements of income. The Company recorded $(0.3) million in earnings (losses) from its 2016
acquisitions for the year ended December 31, 2016, which are included in its consolidated statements of income.
153
During the year ended December 31, 2015, the Company acquired the following properties ($ in thousands):
Acquisition Date
Type
Primary Location(s)
Purchase Price
Ownership
Interest (1)
January 2015
January 2015
January 2015
January 2015
January 2015
February 2015
February 2015
February 2015
February 2015
March 2015
March 2015
March 2015
March 2015
March 2015
March 2015
March 2015
March 2015
March 2015
May 2015
May 2015
June 2015
June 2015
June 2015
June 2015
June 2015
June 2015
June 2015
June 2015
June 2015
June 2015
June 2015
August 2015
August 2015
August 2015
August 2015
August 2015
August 2015
September 2015
September 2015
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Other
Other
Net Lease
Net Lease
Net Lease
Other
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
September 2015
Net Lease
September 2015
Net Lease
September 2015
Net Lease
October 2015
Net Lease
Jacksonville, NC
$
Iberia, MO
Isle, MN
Pine Island, MN
Kings Mountain, NC
Village of Menomonee Falls, WI
Rockland, MA
Crawfordsville, IA
Boardman Township, OH
Hilliard, OH
Weathersfield Township, OH
Rotterdam, NY
Wheaton, MO
Paynesville, MN
Loveland, CO
Battle Lake, MN
Yorktown, TX
St. Francis, MN
Red Oak, IA
Zapata, TX
Aurora, MN
Canyon Lake, TX
Wheeler, TX
Grand Rapids, MI
Grand Rapids, MI
Bridgeport, IL
Peoria, IL
Pleasanton, TX
Wayne, NJ
Warren, MN
Tremont, IL
Ponce, Puerto Rico
Effingham County, IL
Lebanon, MI
Minot, ND
Floresville, TX
Kerrville, TX
De Soto, IL
Biscoe, NC
Moultrie, GA
Rose Hill, NC
Rockingham, NC
Wilmington, IL
154
7,877
1,328
1,078
1,142
21,241
17,050
7,316
6,000
5,400
6,384
5,200
12,000
970
1,254
5,600
1,098
1,207
1,117
1,185
1,150
952
1,377
1,075
9,300
6,300
1,186
1,226
1,316
9,700
1,055
1,150
8,900
1,195
1,200
6,644
1,251
1,174
1,066
1,216
1,305
1,420
1,158
1,309
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
97.0%
97.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
97.0%
97.0%
100.0%
100.0%
100.0%
100.0%
100.0%
October 2015
October 2015
October 2015
October 2015
October 2015
October 2015
October 2015
October 2015
October 2015
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Net Lease
Danville, IL
Bloomington, IL
Lincoln County , MO
Montrose, MN
Jenks, OK
Grove, OK
Farmington, IL
Bixby, OK
Rice, MN
November 2015
Net Lease
Gordonville, MO
December 2015
Net Lease
December 2015
Net Lease
December 2015
Net Lease
December 2015
Net Lease
Malone, NY
Mercedes, TX
Albion, PA
Radford, VA
December 2015
Net Lease
Rural Retreat, VA
Net Lease
December 2015
Total purchases of real estate
October 2015
Total real estate acquired via foreclosure
Other
Mount Vernon, AL
Carmel, NY
Total real estate acquisitions
(1) Properties were consolidated as of acquisition date.
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
1,074
1,193
1,072
1,167
12,160
5,030
1,303
10,978
1,200
1,125
1,466
1,204
1,525
1,564
1,399
1,224
212,756
6,700
6,700
219,456
$
$
$
The purchase prices were allocated to the net assets acquired during the year ended December 31, 2015, as follows ($ in
thousands):
Land
Building
Intangibles
Below Market Lease Intangibles
Total purchase price
Purchase Price
Allocation
$
$
32,260
166,556
32,084
(11,444)
219,456
The weighted average amortization period for intangible assets acquired during the year ended December 31, 2015 was
22.6 years. The Company recorded $14.0 million in revenues for the year ended December 31, 2015, which is included
in its consolidated statements of income. The Company recorded $3.2 million in earnings (losses) from its 2015
acquisitions for the year ended December 31, 2015, which are included in its consolidated statements of income.
During the year ended December 31, 2015, the Company acquired, via foreclosure, title to one commercial retail
operating property, which had a total fair value of $6.7 million and previously served as collateral for mortgage loan
receivables held for investment. The acquisition was accounted for at fair value on the date of foreclosure. This loan was
not originated by the Company. Instead, it was credit impaired at the time of acquisition, which was reflected in Ladder’s
purchase price. A gain of $0.8 million on disposition of loan, representing the difference between the fair value of the
property and the $5.9 million carrying value of the loan on the date of foreclosure, is included in fee and other income in
the Company’s consolidated statement of income for the year ended December 31, 2015.
155
Sales
The Company sold the following properties during the year ended December 31, 2017 ($ in thousands):
Sales Date
Type
Primary Location(s)
Net Sales
Proceeds(1)(2)
Net Book Value
Realized Gain/
(Loss)(1)
Properties
Units Sold
Units
Remaining
Various
Various
Totals
Condominium Las Vegas, NV
Condominium Miami, FL
$
$
20,122
10,982
31,104
$
$
10,824
8,693
19,517
$
$
9,298
2,289
11,587
—
—
46
40
13
48
(1) Realized gain on the sale of real estate, net on the consolidated statements of income also includes $164 thousand
of realized loss on the disposal of fixed assets for the year ended December 31, 2017.
Includes $1.4 million of non-cash proceeds from sale of real estate.
(2)
The Company sold the following properties during the year ended December 31, 2016 ($ in thousands):
Sales Date
Type
Primary Location(s)
Net Sales
Proceeds
Net Book Value
Realized Gain/
(Loss)
Properties
Units Sold
Units
Remaining
Mar 2016
Net Lease
Rockland, MA
Sep 2016
Net Lease
Crawfordsville, IN
Various
Various
Totals
Condominium Las Vegas, NV
Condominium Miami, FL
$
$
7,922
$
7,210
$
6,192
34,049
18,307
5,726
18,907
13,991
66,470
$
45,834
$
712
466
15,142
4,316
20,636
1
1
—
—
—
—
73
65
—
—
59
88
The Company sold the following properties during the year ended December 31, 2015 ($ in thousands):
Sales Date
Type
Primary Location(s)
Net Sales
Proceeds
Net Book
Value
Realized
Gain/(Loss)
Properties
Units Sold
Units
Remaining
May 2015
Net Lease
Plattsmouth, NE
$
May 2015
Net Lease
Worthington, MN
May 2015
Net Lease
Loveland, CO
8,440
8,793
6,249
Sep 2015
Net Lease
Village of
Menomonee Falls,
WI
Nov 2015
Other
Minneapolis, MN
Various
Various
Totals
Condominium Las Vegas, NV
Condominium Miami, FL
$
7,983
$
8,321
5,600
16,827
49,022
22,310
22,942
457
472
649
1,029 (2)
13,071 (4)
16,469
6,982
1
1
1
1
1
—
—
—
—
—
—
—
88
99
—
—
—
—
—
132
153
17,856 (1)
62,093 (3)
38,779
29,924
$
172,134
$
133,005
$
39,129 (5)
(1) Includes $11.3 million of mortgage debt assumed by the buyer, which is included in non-cash transactions on the
Company’s consolidated statement of cash flows.
(2) Excludes $0.3 million of gain on mortgage debt assumed by the buyer, which is included in realized gain on sale
of real estate, net on the Company’s consolidated statement of cash flows.
(3) Includes $39.8 million of mortgage debt assumed by the buyer, which is included in non-cash transactions on the
Company’s consolidated statement of cash flows.
(4) Excludes $1.1 million of gain on mortgage debt assumed by the buyer, which is included in realized gain on sale
of real estate, net on the Company’s consolidated statement of cash flows.
(5) Includes $0.2 million loss on sales of fixed assets, which is included in realized gain on sale of real estate, net on
the Company’s consolidated statements of income.
156
Unaudited Pro Forma Information
The following unaudited pro forma information has been prepared based upon our historical combined consolidated
financial statements and certain historical financial information of the acquired properties, which are accounted for as
business combinations, and should be read in conjunction with the combined consolidated financial statements and notes
thereto. The unaudited pro forma combined consolidated financial information reflects the 2016 acquisition adjustments
made to present financial results as though the acquisition of such properties occurred on January 1, 2015, through the
date of acquisition and the 2015 acquisition adjustments made to present financial results as though the acquisition of the
properties occurred on January 1, 2014, through the date of acquisition. This unaudited pro forma information may not
be indicative of the results that actually would have occurred if these transactions had been in effect on the dates
indicated, nor do they purport to represent our future results of operations ($ in thousands):
Operating lease income
Net income (loss)
Net (income) loss attributable to noncontrolling interest in consolidated joint ventures
Net (income) loss attributable to noncontrolling interest in operating partnership
Net income attributable to Class A common shareholders
Year Ended December 31, 2016
Company
Historical
Acquisitions
Consolidated
Pro Forma
$
77,277
$
2,473
$
79,750
113,720
138
(47,131)
66,727
2,080
—
(865)
1,215
115,800
138
(47,996)
67,942
The Company recorded $2.8 million in revenues and $(0.3) million in earnings (losses) from its 2016 acquisitions for the
year ended December 31, 2016, which are included in our combined consolidated statements of income.
Operating lease income
Net income
Net (income) loss attributable to noncontrolling interest in consolidated joint ventures
Net (income) loss attributable to noncontrolling interest in operating partnership
Net income attributable to Class A common shareholders
Year Ended December 31, 2015
Company
Historical
Acquisitions
Consolidated
Pro Forma
$
80,465
$
10,966
$
91,431
146,134
(1,568)
(70,745)
73,821
7,363
—
(3,334)
4,029
153,497
(1,568)
(74,079)
77,850
The Company recorded $14.0 million in revenues and $3.2 million in earnings from its 2015 acquisitions for the year
ended December 31, 2015, which are included in our combined consolidated statements of income.
The most significant adjustments made in preparing the unaudited pro forma information were to: (i) include the
incremental operating lease income, (ii) include the incremental depreciation, and (iii) adjust for transaction costs
associated with the properties acquired in 2016 as if they were incurred on January 1, 2015 and the properties acquired
in 2015 as if they were incurred on January 1, 2014.
157
7. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of December 31, 2017, the Company had an aggregate investment of $35.4 million in its equity method joint ventures
with unaffiliated third parties.
The following is a summary of the Company’s investments in unconsolidated joint ventures, which we account for using
the equity method, as of December 31, 2017 and December 31, 2016 ($ in thousands):
Entity
Grace Lake JV, LLC
24 Second Avenue Holdings LLC
Investment in unconsolidated joint ventures
December 31, 2017
December 31, 2016
$
$
4,908
30,533
35,441
$
$
3,719
30,306
34,025
The following is a summary of the Company’s allocated earnings (losses) based on its ownership interests from
investment in unconsolidated joint ventures for the years ended December 31, 2017, 2016 and 2015 ($ in thousands):
Entity
Year Ended December 31,
2017
2016
2015
Ladder Capital Realty Income Partnership I LP
Grace Lake JV, LLC
24 Second Avenue Holdings LLC
Earnings (loss) from investment in unconsolidated joint
ventures
$
$
— $
892
$
1,189
(1,100)
953
(1,419)
89
$
426
$
116
823
(568)
371
Ladder Capital Realty Income Partnership I LP
On April 15, 2011, the Company entered into a limited partnership agreement, becoming the general partner and
acquiring a 10% limited partnership interest in LCRIP I to invest in first mortgage loans held for investment and acted as
general partner and manager to LCRIP I. The Company accounted for its interest in LCRIP I using the equity method of
accounting, as it exerted significant influence but the unrelated limited partners had substantive participating rights, as
well as kick-out rights. During the quarter ended June 30, 2015, the last loan held by LCRIP I was repaid. The term of
the partnership expired on April 15, 2016. At that time, LCRIP I made distributions to the partners in the aggregate
amounts determined by the general partner in accordance with the Limited Partnership Agreement. Simultaneously with
the execution of the LCRIP I Partnership Agreement, the Company was engaged as the manager of LCRIP I and was
entitled to a fee based upon the average net equity invested in LCRIP I, which was subject to a fee reduction in the event
average net equity invested in LCRIP I exceeded $100.0 million. As discussed in “Out-of-Period Adjustments” in Note
2. Significant Accounting Policies, during the first quarter of 2016, the Company recorded an additional return on equity
of $0.9 million in this investment in unconsolidated joint venture predominately relating to prior years. During the year
ended December 31, 2017, the Company recorded no management fees. During the years ended December 31, 2016 and
2015, the Company recorded $6,905 and $77,447 in management fees, respectively, which is reflected in fee and other
income in the consolidated statements of income.
Grace Lake JV, LLC
In connection with the origination of a loan in April 2012, the Company received a 25% equity kicker with the right to
convert upon a capital event. On March 22, 2013, the loan was refinanced, and the Company converted its interest into a
19% limited liability company membership interest in Grace Lake JV, LLC (“Grace Lake LLC”), which holds an
investment in an office building complex. After taking into account the preferred return of 8.25% and the return of all
equity remaining in the property to the Company’s operating partner, the Company is entitled to 25% of the distribution
of all excess cash flows and all disposition proceeds upon any sale. The Company is not legally required to provide any
future funding to Grace Lake JV. The Company accounts for its interest in Grace Lake JV using the equity method of
accounting, as it has a 19% investment, compared to the 81% investment of its operating partner and does not control the
entity.
158
The Company’s investment in Grace Lake LLC is an unconsolidated joint venture, which is a VIE for which the
Company is not the primary beneficiary. This joint venture was deemed to be a VIE primarily based on the fact there are
disproportionate voting and economic rights within the joint venture. The Company determined that it was not the
primary beneficiary of this VIE based on the fact that the Company has a passive investment and no control of this entity
and therefore does not have controlling financial interests in this VIE. The Company’s maximum exposure to loss is
limited to its investment in the VIE. The Company has not provided financial support to this VIE that it was not
previously contractually required to provide.
24 Second Avenue Holdings LLC
On August 7, 2015, the Company entered into a joint venture, 24 Second Avenue Holdings LLC (“24 Second Avenue”),
with an operating partner to invest in a ground-up condominium construction and development project located at 24
Second Avenue, New York, NY. The Company accounts for its interest in 24 Second Avenue using the equity method of
accounting as its joint venture partner is the managing member of 24 Second Avenue and has substantive participating
rights. The Company contributed $31.1 million for a 73.8% interest, with the operating partner holding the remaining
26.2% interest. The Company is entitled to income allocations and distributions based upon its membership interest of
73.8% until the Company achieves a 1.70x profit multiple, after which, income is allocated and distributed 50% to the
Company and 50% to the operating partner.
During the years ended December 31, 2017, 2016 and 2015 the Company recorded $1.1 million, $1.4 million and $0.6
million, respectively, in expenses, which is recorded in earnings (loss) from investment in unconsolidated joint ventures
in the consolidated statements of income. The Company capitalizes interest related to the cost of its investment, as 24
Second Avenue has activities in progress necessary to construct and ultimately sell condominium units. During the years
ended December 31, 2017, 2016 and 2015, the Company capitalized and $1.3 million, $0.9 million and $0.3 million,
respectively, of interest expense, using a weighted average interest rate, which is recorded in investment in
unconsolidated joint ventures in the consolidated balance sheets.
As of December 31, 2017 and December 31, 2016, 24 Second Avenue had $36.5 million and $21.6 million, respectively,
of loans payable. As of December 31, 2016, the previously existing building had been demolished and the site was
cleared with all supportive excavation work completed, and we are anticipating completion of the new construction in
2018. 24 Second Avenue consists of 31 residential condominium units and one commercial condominium unit. As of
December 31, 2017, 11 residential condominium units were under contract for sale for $30.0 million in sales proceeds.
As of December 31, 2017, the Company is holding a 10.0% deposit on each sales contract. Our operating partner entered
into a construction loan in the amount of $50.5 million to fund the completion of the project. As of December 31, 2017,
draws of $36.5 million have been taken against the construction loan. The Company has no remaining capital
commitment to our operating partner.
The Company’s investment in 24 Second Avenue is an unconsolidated joint venture, which is a VIE for which the
Company is not the primary beneficiary. This joint venture was deemed to be a VIE primarily based on the fact there are
disproportionate voting and economic rights within the joint venture. The Company determined that it was not the
primary beneficiary of this VIE based on the fact that the Company has shared control of this entity along with the
entity’s partner and therefore does not have controlling financial interests in this VIE. The Company’s maximum
exposure to loss is limited to its investment in the VIE. The Company has not provided financial support to this VIE that
it was not previously contractually required to provide. In general, future costs of development not financed through a
third party will be funded with capital contributions from the Company and its outside partner in accordance with their
respective ownership percentages.
159
Combined Summary Financial Information for Unconsolidated Joint Ventures
The following is a summary of the combined financial position of the unconsolidated joint ventures in which the
Company had investment interests as of December 31, 2017 and December 31, 2016 ($ in thousands):
Total assets
Total liabilities
Partners’/members’ capital
December 31, 2017
December 31, 2016
$
$
154,979
108,119
46,860
$
$
138,298
94,964
43,334
The following is a summary of the combined results from operations of the unconsolidated joint ventures for the period
in which the Company had investment interests during the years ended December 31, 2017, 2016 and 2015 ($ in
thousands):
Total revenues
Total expenses
Net income (loss)
Year Ended December 31,
2017
2016
2015
$
$
18,482
15,291
3,191
$
$
17,047
15,861
1,186
$
$
18,886
15,849
3,037
160
8. DEBT OBLIGATIONS, NET
The details of the Company’s debt obligations at December 31, 2017 and 2016 are as follows ($ in thousands):
December 31, 2017
Debt Obligations
Committed
Financing
Debt
Obligations
Outstanding
Committed
but
Unfunded
Interest
Rate at
December
31, 2017(1)
Current
Term
Maturity
Remaining
Extension
Options
Eligible
Collateral
Carrying
Amount
of
Collateral
Fair
Value of
Collateral
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Total Committed
Loan Repurchase
Facilities
Committed
Securities
Repurchase
Facility
Uncommitted
Securities
Repurchase
Facility
Total Repurchase
Facilities
Revolving Credit
Facility
Mortgage Loan
Financing
CLO Debt
Participation
Financing -
Mortgage Loan
Receivable
Borrowings from
the FHLB
Senior Unsecured
Notes
Total Debt
Obligations
$
600,000
$
120,493
$
479,507
450,000
183,111
266,889
300,000
63,007
236,993
200,000
32,042
167,958
3.23% -
3.98%
3.63% -
4.48%
3.73% -
4.73%
4.25% -
4.50%
10/1/2020
5/24/2018
4/10/2018
2/29/2020
(2)
(4)
(5)
(7)
100,000
—
100,000
NA
6/28/2019
N/A
1,650,000
398,653
1,251,347
400,000
—
400,000
NA
9/30/2019
N/A
N/A (10)
74,757
N/A (10)
1.65% -
3.31%
1/2018 -
3/2018
N/A
2,050,000
473,410
1,651,347
(3)
$ 160,031
$ 159,568
(3)
(6)
(8)
(3)
(9)
(9)
333,647
335,076
125,379
125,975
48,045
48,045
—
—
667,102
668,664
—
—
86,322
86,322 (11)
753,424
754,986
241,430
—
241,430
NA
2/11/2018
(4)
N/A (12)
N/A (14)
N/A (14)
692,696
692,696
688,479
688,479 (15)
4.25% -
6.75%
2.36% -
5.08%
—
—
2018 - 2027
N/A
2021-2034
N/A
(13)
(16)
911,034
1,066,708 (14)
880,385
881,576
3,107
3,107
—
17.00%
6/6/2018
N/A
(3)
3,107
3,107
2,000,000
1,370,000
630,000
1,166,201
1,152,134 (19)
—
0.87% -
2.74%
5.250% -
5.875%
2018 - 2024
N/A
(17)
1,777,597
1,783,210 (18)
2021 - 2025
N/A
N/A (20)
N/A (20)
N/A (20)
$ 6,841,913
$
4,379,826
$ 2,522,777
$4,325,547
$4,489,587
(1) December 31, 2017 LIBOR rates are used to calculate interest rates for floating rate debt.
(2) Two additional 12-month periods at Company’s option. No new advances are permitted after the initial maturity date.
(3) First mortgage commercial real estate loans and senior and pari passu interests therein. It does not include the real estate
collateralizing such loans.
(4) Three additional 12-month periods at Company’s option.
(5) Two additional 364-day periods at Company’s option and one additional 364-day period with Bank’s consent.
(6) First mortgage and mezzanine commercial real estate loans. It does not include the real estate collateralizing such loans.
(7) One additional 12-month extension period and two additional 6-month extension periods at Company’s option.
(8) First mortgage commercial real estate loans. It does not include the real estate collateralizing such loans.
(9) Commercial real estate securities. It does not include the real estate collateralizing such securities.
(10) Represents uncommitted securities repurchase facilities for which there is no committed amount subject to future advances.
(11) As more fully described in Note 4, certain securities which were purchased from the LCCM LC-26 securitization trust are
restricted. Includes $26.7 million of restricted securities.
(12) The obligations under the Revolving Credit Facility are guaranteed by the Company and certain of its subsidiaries and secured
by equity pledges in certain Company subsidiaries.
(13) Real estate.
(14) Using undepreciated carrying value of commercial real estate to approximate fair value.
161
(15) Presented net of unamortized debt issuance costs of $6.0 million at December 31, 2017.
(16) First mortgage commercial real estate loans and pari passu interests therein. It does not include the real estate collateralizing
such loans.
(17) First mortgage commercial real estate loans and investment grade commercial real estate securities. It does not include the real
estate collateralizing such loans and securities.
(18) As more fully described in Note 4, certain securities which were purchased from the LCCM LC-26 securitization trust are
restricted. Includes $10.1 million of restricted securities.
(19) Presented net of unamortized debt issuance costs of $14.1 million at December 31, 2017.
(20) The obligations under the senior unsecured notes are guaranteed by the Company and certain of its subsidiaries.
December 31, 2016
Debt Obligations
Committed
Financing
Debt
Obligations
Outstanding
Committed
but
Unfunded
Interest
Rate at
December
31, 2016(1)
Current
Term
Maturity
Remaining
Extension
Options
Eligible
Collateral
Carrying
Amount
of
Collateral
Fair
Value of
Collateral
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Committed Loan
Repurchase
Facility
Total Committed
Loan Repurchase
Facilities
Committed
Securities
Repurchase
Facility
Uncommitted
Securities
Repurchase
Facility
Total Repurchase
Facilities
Revolving Credit
Facility
Mortgage Loan
Financing
Borrowings from
the FHLB
Senior Unsecured
Notes
Total Debt
Obligations
$
600,000
$
183,604
$
416,396
450,000
184,158
265,842
400,000
100,979
299,021
100,000
27,132
72,868
100,000
71,290
28,710
1,650,000
567,163
1,082,837
2.45% -
3.27%
2.95% -
3.70%
2.95% -
3.99%
2.90% -
3.13%
2.93% -
3.68%
10/30/2018
5/24/2017
4/9/2017
6/28/2019
8/2/2019
(2)
(4)
(5)
—
(7)
(3)
$ 292,628
$ 293,618
(3)
(6)
(3)
(3)
286,848
288,267
235,878
236,696
36,166
36,410
110,271
110,897
961,791
965,888
400,000
228,317
171,683
1.00% -
2.59%
7/1/2018
N/A
(8)
272,402
272,402
N/A (9)
311,705
N/A (9)
1.00% -
2.41%
1/2017 -
3/2017
N/A
(8)
368,638
368,638
2,050,000
1,107,185
1,254,520
1,602,831
1,606,928
143,000
25,000
118,000
3.16%
2/11/2017
(10)
N/A (11)
N/A (11)
N/A (11)
590,106
590,106
—
1,998,931
1,660,000
338,931
563,872
559,847 (15)
—
4.25% -
6.75%
0.43% -
2.74%
5.875% -
7.375%
2018 - 2026
N/A
2017 - 2024
N/A
(12)
(14)
757,468
875,160 (13)
2,162,779
2,167,017
2017 - 2021
N/A
N/A (16)
N/A (16)
N/A (16)
$ 5,345,909
$
3,942,138
$ 1,711,451
$4,523,078
$4,649,105
(1) December 31, 2016 LIBOR rates are used to calculate interest rates for floating rate debt.
(2) Three additional 12-month periods at Company’s option. No new advances are permitted after the initial maturity date, or if the
lender consents, October 30, 2019, the initial extended maturity date.
(3) First mortgage commercial real estate loans. It does not include the real estate collateralizing such loans.
(4) Three additional 12-month periods at Company’s option.
(5) Two additional 364-day periods at Company’s option.
(6) First mortgage and mezzanine commercial real estate loans. It does not include the real estate collateralizing such loans.
(7) One additional 12-month extension period and two additional 6-month extension periods at Company’s option.
(8) Commercial real estate securities. It does not include the real estate collateralizing such securities.
(9) Represents uncommitted securities repurchase facilities for which there is no committed amount subject to future advances.
(10) Two additional 12-month extension periods at Company’s option.
(11) The obligations under the Revolving Credit Facility are guaranteed by the Company and certain of its subsidiaries and secured
by equity pledges in certain Company subsidiaries.
(12) Real estate.
(13) Using undepreciated carrying value of commercial real estate to approximate fair value.
162
(14) First mortgage commercial real estate loans and investment grade commercial real estate securities. It does not include the real
estate collateralizing such loans and securities.
(15) Presented net of unamortized debt issuance costs of $4.0 million at December 31, 2016.
(16) The obligations under the senior unsecured notes are guaranteed by the Company and certain of its subsidiaries.
Committed Loan and Securities Repurchase Facilities
The Company has entered into multiple committed master repurchase agreements in order to finance its lending
activities. The Company has entered into five committed master repurchase agreements, as outlined in the December 31,
2017 table above, totaling $1.7 billion of credit capacity. Assets pledged as collateral under these facilities are limited to
whole mortgage loans or participation interests in mortgage loans collateralized by first liens on commercial properties
and mezzanine debt. The Company also has a term master repurchase agreement with a major U.S. bank to finance
CMBS totaling $400.0 million. The Company’s repurchase facilities include covenants covering net worth requirements,
minimum liquidity levels, maximum leverage ratios, and minimum fixed charge coverage ratios. The Company believes
it was in compliance with all covenants as of December 31, 2017 and 2016.
The Company has the option to extend some of the current facilities subject to a number of conditions, including
satisfaction of certain notice requirements, no event of default exists, and no margin deficit exists, all as defined in the
repurchase facility agreements. The lenders have sole discretion with respect to the inclusion of collateral in these
facilities, to determine the market value of the collateral on a daily basis, to be exercised on a good faith basis, and have
the right in certain cases to require additional collateral, a full and/or partial repayment of the facilities (margin call), or a
reduction in unused availability under the facilities, sufficient to rebalance the facilities if the estimated market value of
the included collateral declines.
On April 19, 2016, the Company entered into an amendment to its committed loan repurchase facility with one of its
multiple major banking institutions, adding two one-year extension options and extending the maximum term of such
facility to May 24, 2020.
On May 26, 2016, the Company entered into an amendment to its committed repurchase facility with a major banking
institution to memorialize the replacement of the servicer under such facility.
On June 27, 2016, the Company executed an amendment and extension of one of its credit facilities with a major
banking institution, with an effective date of July 1, 2016, providing for, among other things, the extension of the
maximum term of the facility to July 1, 2018 and increasing the maximum funding capacity to $400.0 million.
On June 28, 2016, the Company entered into a committed loan repurchase facility with a major banking institution with
total capacity of $100.0 million and a final maturity date of June 28, 2019.
On August 3, 2016, the Company executed a committed loan repurchase facility with a major banking institution with
total capacity of $100.0 million and an initial maturity date of August 2, 2019, with one twelve-month extension period,
followed by two six-month extension periods. In connection with the execution of this new facility, the Company
terminated its existing committed loan repurchase facility with total capacity of $35.0 million.
On November 9, 2016, the Company entered into an amendment to its committed repurchase facility with a major
banking institution to, among other things, extend the initial term to October 30, 2018 and add three additional one year
extension options to the term thereof, provided that the Company will not be permitted to obtain advances under such
facility after October 30, 2018, or if the lender thereunder consents, October 30, 2019.
On February 22, 2017, the Company exercised a one year extension option on one of its committed loan repurchase
facilities. In connection with this extension, the Company elected to reduce the maximum capacity of the facility to
$300.0 million. In addition, on March 21, 2017, the Company amended this committed loan repurchase facility to,
among other things, add one additional 364-day extension period at Company’s option and one additional 364-day
extension period permitted with lender’s consent.
On March 1, 2017, the Company executed an amendment and extension of one of its credit facilities with a major
banking institution, providing for, among other things, the extension of the maximum term of the facility to February 28,
2022 and increasing the maximum funding capacity to $200.0 million.
163
On May 1, 2017, the Company executed an amendment to one of its credit facilities with a major banking institution to,
among other things, extend the maximum term by an additional year to May 24, 2021.
On September 29, 2017, the Company executed an amendment to its committed securities repurchase facility with a
major banking institution, providing for, among other things, the extension of the maximum term of the facility to
September 30, 2019.
Effective September 30, 2017, the Company executed an amendment of one of its committed loan repurchase facilities
with a major banking institution, providing for, among other things, the extension of the maximum term of the facility to
October 1, 2022, inclusive of two 12-month extension options, and to extend of the final date to obtain new advances
under the facility to October 1, 2020.
As of December 31, 2017, we had repurchase agreements with seven counterparties, with total debt obligations
outstanding of $0.5 billion. As of December 31, 2017, two counterparties, Deutsche Bank and J.P. Morgan, held
collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $74.4 million, or
5% of our total equity. As of December 31, 2017, the weighted average haircut, or the percent of collateral value in
excess of the loan amount, under our repurchase agreements was 37.3%. There have been no significant fluctuations in
haircuts across asset classes on our repurchase facilities.
Revolving Credit Facility
On February 11, 2014, the Company entered into a revolving credit facility (the “Revolving Credit Facility”), which was
subsequently amended on February 26, 2016, March 1, 2017, March 23, 2017, September 29, 2017 and October 27,
2017, to add additional banks to our syndicate, add two additional one-year extension options and increase its maximum
funding capacity. The Revolving Credit Facility provides for an aggregate maximum borrowing amount of $241.4
million, including a $25.0 million sublimit for the issuance of letters of credit. The Revolving Credit Facility is available
on a revolving basis to finance the Company’s working capital needs and for general corporate purposes. The Revolving
Credit Facility has a maturity date of February 11, 2018, which may be extended by three 12-month periods subject to
the satisfaction of customary conditions, including the absence of default. Interest on the Revolving Credit Facility is
one-month LIBOR plus 3.50% per annum payable monthly in arrears.
The obligations under the Revolving Credit Facility are guaranteed by the Company and certain of its subsidiaries. The
Revolving Credit Facility is secured by a pledge of the shares of (or other ownership or equity interests in) certain
subsidiaries to the extent the pledge is not restricted under existing regulations, law or contractual obligations.
LCFH is subject to customary affirmative covenants and negative covenants, including limitations on the incurrence of
additional debt, liens, restricted payments, sales of assets and affiliate transactions. In addition, under the Revolving
Credit Facility, LCFH is required to comply with financial covenants relating to minimum net worth, maximum
leverage, minimum liquidity, and minimum fixed charge coverage, consistent with our other credit facilities. The
Company’s ability to borrow under the Revolving Credit Facility is dependent on, among other things, LCFH’s
compliance with the financial covenants. The Revolving Credit Facility contains customary events of default, including
non-payment of principal or interest, fees or other amounts, failure to perform or observe covenants, cross-default to
other indebtedness, the rendering of judgments against the Company or certain of our subsidiaries to pay certain amounts
of money and certain events of bankruptcy or insolvency.
Debt Issuance Costs
As discussed in Note 2, Significant Accounting Policies in this Annual Report, the Company considers its committed
loan master repurchase facilities and Revolving Credit Facility to be revolving debt arrangements. As such, the Company
continues to defer and present costs associated with these facilities as an asset, subsequently amortizing those costs
ratably over the term of each revolving debt arrangement. As of December 31, 2017 and 2016, the amount of
unamortized costs relating to such facilities are $7.8 million and $4.9 million, respectively, and are included in other
assets in the consolidated balance sheets.
164
Uncommitted Securities Repurchase Facilities
The Company has also entered into multiple master repurchase agreements with several counterparties collateralized by
real estate securities. The borrowings under these agreements have typical advance rates between 75% and 95% of the
fair value of collateral.
Mortgage Loan Financing
During the years ended December 31, 2017, 2016 and 2015, the Company executed 28, 18 and 51 term debt agreements,
respectively, to finance properties in its real estate portfolio. These non-recourse debt agreements provide for fixed rate
financing at rates, ranging from 4.25% to 6.75%, maturing between 2018 - 2027 as of December 31, 2017. These loans
have carrying amounts of $692.7 million and $590.1 million, net of unamortized premiums of $6.6 million and $5.6
million at December 31, 2017 and 2016, respectively, representing proceeds received upon financing greater than the
contractual amounts due under these agreements. The premiums are being amortized over the remaining life of the
respective debt instruments using the effective interest method. The Company recorded $1.0 million, $0.9 million and
$0.9 million of premium amortization, which decreased interest expense, for the years ended December 31, 2017, 2016
and 2015, respectively. The loans are collateralized by real estate and related lease intangibles, net, of $911.0 million and
$757.5 million as of December 31, 2017 and 2016, respectively.
CLO Debt
The Company completed its inaugural collateralized loan obligation (“CLO”) issuances in the two transactions described
below. As of December 31, 2017, the Company had a total of $688.5 million of floating rate, non-recourse CLO debt
included in debt obligations on its consolidated balance sheets. Unamortized debt issuance costs of $6.0 million are
included in CLO Debt as of December 31, 2017, in accordance with GAAP. As of December 31, 2017, the CLO debt has
interest rates of 2.36% to 5.08% (with a weighted average of 3.4%). As of December 31, 2017, collateral for the CLO
debt comprised $880.4 million of first mortgage commercial mortgage real estate loans.
On October 17, 2017, a subsidiary of the Company consummated a securitization of floating-rate commercial mortgage
loans through a static CLO structure. Over $456.9 million of balance sheet loans (“Contributed Loans”) were contributed
into the CLO. Certain of the Contributed Loans have future funding components that were not contributed to the CLO
and that are retained by a subsidiary of the Company in the form of a participation interest or separate note. However, for
a limited period of time, to the extent loans in the CLO are repaid, the CLO may acquire portions of the future fundings
from the Company’s affiliate. An affiliate of the Company retained an approximately 18.5% interest in the CLO by
retaining the most subordinate classes of notes issued by the CLO, retains control over major decisions made with
respect to the administration of the Contributed Loans and appoints the special servicer under the CLO. The CLO is a
VIE and the Company is the primary beneficiary and, therefore, consolidates the VIE - See Note 3.
On December 21, 2017, a subsidiary of the Company consummated a securitization of fixed and floating-rate
commercial mortgage loans through a static CLO structure. Over $431.5 million of Contributed Loans were contributed
into the CLO. Certain of the Contributed Loans have future funding components that were not contributed to the CLO
and that are retained by a subsidiary of the Company in the form of a participation interest or separate note. However, for
a limited period of time, to the extent loans in the CLO are repaid, the CLO may acquire portions of the future fundings
from the Company’s affiliate. An affiliate of the Company retained an approximately 25% interest in the CLO by
retaining the most subordinate classes of notes issued by the CLO, retains control over major decisions made with
respect to the administration of the Contributed Loans and appoints the special servicer under the CLO. The CLO is a
VIE and the Company is the primary beneficiary and, therefore, consolidates the VIE - See Note 3.
Participation Financing - Mortgage Loan Receivable
During the year ended December 31, 2017, the Company sold a participating interest in a first mortgage loan receivable
to a third party. The sales proceeds of $4.0 million are considered non-recourse secured borrowings and are recognized
in debt obligations on the Company’s consolidated balance sheets with $3.1 million outstanding as of December 31,
2017. The Company recorded $0.5 million of interest expense for the year ended December 31, 2017.
165
Borrowings from the Federal Home Loan Bank (“FHLB”)
On July 11, 2012, Tuebor Captive Insurance Company LLC (“Tuebor”), a consolidated subsidiary of the Company,
became a member of the FHLB and subsequently drew its first secured funding advances from the FHLB. On December
6, 2017, Tuebor’s advance limit was updated by the FHLB to the lowest of a Set Dollar Limit ($2.0 billion), 40% of
Tuebor’s total assets or 150% of the Company’s total equity. Beginning April 1, 2020 through December 31, 2020, the
Set Dollar Limit will be $1.5 billion. Beginning January 1, 2021 through February 19, 2021, the Set Dollar Limit will be
$750.0 million. Tuebor is well-positioned to meet its obligations and pay down its advances in accordance with the
scheduled reduction in the Set Dollar Limit, which remains subject to revision by the FHLB or as a result of any future
changes in applicable regulations.
As of December 31, 2017, Tuebor had $1.4 billion of borrowings outstanding (with an additional $630.0 million of
committed term financing available from the FHLB), with terms of overnight to six years (with a weighted average of
2.5 years), interest rates of 0.87% to 2.74% (with a weighted average of 1.61%), and advance rates of 49.6% to 100% of
the collateral. As of December 31, 2017, collateral for the borrowings was comprised of $861.7 million of CMBS and
U.S. Agency Securities and $915.9 million of first mortgage commercial real estate loans.
As of December 31, 2016, Tuebor had $1.7 billion of borrowings outstanding (with an additional $338.9 million of
committed term financing available from the FHLB), with terms of overnight to seven years (with a weighted average of
2.4 years), interest rates of 0.43% to 2.74% (with a weighted average of 1.12%), and advance rates of 49.6% to 95.2% of
the collateral. As of December 31, 2016, collateral for the borrowings was comprised of $1.4 billion of CMBS and U.S.
Agency Securities and $724.0 million of first mortgage commercial real estate loans.
Tuebor is subject to state regulations which require that dividends (including dividends to the Company as its parent)
may only be made with regulatory approval. However, there can be no assurance that we would obtain such approval if
sought. Largely as a result of this restriction, approximately $1.2 billion of the member’s capital was restricted from
transfer via dividend to Tuebor’s parent without prior approval of state insurance regulators at December 31, 2017. To
facilitate intercompany cash funding of operations and investments, Tuebor and its parent maintain regulator-approved
intercompany borrowing/lending agreements.
Effective February 19, 2016, the Federal Housing Finance Agency (the “FHFA’’), regulator of the FHLB, adopted a final
rule amending its regulation regarding the eligibility of captive insurance companies for FHLB membership. According
to the final rule, Ladder’s captive insurance company subsidiary, Tuebor may remain as a member of the FHLB through
February 19, 2021 (the “Transition Period”). During the Transition Period, Tuebor is eligible to continue to draw new
additional advances, extend the maturities of existing advances, and pay off outstanding advances on the same terms as
non-captive insurance company FHLB members with the following two exceptions:
1. New advances (including any existing advances that are extended during the Transition Period) will have
maturity dates on or before February 19, 2021; and
2. The FHLB will make new advances to Tuebor subject to a requirement that Tuebor’s total outstanding advances
do not exceed 40% of Tuebor’s total assets.
Tuebor has executed new advances since the effective date of the new rule in the ordinary course of business.
FHLB advances amounted to 31.3% of the Company’s outstanding debt obligations as of December 31, 2017. The
Company does not anticipate that the FHFA’s final regulation will materially impact its operations as it will continue to
access FHLB advances during the five-year Transition Period.
There is no assurance that the FHFA or the FHLB will not take actions that could adversely impact Tuebor’s membership
in the FHLB and continuing access to new or existing advances prior to February 19, 2021.
166
Senior Unsecured Notes
LCFH issued the 2025 Notes, the 2022 Notes, the 2021 Notes and the 2017 Notes (each as defined below, and
collectively, the “Notes”) with Ladder Capital Finance Corporation (“LCFC”), as co-issuers on a joint and several basis.
LCFC is a 100% owned finance subsidiary of Series TRS of LCFH with no assets, operations, revenues or cash flows
other than those related to the issuance, administration and repayment of the Notes. The Company and certain
subsidiaries of LCFH currently guarantee the obligations under the Notes and the indenture. The Company is the general
partner of LCFH and, through LCFH and its subsidiaries, operates the Ladder Capital business. As of December 31,
2017, the Company has a 84.1% economic and voting interest in LCFH and controls the management of LCFH as a
result of its ability to appoint board members. Accordingly, the Company consolidates the financial results of LCFH and
records noncontrolling interest for the economic interest in LCFH held by the Continuing LCFH Limited Partners. In
addition, the Company, through certain subsidiaries which are treated as TRSs, is indirectly subject to U.S. federal, state
and local income taxes. Other than the noncontrolling interest in the Operating Partnership and federal, state and local
income taxes, there are no material differences between the Company’s consolidated financial statements and LCFH’s
consolidated financial statements.
Unamortized debt issuance costs of $14.1 million and $4.0 million are included in senior unsecured notes as of
December 31, 2017 and 2016, respectively, in accordance with GAAP.
2017 Notes
On September 19, 2012, LCFH issued $325.0 million in aggregate principal amount of 7.375% senior notes due
October 1, 2017 (the “2017 Notes”). The 2017 Notes required interest payments semi-annually in cash in arrears on
April 1 and October 1 of each year, beginning on September 19, 2012. The 2017 Notes were unsecured and subject to
incurrence-based covenants, including limitations on the incurrence of additional debt, restricted payments, liens, sales
of assets, affiliate transactions and other covenants typical for financings of this type. At any time on or after April 1,
2017, the 2017 Notes were redeemable at the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days’ notice, without penalty. On November 5, 2014, the board of directors authorized the Company to make up
to $325.0 million in repurchases of the 2017 Notes from time to time without further approval.
On December 17, 2014, the Company retired $5.4 million of principal of the 2017 Notes for a repurchase price of $5.6
million recognizing a $0.2 million loss on extinguishment of debt. During the year ended December 31, 2016, the
Company retired $21.9 million of principal of the 2017 Notes for a repurchase price of $21.4 million, recognizing a $0.3
million net gain on extinguishment of debt after recognizing $(0.2) million of unamortized debt issuance costs associated
with the retired debt.
On March 1, 2017, the Company delivered a notice of conditional full redemption to holders of the 2017 Notes, pursuant
to which the Company redeemed all outstanding 2017 Notes at 100% of the principal amount thereof (plus any accrued
and unpaid interest to the redemption date) as of April 1, 2017. The redemption was conditional on the completion by the
Company of a senior notes offering with gross proceeds of not less than $500 million. The Company’s offering of the
2022 Notes, described below, satisfied this condition. On April 3, 2017, the Company retired the remaining $297.7
million of principal of the 2017 Notes for a repurchase price of $297.7 million, recognizing a $53,547 net loss on
extinguishment of debt after recognizing $(22,847) of unamortized debt issuance costs associated with the retired debt.
2021 Notes
On August 1, 2014, LCFH issued $300.0 million in aggregate principal amount of 5.875% senior notes due August 1,
2021 (the “2021 Notes”). The 2021 Notes require interest payments semi-annually in cash in arrears on February 1 and
August 1 of each year, beginning on February 1, 2015. The 2021 Notes will mature on August 1, 2021. The 2021 Notes
are unsecured and are subject to incurrence-based covenants, including limitations on the incurrence of additional debt,
restricted payments, liens, sales of assets, affiliate transactions and other covenants typical for financings of this type. At
any time on or after August 1, 2020, the 2021 Notes are redeemable at the option of the Company, in whole or in part,
upon not less than 30 nor more than 60 days’ notice, without penalty. On February 24, 2016, the board of directors
authorized the Company to make up to $100.0 million in repurchases of the 2021 Notes from time to time without
further approval.
167
During the year ended December 31, 2016, the Company retired $33.8 million of principal of the 2021 Notes for a
repurchase price of $28.2 million, recognizing a $5.1 million net gain on extinguishment of debt after recognizing $(0.4)
million of unamortized debt issuance costs associated with the retired debt. As of December 31, 2017, the remaining
$266.2 million in aggregate principal amount of the 2021 Notes is due August 1, 2021.
2022 Notes
On March 16, 2017, LCFH issued $500.0 million in aggregate principal amount of 5.250% senior notes due March 15,
2022 (the “2022 Notes”). The 2022 Notes require interest payments semi-annually in cash in arrears on March 15 and
September 15 of each year, beginning on September 15, 2017. The 2022 Notes will mature on March 15, 2022. The 2022
Notes are unsecured and are subject to an unencumbered assets to unsecured debt covenant. At any time on or after
September 15, 2021, the 2022 Notes are redeemable at the option of the Company, in whole or in part, upon not less than
15 nor more than 60 days’ notice, without penalty.
2025 Notes
On September 25, 2017, LCFH issued $400.0 million in aggregate principal amount of 5.250% senior notes due October
1, 2025 (the “2025 Notes”). The 2025 Notes require interest payments semi-annually in cash in arrears on April 1 and
October 1 of each year, beginning on April 1, 2018. The 2025 Notes will mature on October 1, 2025. The 2025 Notes are
unsecured and are subject to an unencumbered assets to unsecured debt covenant. The Company may redeem the 2025
Notes, in whole, at any time, or from time to time, prior to their stated maturity. The 2025 Notes are redeemable at the
option of the Company, in whole or in part, upon not less than 15 nor more than 60 days’ notice, at a redemption price
equal to 100% of the principal amount of the 2025 Notes plus the Applicable Premium (as defined in the indenture
governing the 2025 Notes) as of, and accrued and unpaid interest, if any, to the redemption date.
Combined Maturity of Debt Obligations
The following schedule reflects the Company’s contractual payments under all borrowings by maturity ($ in thousands):
Period ending December 31,
Borrowings by
Maturity
2018
2019
2020
2021
2022
Thereafter
Subtotal
Debt issuance costs included in senior unsecured notes
Debt issuance costs included in CLO debt
Premiums included in mortgage loan financing(1)
Total
$
$
1,083,235
283,101
490,321
605,649
656,166
1,274,833
4,393,305
(14,067)
(6,009)
6,597
4,379,826
(1) Deferred gains on intercompany loans, secured by our own real estate, sold into securitizations. Premium is
amortized as a reduction to interest expense.
The Company’s debt facilities are subject to covenants which require the Company to maintain a minimum level of total
equity. Largely as a result of this restriction, approximately $780.0 million of the total equity is restricted from payment
as a dividend by the Company at December 31, 2017.
168
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is based upon market quotations, broker quotations, counterparty quotations or pricing services quotations,
which provide valuation estimates based upon reasonable market order indications and are subject to significant
variability based on market conditions, such as interest rates, credit spreads and market liquidity. The fair value of the
mortgage loan receivables held for sale is based upon a securitization model utilizing market data from recent
securitization spreads and pricing.
Fair Value Summary Table
The carrying values and estimated fair values of the Company’s financial instruments, which are both reported at fair
value on a recurring basis (as indicated) or amortized cost/par, at December 31, 2017 and 2016 are as follows ($ in
thousands):
December 31, 2017
Assets:
CMBS(1)
CMBS interest-only(1)
GNMA interest-only(3)
Agency securities(1)
GNMA permanent securities(1)
Mortgage loan receivables held for
investment, net, at amortized cost:
Mortgage loan receivables held for
investment, net, at amortized cost
Outstanding
Face Amount
Amortized
Cost Basis
Fair Value
Fair Value Method
$
945,167
$
954,397
$
953,499
Internal model, third-party inputs
3,140,297 (2)
112,609
113,071
Internal model, third-party inputs
172,916 (2)
720
33,745
5,245
743
34,386
4,477
Internal model, third-party inputs
728
Internal model, third-party inputs
34,742
Internal model, third-party inputs
3,300,709
3,282,462
3,292,035
Discounted Cash Flow(4)
Provision for loan losses
N/A
(4,000)
(4,000)
(5)
Mortgage loan receivables held for sale
FHLB stock(7)
Nonhedge derivatives(1)(8)
Liabilities:
Repurchase agreements - short-term
Repurchase agreements - long-term
Mortgage loan financing
CLO debt
Participation Financing - Mortgage
Loan Receivable
232,527
77,915
594,140
371,427
101,983
692,394
688,479
230,180
77,915
N/A
371,427
101,983
692,696
688,479
236,428
77,915
Internal model, third-party
inputs(6)
(7)
888
Counterparty quotations
371,427
101,983
693,055
688,479
Discounted Cash Flow(9)
Discounted Cash Flow(10)
Discounted Cash Flow(10)
Discounted Cash Flow(9)
3,107
3,107
3,107
Discounted Cash Flow(11)
Borrowings from the FHLB
1,370,000
1,370,000
1,369,544
Discounted Cash Flow
Senior unsecured notes
1,166,201
1,152,134
1,187,187
Broker quotations, pricing
services
Nonhedge derivatives(1)(8)
54,160
N/A
2,606
Counterparty quotations
Weighted Average
Yield
%
Remaining
Maturity/
Duration (years)
2.79%
3.16%
6.70%
1.80%
3.62%
7.18%
N/A
4.88%
4.25%
N/A
3.19%
2.62%
4.91%
3.40%
17.00%
1.61%
5.39%
N/A
2.89
3.08
4.18
2.94
5.66
1.61
N/A
8.17
N/A
0.24
0.35
2.64
6.81
10.77
0.43
2.49
5.28
2.44
(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income
(loss) in equity.
Represents notional outstanding balance of underlying collateral.
(2)
(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.
(4)
Fair value for floating rate mortgage loan receivables, held for investment is estimated to approximate the outstanding face amount given the
short interest rate reset risk (30 days) and no significant change in credit risk. Fair value for fixed rate mortgage loan receivables, held for
investment is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.
Fair value is estimated to equal par value.
Fair value for mortgage loan receivables, held for sale is measured using a hypothetical securitization model utilizing market data from recent
securitization spreads and pricing.
Fair value of the FHLB stock approximates outstanding face amount as the Company’s captive insurance subsidiary is restricted from trading
the stock and can only put the stock back to the FHLB, at the FHLB’s discretion, at par.
The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.
Fair value for repurchase agreement liabilities and CLO debt is estimated to approximate carrying amount primarily due to the short interest rate
reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. If the collateral is determined to be
impaired, the related financing would be revalued accordingly. There are no impairments on any positions.
(5)
(6)
(7)
(8)
(9)
169
(10) For repurchase agreements - long term and mortgage loan financing, the carrying value approximates the fair value discounting the expected
cash flows at current market rates. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are
no impairments on any positions.
(11) Fair value for Participation Financing - Mortgage Loan Receivable approximates amortized cost as this is a loan participation to a third party.
December 31, 2016
Assets:
CMBS(1)
CMBS interest-only(1)
GNMA interest-only(3)
Agency securities(1)
GNMA permanent securities(1)
Mortgage loan receivables held for
investment, net, at amortized cost:
Mortgage loan receivables held for
investment, net, at amortized cost
Outstanding
Face Amount
Amortized
Cost Basis
Fair Value
Fair Value Method
$
1,676,680
$
1,698,276
$
1,701,395
Internal model, third-party inputs
8,160,458 (2)
478,577 (2)
774
38,327
343,534
18,994
802
39,145
342,171
Internal model, third-party inputs
16,821
Internal model, third-party inputs
780
Internal model, third-party inputs
39,780
Internal model, third-party inputs
2,011,309
2,000,095
2,018,973
Discounted Cash Flow(4)
Provision for loan losses
N/A
(4,000)
(4,000)
(5)
Mortgage loan receivables held for sale
FHLB stock(7)
Nonhedge derivatives(1)(8)
360,518
77,915
847,000
357,882
359,897
77,915
N/A
77,915
5,018
Internal model, third-party
inputs(6)
(7)
Counterparty quotations
Liabilities:
Repurchase agreements - short-term
Repurchase agreements - long-term
Revolving credit facility
Mortgage loan financing
Borrowings from the FHLB
Senior unsecured notes
Nonhedge derivatives(1)(8)
629,430
477,756
25,000
589,152
1,660,000
563,872
100,400
629,430
477,756
25,000
590,106
629,430
477,756
25,000
595,778
Discounted Cash Flow(9)
Discounted Cash Flow(10)
Discounted Cash Flow(11)
Discounted Cash Flow(10)
1,660,000
1,662,178
Discounted Cash Flow
559,847
N/A
550,562
3,446
Broker quotations, pricing
services
Counterparty quotations
Weighted Average
Yield
%
Remaining
Maturity/
Duration (years)
2.81%
3.45%
4.19%
1.29%
3.80%
7.17%
N/A
4.20%
4.25%
N/A
2.10%
2.00%
3.16%
4.85%
1.12%
6.67%
N/A
3.55
2.99
4.44
3.27
10.30
1.66
N/A
4.55
N/A
0.25
0.18
1.70
0.12
7.15
2.42
2.81
3.21
(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income
(loss) in equity.
Represents notional outstanding balance of underlying collateral.
(2)
(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.
(4)
Fair value for floating rate mortgage loan receivables, held for investment is estimated to approximate the outstanding face amount given the
short interest rate reset risk (30 days) and no significant change in credit risk. Fair value for fixed rate mortgage loan receivables, held for
investment is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.
Fair value is estimated to equal par value.
Fair value for mortgage loan receivables, held for sale is measured using a hypothetical securitization model utilizing market data from recent
securitization spreads and pricing.
Fair value of the FHLB stock approximates outstanding face amount as the Company’s captive insurance subsidiary is restricted from trading
the stock and can only put the stock back to the FHLB, at the FHLB’s discretion, at par.
The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.
Fair value for repurchase agreement liabilities is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30
days) of the financings and the high credit quality of the assets collateralizing these positions. If the collateral is determined to be impaired, the
related financing would be revalued accordingly. There are no impairments on any positions.
(5)
(6)
(7)
(8)
(9)
(10) For repurchase agreements - long term and mortgage loan financing, the carrying value approximates the fair value discounting the expected
cash flows at current market rates. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are
no impairments on any positions.
(11) Fair value for borrowings under the revolving credit facility is estimated to approximate carrying amount primarily due to the short interest rate
reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions.
170
The following table summarizes the Company’s financial assets and liabilities, which are both reported at fair value on a
recurring basis (as indicated) or amortized cost/par, at December 31, 2017 and 2016 ($ in thousands):
December 31, 2017
Financial Instruments Reported at Fair
Value on Consolidated Statements of
Financial Condition
Outstanding Face
Amount
Level 1
Level 2
Level 3
Total
Fair Value
$
945,167
$
— $
— $
953,499
$
953,499
Assets:
CMBS(1)
CMBS interest-only(1)
GNMA interest-only(3)
Agency securities(1)
GNMA permanent securities(1)
Nonhedge derivatives(4)
3,140,297 (2)
172,916 (2)
720
33,745
594,140
Liabilities:
Nonhedge derivatives(4)
54,160
$
$
—
—
—
—
—
— $
—
—
—
—
888
888
113,071
113,071
4,477
728
34,742
—
4,477
728
34,742
888
$ 1,106,517
$ 1,107,405
— $
2,606
$
— $
2,606
Financial Instruments Not Reported at
Fair Value on Consolidated Statements
of Financial Condition
Outstanding Face
Amount
Level 1
Level 2
Level 3
Total
Fair Value
Assets:
Mortgage loan receivable held for
investment, net, at amortized cost:
Mortgage loans held by
consolidated subsidiaries
Provision for loan losses
Mortgage loan receivable held for
sale
FHLB stock
Liabilities:
Repurchase agreements - short-
term
Repurchase agreements - long-
term
Mortgage loan financing
CLO debt
Participation Financing -
Mortgage Loan Receivable
Borrowings from the FHLB
Senior unsecured notes
$
3,300,709
$
— $
N/A
232,527
77,915
371,427
101,983
692,394
688,479
3,107
1,370,000
1,166,201
—
—
—
— $ 3,292,035
(4,000)
—
$ 3,292,035
(4,000)
—
—
236,428
77,915
236,428
77,915
$
$
— $
— $ 3,602,378
$ 3,602,378
0
— $
— $
371,427
$
371,427
—
—
—
—
—
—
—
—
—
—
—
—
101,983
693,055
688,479
3,107
1,369,544
1,187,187
101,983
693,055
688,479
3,107
1,369,544
1,187,187
$
— $
— $ 4,414,782
$ 4,414,782
(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of
other comprehensive income (loss) in equity.
(2) Represents notional outstanding balance of underlying collateral.
(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period
earnings.
171
(4) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period
earnings. The outstanding face amount of the nonhedge derivatives represents the notional amount of the
underlying contracts.
December 31, 2016
Financial Instruments Reported at Fair
Value on Consolidated Statements of
Financial Condition
Outstanding Face
Amount
Level 1
Level 2
Level 3
Total
Fair Value
$
1,676,680
$
— $
— $ 1,701,395
$ 1,701,395
Assets:
CMBS(1)
CMBS interest-only(1)
GNMA interest-only(3)
Agency securities(1)
GNMA permanent securities(1)
Nonhedge derivatives(4)
8,160,458 (2)
478,577 (2)
774
38,327
847,000
Liabilities:
Nonhedge derivatives(4)
$
100,400
$
$
—
—
—
—
—
—
—
—
—
5,018
342,171
16,821
780
39,780
—
342,171
16,821
780
39,780
5,018
— $
5,018
$ 2,100,947
$ 2,105,965
— $
3,446
$
— $
3,446
Financial Instruments Not Reported at
Fair Value on Consolidated Statements
of Financial Condition
Outstanding Face
Amount
Level 1
Level 2
Level 3
Total
Fair Value
Assets:
Mortgage loan receivable held for
investment, net, at amortized cost:
Mortgage loans held by
consolidated subsidiaries
Provision for loan losses
Mortgage loan receivables held
for sale
FHLB stock
Liabilities:
Repurchase agreements - short-
term
Repurchase agreements - long-
term
Revolving credit facility
Mortgage loan financing
Borrowings from the FHLB
Senior unsecured notes
$
2,011,309
$
— $
N/A
360,518
77,915
629,430
477,756
25,000
589,152
1,660,000
563,872
—
—
—
— $ 2,018,973
(4,000)
—
$ 2,018,973
(4,000)
—
—
359,897
77,915
359,897
77,915
$
$
— $
— $ 2,452,785
$ 2,452,785
0
— $
— $
629,430
$
629,430
—
—
—
—
—
—
—
—
—
—
477,756
25,000
595,778
477,756
25,000
595,778
1,662,178
1,662,178
550,562
550,562
$ 3,940,704
$
— $
— $ 3,940,704
(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of
other comprehensive income (loss) in equity.
(2) Represents notional outstanding balance of underlying collateral.
(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period
earnings.
172
(4) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period
earnings. The outstanding face amount of the nonhedge derivatives represents the notional amount of the
underlying contracts.
The following table summarizes changes in Level 3 financial instruments reported at fair value on the consolidated
statements of financial condition for the years ended December 31, 2017 and 2016 ($ in thousands):
Level 3
Balance at January 1,
Transfer from level 2
Purchases
Sales
Paydowns/maturities
Amortization of premium/discount
Unrealized gain/(loss)
Realized gain/(loss) on sale(1)
Balance at December 31,
2017
2016
$
2,100,947
$
2,407,217
—
210,521
(1,025,700)
(138,413)
(57,231)
(816)
17,209
1,106,517
$
—
977,456
(539,295)
(684,143)
(76,475)
8,463
7,724
2,100,947
$
(1)
Includes realized losses on securities recorded as other than temporary impairments.
The following is quantitative information about significant unobservable inputs in our Level 3 measurements for those
assets and liabilities measured at fair value on a recurring basis ($ in thousands):
December 31, 2017
Financial Instrument
Carrying Value
Valuation Technique
Unobservable Input Minimum
CMBS (1)
$
953,499
Discounted cash flow
Yield (4)
CMBS interest-only (1)
113,072 (2) Discounted cash flow
Yield (4)
Duration (years)(5)
Duration (years)(5)
Prepayment speed
(CPY)(5)
GNMA interest-only (3)
4,476 (2) Discounted cash flow
Yield (4)
Duration (years)(5)
Prepayment speed
(CPJ)(5)
Agency securities (1)
728
Discounted cash flow
Yield (4)
Duration (years)(5)
GNMA permanent securities
(1)
34,742
Discounted cash flow
Yield (4)
Duration (years)(5)
Total
$
1,106,517
Weighted
Average Maximum
3%
18.32%
0.61%
0.12
2.7%
0.39
3.19
3.52%
3.06
100.00
100.00
4.46%
11.85%
0.44
2.43
5.00
1.4%
0
2.62%
1.40
12.19
2.16%
3.22
3.44%
5.75
7.84
6.31%
4.46
100.00
71.88%
5.19
35.00
2.52%
4.72
6.93%
5.94
(1) CMBS, CMBS interest-only securities, Agency securities, GNMA construction securities, and GNMA permanent
securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the
current period in other comprehensive income.
The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the
interest-only securities participate.
(2)
(3) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period
earnings.
173
Sensitivity of the Fair Value to Changes in the Unobservable Inputs
(4)
(5)
Significant increase (decrease) in the unobservable input in isolation would result in significantly lower (higher)
fair value measurement.
Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or
higher (lower or higher) fair value measurement depending on the structural features of the security in question.
December 31, 2016
Financial Instrument
Carrying Value
Valuation Technique
Unobservable Input Minimum
Weighted
Average Maximum
CMBS (1)
$
1,701,395
Discounted cash flow
Yield (3)
CMBS interest-only (1)
342,171 (2) Discounted cash flow
Yield (3)
Duration (years)(4)
Duration (years)(4)
Prepayment speed
(CPY)(4)
GNMA interest-only (3)
16,821 (2) Discounted cash flow
Yield (4)
Duration (years)(5)
Prepayment speed
(CPJ)(5)
Agency securities (1)
780
Discounted cash flow
Yield (4)
Duration (years)(5)
GNMA permanent securities
(1)
39,780
Discounted cash flow
Yield (4)
Duration (years)(5)
Total
$
2,100,947
1.35%
0.04
2.84%
0.00
2.87%
3.55
4.04%
2.99
100.00
100.00
0.87%
1.69
5.00
1.4%
2.61
2.63%
1.92
7.22%
4.44
13.80
2.17%
3.27
3.65%
10.30
9.18%
9.01
4.8%
4.37
100.00
48.64%
20.66
35.00
2.63%
4.39
6.92%
15.66
(1) CMBS, CMBS interest-only securities, GNMA construction securities, and GNMA permanent securities are
classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period
in other comprehensive income.
The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the
interest-only securities participate.
(2)
(3) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period
earnings.
Sensitivity of the Fair Value to Changes in the Unobservable Inputs
(4)
(5)
Significant increase (decrease) in the unobservable input in isolation would result in significantly lower (higher)
fair value measurement.
Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or
higher (lower or higher) fair value measurement depending on the structural features of the security in question.
174
10. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments primarily to economically manage the fair value variability of fixed rate assets
caused by interest rate fluctuations and overall portfolio market risk. The following is a breakdown of the derivatives
outstanding as of December 31, 2017 and 2016 ($ in thousands):
December 31, 2017
Contract Type
Futures
5-year Swap
10-year Swap
5-year U.S. Treasury Note
Variation Margin
Total futures
Swaps
3 Month LIBOR(2)
Credit derivatives
VIX
Total credit derivatives
Total derivatives
Notional
Asset(1)
Liability(1)
Fair Value
Remaining
Maturity
(years)
$
304,300
$
248,100
11,400
—
563,800
50,000
34,500
34,500
648,300
$
$
656
133
47
—
836
—
52
52
888
$
$
—
153
—
911
1,064
1,542
—
—
2,606
0.25
0.25
0.25
2.68
0.12
(1) Shown as derivative instruments, at fair value, in the accompanying consolidated balance sheets.
(2) The Company is paying fixed interest rates on these swaps.
December 31, 2016
Contract Type
Futures
5-year Swap
10-year Swap
5-year U.S. Treasury Note
10-year U.S. Treasury Note
Total futures
Swaps
3 Month LIBOR(2)
Credit Derivatives
CMBX
CDX
Total credit derivatives
Total derivatives
Notional
Asset(1)
Liability(1)
Fair Value
Remaining
Maturity
(years)
602,200
226,700
21,800
3,200
853,900
50,000
10,000
33,500
43,500
947,400
$
3,210
1,674
93
38
5,015
—
3
—
3
5,018
$
$
2
266
—
—
268
2,697
—
481
481
3,446
0.25
0.25
0.25
0.25
3.72
5.08
1.97
(1) Shown as derivative instruments, at fair value, in the accompanying consolidated balance sheets.
(2) The Company is paying fixed interest rates on these swaps.
175
The following table indicates the net realized gains (losses) and unrealized appreciation (depreciation) on derivatives, by
primary underlying risk exposure, as included in net result from derivatives transactions in the consolidated statements
of operations for the years ended December 31, 2017, 2016 and 2015 ($ in thousands):
Contract Type
Futures
Swaps
Credit Derivatives
Total
Contract Type
Futures
Swaps
Credit Derivatives
Total
Contract Type
Futures
Swaps
Credit Derivatives
Total
Year Ended December 31, 2017
Unrealized
Gain/(Loss)
Realized
Gain/(Loss)
Net Result
from
Derivative
Transactions
(4,975) $
1,126
417
(3,432) $
(7,655) $
(1,008)
(546)
(9,209) $
(12,630)
118
(129)
(12,641)
Year Ended December 31, 2016
Unrealized
Gain/(Loss)
Realized
Gain/(Loss)
Net Result
from
Derivative
Transactions
3,608
$
956
(340)
4,224
$
(3,954) $
(1,264)
(415)
(5,633) $
(346)
(308)
(755)
(1,409)
Year Ended December 31, 2015
Unrealized
Gain/(Loss)
Realized
Gain/(Loss)
Net Result
from
Derivative
Transactions
9,214
$
661
307
10,182
$
(46,816) $
(1,992)
(311)
(49,119) $
(37,602)
(1,331)
(4)
(38,937)
$
$
$
$
$
$
The Company’s counterparties held $9.6 million and $11.3 million of cash margin as collateral for derivatives as of
December 31, 2017 and 2016, respectively, which is included in restricted cash in the consolidated balance sheets.
Futures
Collateral posted with our futures counterparties is segregated in the Company’s books and records. Interest rate futures
are centrally cleared by the Chicago Mercantile Exchange (“CME”) through a Futures Commission Merchant. Interest
rate futures that are governed by an ISDA agreement provide for bilateral collateral pledging based on the counterparties’
market value. The counterparties have the right to re-pledge the collateral posted, but have the obligation to return the
pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the interest rate futures
change.
176
The Company is required to post initial margin and daily variation margin for our interest rate futures that are centrally
cleared by CME. CME determines the fair value of our centrally cleared futures, including daily variation margin.
Effective January 3, 2017, CME amended their rulebooks to legally characterize daily variation margin payments for
centrally cleared interest rate futures as settlement rather than collateral. As a result of this rule change, variation margin
pledged on the Company’s centrally cleared interest rate futures is settled against the realized results of these futures.
Credit Risk-Related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain a provision whereby, if the
Company defaults on certain of its indebtedness, the Company could also be declared in default on its derivatives,
resulting in an acceleration of payment under the derivatives. As of December 31, 2017 and 2016, the Company was in
compliance with these requirements and not in default on its indebtedness. As of December 31, 2017 and 2016, there
was $4.1 million and $6.2 million of cash collateral held by the derivative counterparties for these derivatives,
respectively, included in restricted cash in the consolidated statements of financial condition. No additional cash would
be required to be posted if the acceleration of payment under the derivatives was triggered.
11. OFFSETTING ASSETS AND LIABILITIES
The following tables present both gross information and net information about derivatives and other instruments eligible
for offset in the statement of financial position as of December 31, 2017 and 2016. The Company’s accounting policy is
to record derivative asset and liability positions on a gross basis, therefore, the following tables present the gross
derivative asset and liability positions recorded on the balance sheets, while also disclosing the eligible amounts of
financial instruments and cash collateral to the extent those amounts could offset the gross amount of derivative asset
and liability positions. The actual amounts of collateral posted by or received from counterparties may be in excess of
the amounts disclosed in the following tables as the following only disclose amounts eligible to be offset to the extent of
the recorded gross derivative positions.
As of December 31, 2017
Offsetting of Financial Assets and Derivative Assets
($ in thousands)
Description
Derivatives
Total
Gross amounts of
recognized assets
Gross amounts
offset in the
balance sheet
Net amounts of
assets presented
in the balance
sheet
Gross amounts not offset in the
balance sheet
Financial
instruments
Cash collateral
received/(posted)(1)
Net amount
$
$
888
888
$
$
— $
— $
888
888
$
$
— $
— $
— $
— $
888
888
(1) Included in restricted cash on consolidated balance sheets.
As of December 31, 2017
Offsetting of Financial Liabilities and Derivative Liabilities
($ in thousands)
Gross amounts of
recognized
liabilities
Gross amounts
offset in the
balance sheet
Net amounts of
liabilities
presented in the
balance sheet
Gross amounts not offset in the
balance sheet
Financial
instruments
collateral
Cash collateral
posted/(received)(1)
Net amount
$
$
2,606
$
— $
2,606
$
— $
2,606
$
—
473,410
476,016
$
—
— $
473,410
476,016
$
473,410
473,410
$
—
2,606
$
—
—
Description
Derivatives
Repurchase
agreements
Total
(1) Included in restricted cash on consolidated balance sheets.
177
As of December 31, 2016
Offsetting of Financial Assets and Derivative Assets
($ in thousands)
Description
Derivatives
Total
Gross amounts of
recognized assets
Gross amounts
offset in the
balance sheet
Net amounts of
assets presented
in the balance
sheet
Gross amounts not offset in the
balance sheet
Financial
instruments
Cash collateral
received/(posted)(1)
Net amount
$
$
5,018
5,018
$
$
— $
— $
5,018
5,018
$
$
— $
— $
— $
— $
5,018
5,018
(1) Included in restricted cash on consolidated balance sheets.
As of December 31, 2016
Offsetting of Financial Liabilities and Derivative Liabilities
($ in thousands)
Gross amounts of
recognized
liabilities
Gross amounts
offset in the
balance sheet
Net amounts of
liabilities
presented in the
balance sheet
Gross amounts not offset in the
balance sheet
Financial
instruments
collateral
Cash collateral
posted/(received)(1)
Net amount
$
$
3,446
$
— $
3,446
$
— $
3,446
$
1,107,185
1,110,631
$
—
— $
1,107,185
1,110,631
$
1,107,185
1,107,185
$
—
3,446
$
—
—
—
Description
Derivatives
Repurchase
agreements
Total
(1) Included in restricted cash on consolidated balance sheets.
Master netting agreements that the Company has entered into with its derivative and repurchase agreement
counterparties allow for netting of the same transaction, in the same currency, on the same date. Assets, liabilities, and
collateral subject to master netting agreements as of December 31, 2017 and 2016 are disclosed in the tables above. The
Company does not present its derivative and repurchase agreements net on the consolidated financial statements as it has
elected gross presentation.
12. EQUITY STRUCTURE AND ACCOUNTS
The Company has two classes of common stock, Class A and Class B, which are described as follows:
Class A Common Stock
Voting Rights
Holders of shares of Class A common stock are entitled to one vote per share on all matters to be voted upon by the
shareholders. The holders of Class A common stock do not have cumulative voting rights in the election of directors.
178
Dividend Rights
Subject to the rights of the holders of any preferred stock that may be outstanding and any contractual or statutory
restrictions, holders of Class A common stock are entitled to receive equally and ratably, share for share, dividends as
may be declared by the board of directors out of funds legally available to pay dividends. Dividends upon Class A
common stock may be declared by the board of directors at any regular or special meeting and may be paid in cash, in
property, or in shares of capital stock. Before payment of any dividend, there may be set aside out of any funds available
for dividends, such sums as the board of directors deems proper as reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any of the Company’s property, or for any proper purpose, and the board of
directors may modify or abolish any such reserve.
Liquidation Rights
Upon liquidation, dissolution, distribution of assets or other winding up, the holders of Class A common stock are
entitled to receive ratably the assets available for distribution to the shareholders after payment of liabilities and the
liquidation preference of any outstanding shares of preferred stock.
Other Matters
The shares of Class A common stock have no preemptive or conversion rights and are not subject to further calls or
assessment by the Company. There are no redemption or sinking fund provisions applicable to the Class A common
stock. All outstanding shares of Class A common stock are fully paid and non-assessable.
Allocation of Income and Loss
Income and losses are allocated among the shareholders based upon the number of shares outstanding.
Class B Common Stock
Voting Rights
Holders of shares of Class B common stock are entitled to one vote for each share held of record by such holder and all
matters submitted to a vote of shareholders. Holders of shares of our Class A common stock and Class B common stock
vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise
required by applicable law.
No Dividend or Liquidation Rights
Holders of Class B common stock do not have any right to receive dividends or to receive a distribution upon a
liquidation or winding up of Ladder Capital Corp.
Exchange for Class A Common Stock
As part of the REIT Structuring Transactions described in Note 1, and pursuant to the Third Amended and Restated
LLLP Agreement of LCFH, the Continuing LCFH Limited Partners may from time to time, subject to certain conditions,
receive one share of the Company’s Class A common stock in exchange for (i) one share of the Company’s Class B
common stock, (ii) one Series REIT LP Unit and (iii) either one Series TRS LP Unit or one TRS Share, subject to
equitable adjustments for stock splits, stock dividends and reclassifications.
During the year ended December 31, 2017, 20,767,407 Series REIT LP Units and 20,767,407 Series TRS LP Units were
collectively exchanged for 20,767,407 shares of Class A common stock and 20,767,407 shares of Class B common stock
were canceled. We received no other consideration in connection with these exchanges.
During the year ended December 31, 2016, 10,521,149 Series REIT LP Units and 10,521,149 Series TRS LP Units were
collectively exchanged for 10,521,149 shares of Class A common stock; and 10,521,149 shares of Class B common
stock were canceled. We received no other consideration in connection with these exchanges.
179
During the year ended December 31, 2015, 3,586,546 Series REIT LP Units and 3,586,546 Series TRS LP Units were
collectively exchanged for 3,586,546 shares of Class A common stock; and 3,586,546 shares of Class B common stock
were canceled. We received no other consideration in connection with these exchanges.
Stock Repurchases
On October 30, 2014, the board of directors authorized the Company to repurchase up to $50.0 million of the Company’s
Class A common stock from time to time without further approval. Stock repurchases by the Company are generally
made for cash in open market transactions at prevailing market prices but may also be made in privately negotiated
transactions or otherwise. The timing and amount of purchases are determined based upon prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors. During the year ended December 31, 2017, the
Company repurchased 189,897 shares of Class A common stock at an average of $13.61 per share for a total aggregate
purchase price of $2.6 million. During the year ended December 31, 2016, the Company repurchased 424,317 shares of
Class A common stock at an average of $10.96 per share for a total aggregate purchase price of $4.7 million. During the
year ended December 31, 2015, the Company repurchased 84,203 shares of Class A common stock at an average of
$11.81 per share for a total aggregate purchase price of $1.0 million. All repurchased shares are recorded in treasury
stock at cost. As of December 31, 2017, the Company has a remaining amount available for repurchase of $41.8 million,
which represents 3.5% in the aggregate of its outstanding Class A common stock, based on the closing price of $13.63
per share on such date.
The following table is a summary of the Company’s repurchase activity of its Class A common stock during the years
ended December 31, 2017, 2016 and 2015 ($ in thousands):
Authorizations remaining as of December 31, 2016
Additional authorizations
Repurchases paid
Repurchases unsettled
Authorizations remaining as of December 31, 2017
(1) Amount excludes commissions paid associated with share repurchases.
Authorizations remaining as of December 31, 2015
Additional authorizations
Repurchases paid
Repurchases unsettled
Authorizations remaining as of December 31, 2016
(1) Amount excludes commissions paid associated with share repurchases.
Authorizations remaining as of December 31, 2014
Additional authorizations
Repurchases paid
Repurchases unsettled
Authorizations remaining as of December 31, 2015
(1) Amount excludes commissions paid associated with share repurchases.
180
Shares
Amount(1)
189,897
Shares
424,317
Shares
84,203
$
$
$
$
$
$
44,353
—
(2,584)
—
41,769
Amount(1)
49,006
—
(4,653)
—
44,353
Amount(1)
50,000
—
(994)
—
49,006
Dividends
In order for the Company to maintain its qualification as a REIT under the Code, it must annually distribute at least 90%
of its taxable income. The Company has paid and in the future intends to declare regular quarterly distributions to its
shareholders in an amount approximating the REIT’s net taxable income.
Consistent with IRS guidance, the Company may, subject to a cash/stock election by its shareholders, pay a portion of its
dividends in stock, to provide for meaningful capital retention; however, the REIT distribution requirements limit its
ability to retain earnings and thereby replenish or increase capital for operations. The timing and amount of future
distributions is based on a number of factors, including, among other things, the Company’s future operations and
earnings, capital requirements and surplus, general financial condition and contractual restrictions. All dividend
declarations are subject to the approval of the Company’s board of directors. Generally, the Company expects its
distributions to be taxable as ordinary dividends to its shareholders, whether paid in cash or a combination of cash and
common stock, and not as a tax-free return of capital or a capital gain (although for taxable years beginning after
December 31, 2017 and before January 1, 2026, generally stockholders that are individuals, trusts or estates may deduct
20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations). The Company
believes that its significant capital resources and access to financing will provide the financial flexibility at levels
sufficient to meet current and anticipated capital requirements, including funding new investment opportunities, paying
distributions to its shareholders and servicing our debt obligations.
The following table presents dividends declared (on a per share basis) of Class A common stock for the years ended
December 31, 2017, 2016 and 2015:
Dividend per
Share
0.300
0.300
0.300
0.315
1.215
0.275
0.275
0.275
0.460
1.285
0.250
0.250
0.275
1.450
2.225
$
$
$
$
$
$
Declaration Date
March 1, 2017
June 1, 2017
September 1, 2017
November 7, 2017
Total
March 1, 2016
June 1, 2016
September 1, 2016
December 2, 2016
Total
March 12, 2015
June 8, 2015
September 1, 2015
December 1, 2015
Total
181
The following table presents the tax treatment for our aggregate distributions per share of common stock paid for the
years ended December 31, 2017, 2016 and 2015:
Record Date
Payment Date
Dividend per
Share
Ordinary
Dividends
Qualified
Dividends
Capital Gain
Unrecaptured
1250 Gain
December 27, 2016
January 24, 2017 (1) $
0.059
$
0.054
$
— $
0.005
$
March 13, 2017
April 3, 2017
June 12, 2017
July 3, 2017
September 11, 2017 October 2, 2017
December 11, 2017
January 3, 2018
(2)
0.300
0.300
0.300
0.265
0.276
0.276
0.276
0.244
—
—
—
—
0.024
0.024
0.024
0.021
Total
$
1.224
$
1.126
$
— $
0.098
$
—
—
—
—
—
—
(1) $0.401 of the $0.460 fourth quarter dividend paid on January 24, 2017 is considered a 2016 dividend for U.S.
federal income tax purposes. $0.059 is considered a 2017 dividend for U.S. federal income tax purposes and will be
reflected in 2017 tax reporting.
(2) $0.265 of the $0.315 fourth quarter dividend paid on January 3, 2018 is considered a 2017 dividend for U.S. federal
income tax purposes. $0.050 is considered a 2018 dividend for U.S. federal income tax purposes and will be
reflected in 2018 tax reporting.
Record Date
Payment Date
Dividend per
Share
Ordinary
Dividends
Qualified
Dividends
Capital Gain
Unrecaptured
1250 Gain
March 10, 2016
April 1, 2016
June 13, 2016
July 1, 2016
September 12, 2016 October 3, 2016
December 27, 2016
January 24, 2017 (1)
Total
$
$
0.275
$
0.254
$
— $
0.021
$
0.275
0.275
0.401
0.254
0.254
0.370
—
—
—
0.021
0.021
0.031
1.226
$
1.132
$
— $
0.094
$
—
—
—
—
—
(1) $0.401 of the $0.460 fourth quarter dividend paid on January 24, 2017 is considered a 2016 dividend for U.S.
federal income tax purposes. $0.059 is considered a 2017 dividend for U.S. federal income tax purposes and will be
reflected in 2017 tax reporting.
Record Date
Payment Date
Dividend per
Share
Ordinary
Dividends
Qualified
Dividends (1)
Capital Gain
Unrecaptured
1250 Gain (2)
April 6, 2015
April 15, 2015
June 15, 2015
July 1, 2015
September 10, 2015 October 1, 2015
December 10, 2015
January 21, 2016 (3)
Total
$
$
0.250
$
0.250
$
0.250
$
— $
0.250
0.275
1.450
0.250
0.275
1.306
0.250
0.275
0.156
—
—
0.144
2.225
$
2.081
$
0.931
$
0.144
$
—
—
—
0.020
0.020
(1) For 2015, Qualified Dividends represents the portion of total Ordinary Dividends which constitutes “qualified
dividend income,” as defined by the Internal Revenue Code.
(2) For 2015, Unrecaptured 1250 Gain represents the portion of total Capital Gain which constitutes gain required to be
taxed as “Unrecaptured Section 1250 Gain,” as defined by the Internal Revenue Code.
(3) The fourth quarter dividend paid on January 21, 2016 is considered a 2015 dividend for U.S. federal income tax
purposes.
182
Stock Dividend and Distribution of Accumulated Earnings and Profits
In order to qualify as a REIT the Company must annually distribute at least 90% of its taxable income. In addition, the
Company was required to make a one-time distribution of its undistributed accumulated earnings and profits attributable
to taxable periods ending prior to January 1, 2015 (the “E&P Distribution”). The E&P Distribution requirement was
$48.3 million or $0.90 per share. Pursuant to the terms of an IRS private letter ruling (the “Private Letter Ruling”), the
Company elected, subject to the cash/stock election by its shareholders described below, to pay its fourth quarter 2015
and 2016 dividends in a mix of cash and stock and have such dividends be treated as a taxable distribution to its
shareholders for U.S. federal income tax purposes.
In order to comply with the Private Letter Ruling, shareholders had the option to elect to receive the fourth quarter 2015
and 2016 dividends in all cash (a “Cash Election”), or all shares of Ladder’s Class A common stock (a “Share Election”).
Shareholders who did not return an election form, or who otherwise failed to properly complete an election form, were
deemed to have made a Share Election. The total amount of cash paid to all shareholders was limited to a maximum of
20% of the total value of each of the fourth quarter 2015 and 2016 dividends (the “Cash Amount”). The aggregate
amount of the dividends owed to shareholders who made Cash Elections exceeded the Cash Amount, and accordingly,
the Cash Amount was prorated among such shareholders, with the remaining portion of the fourth quarter 2015 or 2016
dividend, as applicable, paid to such shareholders in shares of Ladder’s Class A common stock plus cash in lieu of any
fractional shares. Shareholders making Stock Elections received the full amount of the dividend in shares of Ladder’s
Class A common stock plus cash in lieu of any fractional shares. The Company believes that the total value of its 2015
dividends was sufficient to fully distribute its 2015 taxable income and its accumulated earnings and profits.
On January 24, 2017, the Company paid an aggregate of $20.8 million in cash to its Class A shareholders, accrued for
dividends payable on unvested restricted stock and unvested options with dividend equivalent rights of $0.7 million and
issued 815,819 shares of its Class A common stock, equivalent to $11.5 million, in connection with the fourth quarter
2016 dividend totaling $0.46 per share. The total number of shares of Class A common stock distributed pursuant to the
fourth quarter 2016 dividend was determined based on shareholder elections and the volume weighted average price of
$14.06 per share of Class A common stock on the New York Stock Exchange for the three trading days after January 12,
2017, the date that election forms were due. The Company also issued 432,314 shares of its Class B common stock and
each of Series REIT and Series TRS of LCFH issued 1,248,133 of their respective Series LP units corresponding to the
aggregate number of Class A and Class B shares issued by the Company. The Company believes that the total value of
its 2016 dividend was sufficient to fully distribute its 2016 taxable income.
Changes in Accumulated Other Comprehensive Income
The following table presents changes in accumulated other comprehensive income related to the cumulative difference
between the fair market value and the amortized cost basis of securities classified as available for sale for the years
ended December 31, 2017, 2016 and 2015 ($ in thousands):
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Other
Comprehensive
Income of
Noncontrolling
Interests
Total Accumulated
Other
Comprehensive
Income (Loss)
December 31, 2016
Other comprehensive income (loss)
Exchange of noncontrolling interest for common
stock
Rebalancing of ownership percentage between
Company and Operating Partnership
December 31, 2017
$
$
$
1,365
(2,915)
$
759
695
1,696
(1,696)
(358)
(212) $
358
116
$
2,124
(2,220)
—
—
(96)
183
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Other
Comprehensive
Income of
Noncontrolling
Interests
Total Accumulated
Other
Comprehensive
Income (Loss)
(3,556) $
3,420
(2,839) $
5,099
1,202
(1,202)
299
1,365
$
(299)
759
$
(6,395)
8,519
—
—
2,124
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Other
Comprehensive
Income of
Noncontrolling
Interests
Total Accumulated
Other
Comprehensive
Income (Loss)
$
15,656
(20,046)
$
14,494
(16,499)
645
(645)
189
(3,556) $
(189)
(2,839) $
30,150
(36,545)
—
—
(6,395)
$
$
$
$
December 31, 2015
Other comprehensive income (loss)
Exchange of noncontrolling interest for common
stock
Rebalancing of ownership percentage between
Company and Operating Partnership
December 31, 2016
December 31, 2014
Other comprehensive income (loss)
Exchange of noncontrolling interest for common
stock
Rebalancing of ownership percentage between
Company and Operating Partnership
December 31, 2015
184
13. NONCONTROLLING INTERESTS
Pursuant to ASC 810, Consolidation, on the accounting and reporting for noncontrolling interests and changes in
ownership interests of a subsidiary, changes in a parent’s ownership interest (and transactions with noncontrolling
interest unitholders in the subsidiary), while the parent retains its controlling interest in its subsidiary, should be
accounted for as equity transactions. The carrying amount of the noncontrolling interest shall be adjusted to reflect the
change in its ownership interest in the subsidiary, with the offset to equity attributable to the parent. Accordingly, as a
result of LP unit exchanges which caused changes in ownership percentages between the Company’s Class A
shareholders and the noncontrolling interests in the Operating Partnership that occurred during the year ended
December 31, 2017, the Company has increased noncontrolling interests in the Operating Partnership and decreased
additional paid-in capital and accumulated other comprehensive income in the Company’s shareholders’ equity by $3.5
million as of December 31, 2017. Upon the adoption of ASU 2015-02, which amended ASC 810, Consolidation, in the
quarter ended March 31, 2016, the Operating Partnership is now determined to be a VIE, however, since the Company
was previously consolidating the Operating Partnership, the adoption of ASU 2015-02 had no material impact on the
Company’s consolidated financial statements.
There are two main types of noncontrolling interest reflected in the Company’s consolidated financial statements (i)
noncontrolling interest in the operating partnership and (ii) noncontrolling interest in consolidated joint ventures.
Noncontrolling Interest in the Operating Partnership
As more fully described in Note 1, certain of the predecessor equity owners continue to own interests in the operating
partnership as modified by the IPO Transactions. These interests were subsequently further modified by the REIT
Structuring Transactions (also described in Note 1). These interests, along with the Class B shares held by these
investors, are exchangeable for Class A shares of the Company. The roll-forward of the Operating Partnership’s LP Units
follow the Class B common stock of the Company as disclosed in the consolidated statements of changes in equity.
Distributions to Noncontrolling Interest in the Operating Partnership
Notwithstanding the foregoing, subject to any restrictions in applicable debt financing agreements and available liquidity
as determined by the board of directors of each of Series REIT of LCFH and Series TRS of LCFH, each Series must use
commercially reasonable efforts to make quarterly distributions to each of its partners (including the Company) at least
equal to such partner’s “Quarterly Estimated Tax Amount,” which shall be computed (as more fully described in LCFH’s
Third Amended and Restated LLLP Agreement) for each partner as the product of (x) the U.S. federal taxable income (or
alternative minimum taxable income, if higher) allocated by such Series to such partner in respect of the Series REIT LP
Units and Series TRS LP Units held by such partner and (y) the highest marginal blended U.S. federal, state and local
income tax rate (or alternative minimum taxable rate, as applicable) applicable to an individual residing in New York,
NY, taking into account, for U.S. federal income tax purposes, the deductibility of state and local taxes; provided that
Series TRS of LCFH may take into account, in determining the amount of tax distributions to holders of Series TRS LP
Units, the amount of any distributions each such holder received from Series REIT of LCFH in excess of tax
distributions. In addition, to the extent the Company requires an additional distribution from the Series of LCFH in
excess of its quarterly tax distribution in order to pay its quarterly cash dividend, the Series of LCFH will be required to
make a corresponding distribution of cash to each of their partners (other than the Company) on a pro-rata basis.
Allocation of Income and Loss
Income and losses and comprehensive income are allocated among the partners in a manner to reflect as closely as
possible the amount each partner would be distributed under the Third Amended and Restated LLLP Agreement upon
liquidation of the Operating Partnership’s assets.
Noncontrolling Interest in Unconsolidated Joint Ventures
The Company consolidates nine ventures in which there are other noncontrolling investors, which own between 1.2% -
30.0% of such ventures. These ventures hold investments in 26 office buildings, one warehouse, one mobile home
community and a condominium project. The Company makes distributions and allocates income from these ventures to
the noncontrolling interests in accordance with the terms of the respective governing agreements.
185
14. EARNINGS PER SHARE
The Company’s net income (loss) and weighted average shares outstanding for the years ended December 31, 2017,
2016 and 2015 consist of the following:
($ in thousands except share amounts)
Basic Net income (loss) available for Class A common
shareholders
Diluted Net income (loss) available for Class A common
shareholders
Weighted average shares outstanding
Basic
Diluted
For the Year
Ended December
31, 2017
For the Year
Ended December
31, 2016
For the Year
Ended December
31, 2015
$
$
95,276
124,046
$
$
66,727
114,156
$
$
73,821
73,821
81,902,524
61,998,089
109,704,880
107,638,788
51,702,188
51,870,808
The calculation of basic and diluted net income (loss) per share amounts for the years ended December 31, 2017, 2016
and 2015 are described and presented below.
Basic Net Income (Loss) per Share
Numerator: utilizes net income (loss) available for Class A common shareholders for the years ended December 31,
2017, 2016 and 2015, respectively.
Denominator: utilizes the weighted average shares of Class A common stock for the years ended December 31, 2017,
2016 and 2015, respectively.
Diluted Net Income (Loss) per Share
Numerator: utilizes net income (loss) available for Class A common shareholders for the years ended December 31,
2017, 2016 and 2015, respectively, for the basic net income (loss) per share calculation described above, adding net
income (loss) amounts attributable to the noncontrolling interest in the Operating Partnership using the as-if converted
method for the Class B common shareholders while adjusting for additional corporate income tax expense (benefit) for
the described net income (loss) add-back.
Denominator: utilizes the weighted average number of shares of Class A common stock for the years ended
December 31, 2017, 2016 and 2015, respectively, for the basic net income (loss) per share calculation described above
adding the dilutive effect of shares issuable relating to Operating Partnership exchangeable interests and the incremental
shares of unvested Class A restricted stock using the treasury method.
186
(In thousands except share amounts)
For the Year
Ended December
31, 2017
For the Year
Ended December
31, 2016
For the Year
Ended December
31, 2015
Basic Net Income (Loss) Per Share of Class A Common
Stock
Numerator:
Net income (loss) attributable to Class A common
shareholders
Denominator:
Weighted average number of shares of Class A common stock
outstanding
Basic net income (loss) per share of Class A common stock
$
$
95,276
$
66,727
$
73,821
81,902,524
1.16
$
61,998,089
1.08
$
51,702,188
1.43
Diluted Net Income (Loss) Per Share of Class A Common
Stock
Numerator:
Net income (loss) attributable to Class A common
shareholders
Add (deduct) - dilutive effect of:
Amounts attributable to operating partnership’s share of
Ladder Capital Corp net income (loss)
Additional corporate tax (expense) benefit
Diluted net income (loss) attributable to Class A common
shareholders
Denominator:
$
95,276
$
66,727
$
73,821
30,378
(1,608)
47,130
299
—
—
$
124,046
$
114,156
$
73,821
Basic weighted average number of shares of Class A common
stock outstanding
81,902,524
61,998,089
51,702,188
Add - dilutive effect of:
Shares issuable relating to converted Class B common
shareholders
27,773,765
45,118,668
Incremental shares of unvested Class A restricted stock
28,591
522,031
—
168,620
Diluted weighted average number of shares of Class A
common stock outstanding
Diluted net income (loss) per share of Class A common stock
$
109,704,880
1.13
107,638,788
1.06
$
$
51,870,808
1.42
For the year ended December 31, 2015, shares issuable relating to converted Class B common shareholders are excluded
from the calculation of diluted EPS, as the inclusion of such potential common shares in the calculation would be anti-
dilutive.
The shares of Class B common stock do not share in the earnings of Ladder Capital Corp and are, therefore, not
participating securities. Accordingly, basic and diluted net income (loss) per share of Class B common stock has not
been presented, although the assumed conversion of Class B common stock has been included in the presented diluted
net income (loss) per share of Class A common stock.
187
15. STOCK BASED AND OTHER COMPENSATION PLANS
The following table summarizes the impact on the consolidated statement of operations of the various stock based
compensation plans described in this note ($ in thousands):
Stock Based Compensation Expense:
2015 Annual Restricted Stock/Option Awards
2016 Annual Restricted Stock/Option Awards
2017 Annual Restricted Stock Awards
2017 Other Restricted Stock Awards
2018 Annual Restricted Stock Awards(2)
Other Employee/Director Awards
Total Stock Based Compensation Expense
Phantom Equity Investment Plan
Ladder Capital Corp Deferred Compensation Plan
Bonus Expense
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
1,876
2,094
7,289 (1)
302
6,768 (1)
636
18,965
510
568
33,747
$
$
$
$
$
4,838
6,690
—
—
—
6,112
17,640
689
710
29,224
$
6,197
—
—
—
—
7,591
13,788
(2,958)
(553)
34,359
$
$
$
$
Includes immediate vesting of retirement eligible employees, including Brian Harris.
(1)
(2) Granted in December 2017.
2014 Omnibus Incentive Plan
In connection with the IPO Transactions, the 2014 Ladder Capital Corp Omnibus Incentive Equity Plan (the “2014
Omnibus Incentive Plan”) was adopted by the board of directors on February 11, 2014, and provides certain members of
management, employees and directors of the Company or its affiliates with additional incentives including grants of
stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards.
2015 Annual Restricted Stock Awards and Annual Option Awards
Members of management are eligible to receive annual restricted stock awards (the “Annual Restricted Stock Awards”)
and annual option awards (the “Annual Option Awards”) based on the performance of the Company. On February 18,
2015, Annual Restricted Stock Awards were granted to our executive officers (each, a “Management Grantee”) with an
aggregate value of $12.6 million which represents 688,400 shares of restricted Class A common stock in connection with
2014 compensation. Fifty percent of each restricted stock award granted is subject to time-based vesting criteria, and the
remaining 50% of each restricted stock award is subject to attainment of the Performance Target for the applicable years.
The time-vesting restricted stock granted to the Management Grantees will generally vest in three installments on each
of the first three anniversaries of the date of grant, subject to continued employment on the applicable vesting dates. The
performance-vesting restricted stock will vest in three equal installments upon the compensation committee’s
confirmation that the Company achieves a return on equity, based on Core Earnings divided by the Company’s average
book value of equity, equal to or greater than 8% for such year (the “Performance Target”) for those years. If the
Company misses the Performance Target during either the first or second calendar year but meets the Performance Target
for a subsequent year during the three-year performance period and the Company’s return on equity for such subsequent
year and any years for which it missed its Performance Target equals or exceeds the compounded return on equity of 8%,
based on Core Earnings divided by the Company’s average book value of equity, the performance-vesting restricted
stock which failed to vest because the Company previously missed its Performance Target will vest on the last day of
such subsequent year (the “Catch-Up Provision”). If the term “Core Earnings” is no longer used in the Company’s SEC
filings and approved by the compensation committee, then the Performance Target will be calculated using such other
pre-tax performance measurement defined in the Company’s SEC filings, as determined by the compensation committee.
The Company met the Performance Target for the years ended December 31, 2016 and 2015.
188
The Company has elected to recognize the compensation expense related to the time-based vesting portion of the Annual
Restricted Stock Awards for the entire award on a straight-line basis over the requisite service period. As such, the
compensation expense related to the February 18, 2015 Annual Restricted Stock Awards to Management Grantees shall
be recognized as follows:
1. Compensation expense for restricted stock subject to time-based vesting criteria granted to Brian Harris will
be expensed 1/2 each year, for two years, on an annual basis in advance of the Harris Retirement Eligibility
Date, as described below.
2. Compensation expense for restricted stock subject to time-based vesting criteria granted to the Management
Grantees other than Mr. Harris, will be expensed 1/3 each year, for three years on an annual basis following
such grant.
Accruals of compensation cost for an award with a performance condition shall be based on the probable outcome of that
performance condition. Therefore, compensation cost shall be accrued if it is probable that the performance condition
will be achieved and shall not be accrued if it is not probable that the performance condition will be achieved.
On February 18, 2015, Annual Stock Option Awards were granted to Management Grantees with an aggregate grant date
fair value of $1.4 million, which represents 670,256 shares of Class A common stock subject to the Annual Stock Option
Awards. The stock option awards are subject to time-based vesting criteria only and vest in three equal installments on
February 18 of each of 2016, 2017 and 2018, subject to continued employment until the applicable vesting date. Upon
termination of a Management Grantee’s employment or service due to death, disability, termination by the Company
without cause or termination by the Management Grantee for Good Reason (each, as defined in the 2014 Omnibus
Incentive Plan), the respective Management Grantee’s option awards will accelerate and vest in full. The actual grant
date fair values of the Annual Option Awards granted to our Management Grantees were computed in accordance with
FASB ASC Topic 718 using the Black Scholes model based on the following assumptions: (1) risk-free rate of 1.79%;
(2) dividend yield of 5.3%; (3) expected life of six years; and (4) volatility of 24.0%.
On February 18, 2015, members of the board of directors each received Annual Restricted Stock Awards with a grant
date fair value of $0.1 million, representing 7,962 shares of restricted Class A common stock, which vested in full on the
first anniversary of the date of grant, subject to continued service on the board of directors. Compensation expense for
restricted stock subject to time-based vesting criteria granted to directors will be expensed in full on an annual basis
following such grant.
Upon a change in control (as defined in the respective award agreements), all restricted stock and option awards will
become fully vested, if (1) the Management Grantee continues to be employed through the closing of the change in
control or (2) after the signing of definitive documentation related to the change in control, but prior to its closing, the
Management Grantee’s employment is terminated without cause or due to death or disability or the Management Grantee
resigns for Good Reason. The compensation committee retains the right, in its sole discretion, to provide for the
accelerated vesting (in whole or in part) of the restricted stock and option awards granted.
On February 11, 2017 (the “Harris Retirement Eligibility Date”), all outstanding Annual Restricted Stock Awards,
including the time-vesting portion and the performance-vesting portion, and all outstanding Annual Option Awards
granted to Mr. Harris became fully vested, and any Annual Restricted Stock Awards and Annual Option Awards granted
after the Harris Retirement Eligibility Date will be fully vested at grant. The Executive Retirement Eligibility Date for
Pamela McCormack is December 8, 2019 (the “McCormack Retirement Eligibility Date”). For Management Grantees
other than Harris and McCormack, the Executive Retirement Eligibility Date is February 11, 2019, the time-vesting
portion of the Annual Restricted Stock Awards and the Annual Option Awards will become fully vested, and the time-
vesting portion of any Annual Restricted Stock Awards and Annual Option Awards granted after the Executive
Retirement Eligibility Date will be fully vested at grant. Upon the occurrence of the Executive Retirement Eligibility
Date, the performance-vesting portion of such Management Grantee’s Annual Restricted Stock Awards will remain
outstanding for the performance period and will vest to the extent we meet the Performance Target, including via the
Catch-Up Provision described above, regardless of continued employment with us our subsidiaries following the
Executive Retirement Eligibility Date.
189
On June 10, 2015, a new member of the board of directors received an Annual Restricted Stock Award with a grant date
fair value of $0.1 million, representing 4,223 shares of restricted Class A common stock, which will vest in three equal
installments on each of the first three anniversaries of the date of grant, subject to continued service on the board of
directors. Compensation expense for restricted stock subject to time-based vesting criteria granted to the director will be
expensed 1/3 each year, for three years on an annual basis following such grant.
2016 Annual Restricted Stock Awards and Annual Option Awards
On February 18, 2016, Annual Restricted Stock Awards were granted to Management Grantees with an aggregate value
of $9.1 million which represents 793,598 shares of restricted Class A common stock in connection with 2015
compensation. These awards are subject to the same terms and conditions as the 2015 Annual Restricted Stock Awards,
except that the relevant vesting periods begin in 2016, rather than in 2015. The Company met the Performance Target for
the year ended December 31, 2016.
The Company has elected to recognize the compensation expense related to the time-based vesting of the Annual
Restricted Stock Awards for the entire award on a straight-line basis over the requisite service period. As such, the
compensation expense related to the February 18, 2016 Annual Restricted Stock Awards to Management Grantees shall
be recognized as follows:
1. Compensation expense for restricted stock subject to time-based vesting criteria granted to Brian Harris was
expensed in full on February 11, 2017, the Harris Retirement Eligibility Date.
2. Compensation expense for restricted stock subject to time-based vesting criteria granted to the Management
Grantees other than Mr. Harris, will be expensed 1/3 each year, for three years on an annual basis following
such grant.
Accruals of compensation cost for an award with a performance condition shall be based on the probable outcome of that
performance condition. Therefore, compensation cost shall be accrued if it is probable that the performance condition
will be achieved and shall not be accrued if it is not probable that the performance condition will be achieved.
On February 18, 2016, Annual Stock Option Awards were granted to Management Grantees with an aggregate grant date
fair value of $1.0 million, which represents 289,326 shares of Class A common stock subject to the Annual Stock Option
Awards. The stock option awards are subject to the same terms and conditions as those granted in 2015 except that the
vesting period commenced in 2016 and the 2016 stock option awards included dividend equivalent rights. The actual
grant date fair values of the Annual Option Awards granted to our Management Grantees were computed in accordance
with FASB ASC Topic 718 using the Black Scholes model based on the following assumptions: (1) risk-free rate of
1.5%; (2) dividend yield of 9.8%; (3) expected life of six years; and (4) volatility of 48.0%.
On February 18, 2016, certain members of the board of directors each received Annual Restricted Stock Awards with a
grant date fair value of $0.1 million, representing 12,636 shares of restricted Class A common stock, which will vest in
full on the first anniversary of the date of grant, subject to continued service on the board of directors. Compensation
expense for restricted stock subject to time-based vesting criteria granted to directors will be expensed in full on an
annual basis following such grant. These grants are subject to the same terms and conditions as those made in 2015
except that the vesting period commenced in 2016.
The 2016 awards are subject to the same change in control and retirement provisions that are described above.
2017 Annual Restricted Stock Awards
On February 18, 2017, certain members of the board of directors each received Annual Restricted Stock Awards with a
grant date fair value of $0.2 million, representing 16,245 shares of restricted Class A common stock, which will vest in
full on the first anniversary of the date of grant, subject to continued service on the board of directors. Compensation
expense related to the time-based vesting criteria of the award shall be recognized on a straight-line basis over the one-
year vesting period.
190
For 2016 performance, management received stock-based incentive equity. On February 18, 2017, Annual Restricted
Stock Awards were granted to Management Grantees with an aggregate value of $10.2 million which represents
736,461 shares of restricted Class A common stock in connection with 2016 compensation. In accordance with the Harris
Employment Agreement, Mr. Harris’ annual awards were fully vested at grant. For other Management Grantees, fifty
percent of each restricted stock award granted is subject to time-based vesting criteria, and the remaining 50% of each
restricted stock award is subject to attainment of the Performance Target for the applicable years. The time-vesting
restricted stock will vest in three installments on each of the first three anniversaries of the date of grant, subject to
continued employment on the applicable vesting dates and subject to the applicable Retirement Eligibility Date. The
performance-vesting restricted stock will vest in three equal installments upon the compensation committee’s
confirmation that the Company achieves the Performance Target for the years ended December 31, 2017, 2018 and 2019,
respectively. The Catch-Up Provision applies to the performance vesting portion of this award.
The Company has elected to recognize the compensation expense related to the time-based vesting of the Annual
Restricted Stock Awards for the entire award on a straight-line basis over the requisite service period for the entire
award. As such, the compensation expense related to the February 18, 2017 Annual Restricted Stock Awards to
Management Grantees shall be recognized as follows:
1. Compensation expense for stock granted to Brian Harris will be expensed immediately in accordance with the
Harris Retirement Eligibility Date.
2. Compensation expense for restricted stock subject to time-based vesting criteria granted to Pamela
McCormack will be expensed 1/3 each year, for three years, on an annual basis in advance of the McCormack
Retirement Eligibility Date.
3. Compensation expense for restricted stock subject to time-based vesting criteria granted to Michael Mazzei
will be expensed 1/3 each year, for three years, on an annual basis.
4. Compensation expense for restricted stock subject to time-based vesting criteria granted to the Management
Grantees other than Mr. Harris, Ms. McCormack and Mr. Mazzei will be expensed 1/3 each year, for three
years, on an annual basis in advance of the Executive Retirement Eligibility Date.
Accruals of compensation cost for an award with a performance condition is accrued if it is probable that the
performance condition will be achieved and shall not be accrued if it is not probable that the performance condition will
be achieved.
Upon a change in control (as defined in the respective award agreements), all restricted stock and option awards will
become fully vested, if (1) the Management Grantee continues to be employed through the closing of the change in
control or (2) after the signing of definitive documentation related to the change in control, but prior to its closing, the
Management Grantee’s employment is terminated without cause or due to death or disability or the Management Grantee
resigns for Good Reason. The compensation committee retains the right, in its sole discretion, to provide for the
accelerated vesting (in whole or in part) of the restricted stock and option awards granted.
Other 2017 Restricted Stock Awards
On January 24, 2017, Management Grantees received a Restricted Stock Award with a grant date fair value of $30,455,
representing 2,191 shares of restricted Class A common stock. These shares represent stock dividends paid on the
number of shares subject to the 2016 options (had such shares been outstanding) and vest with the time-vesting 2016
options they are associated with, subject to the Retirement Eligibility Date of the respective member of management.
Compensation expense shall be recognized on a straight-line basis over the requisite service period.
On February 18, 2017, a new employee of the Company received a Restricted Stock Award with a grant date fair value
of $0.4 million, representing 28,881 shares of restricted Class A common stock, which will vest in two equal installments
on each of the first two anniversaries of the date of grant, subject to continued employment on the applicable vesting
dates. Compensation expense shall be recognized on a straight-line basis over the requisite service period.
191
On February 18, 2017, Management Grantees received cash of $1.0 million and a Stock Award with a grant date fair
value of $48,475, representing 3,500 shares of Class A common stock, intended to represent dividends in type and
amount that the 2015 stock option grant to management would have received had such options had dividend equivalent
rights since grant. This grant also provides for future dividend equivalents that vest according to the vesting schedule of
the 2015 stock option grant. Compensation expense shall be recognized on a straight-line basis over the requisite service
period.
On February 18, 2017, Restricted Stock Awards were granted to certain non-management employees (each, a “Non-
Management Grantee”) with an aggregate value of $0.6 million which represents 40,000 shares of restricted Class A
common stock in connection with 2016 compensation. Fifty percent of each Restricted Stock Award granted is subject to
time-based vesting criteria, and the remaining 50% of each Restricted Stock Award is subject to attainment of the
Performance Target for the applicable years. The time-vesting restricted stock granted to Non-Management Grantees will
vest in three installments on each of the first three anniversaries of June 1, 2017, subject to continued employment on the
applicable vesting dates. The performance-vesting restricted stock will vest in three equal installments on June 1 of each
of 2018, 2019 and 2020 (subject to the performance target being achieved). The Catch-Up Provision applies to the
performance vesting portion of this award. The Company has elected to recognize the compensation expense related to
the time-based vesting criteria of these Restricted Stock Awards for the entire award on a straight-line basis over the
requisite service period. As such, the compensation expense related to the February 18, 2017 Restricted Stock Awards to
Non-Management Grantees for time-based vesting shall be recognized 1/3 for the period February 18, 2017 through June
1, 2018, 1/3 for the period June 2, 2018 through June 1, 2019 and 1/3 for the period June 2, 2019 through June 1, 2020.
Accruals of compensation cost for an award with a performance condition shall be based on the probable outcome of that
performance condition. Therefore, compensation cost shall be accrued if it is probable that the performance condition
will be achieved and shall not be accrued if it is not probable that the performance condition will be achieved.
On March 3, 2017, a new member of the board of directors received a Restricted Stock Award with a grant date fair
value of $0.1 million, representing 5,130 shares of restricted Class A common stock, which will vest in three equal
installments on each of the first three anniversaries of the date of grant, subject to continued service on the board of
directors. Compensation expense for restricted stock subject to time-based vesting criteria granted to the director will be
expensed 1/3 each year, for three years on an annual basis following such grant.
On June 19, 2017, Restricted Stock Awards were granted to a Non-Management Grantee with an aggregate value of $0.3
million, which represents 21,307 shares of time-based restricted Class A common stock. One-third of this amount will
vest on the first anniversary date of the grant date and 1,775 shares will vest on each of October 1, 2018, December 31,
2018, April 1, 2019, July 1, 2019, September 30, 2019, December 31, 2019 and March 31, 2020. The remaining 1,780
shares of the grant will vest on July 1, 2020, subject to the Non-Management Grantee’s continued employment with the
Company. The Company has elected to recognize the compensation expense related to the time-based vesting criteria of
this Restricted Stock Award for the entire award on a straight-line basis over the requisite service period.
In connection with Mr. Mazzei’s retirement as President, Ladder Capital Finance LLC, a subsidiary of Ladder, and Mr.
Mazzei entered into a separation agreement, dated June 22, 2017 (the “Separation Agreement”). Pursuant to the
Separation Agreement, Mr. Mazzei was appointed as a Class III director of Ladder and, subject to certain exceptions, Mr.
Mazzei’s unvested stock and stock options will continue to vest as they would have had he continued to be employed
with Ladder as long as he continues to serve on the Board of Directors. Such unvested stock and stock options will not
be subject to the original retirement eligibility date provided for in his employment agreement. On June 22, 2017, in
connection with his appointment to the board of directors, Mr. Mazzei received a Restricted Stock Award with a grant
date fair value of $0.1 million, representing 5,346 shares of restricted Class A common stock, which will vest in three
equal installments on each of the first three anniversaries of the date of grant, subject to continued service on the board
of directors. Compensation expense for restricted stock subject to time-based vesting criteria granted to the director will
be expensed 1/3 each year, for three years on an annual basis following such grant.
192
2018 Annual Restricted Stock Awards
For 2017 performance, management received stock-based incentive equity. On December 21, 2017, Annual Restricted
Stock Awards were granted to Management Grantees with an aggregate value of $10.5 million which represents
768,205 shares of restricted Class A common stock in connection with 2017 compensation. In accordance with the Harris
Employment Agreement, Mr. Harris’ annual awards were fully vested at grant. For other Management Grantees, fifty
percent of each restricted stock award granted is subject to time-based vesting criteria, and the remaining 50% of each
restricted stock award is subject to attainment of the Performance Target for the applicable years. The time-vesting
restricted stock will vest in three installments on each of February 18, 2019, February 18, 2020 and February 18, 2021,
subject to continued employment on the applicable vesting dates and subject to the applicable Retirement Eligibility
Date. The performance-vesting restricted stock will vest in three equal installments upon the compensation committee’s
confirmation that the Company achieves the Performance Target for the years ended December 31, 2018, 2019 and 2020,
respectively. The Catch-Up Provision applies to the performance vesting portion of this award.
The Company has elected to recognize the compensation expense related to the time-based vesting of the Annual
Restricted Stock Awards for the entire award on a straight-line basis over the requisite service period for the entire
award. As such, the compensation expense related to the December 21, 2017 Annual Restricted Stock Awards to
Management Grantees shall be recognized as follows:
1. Compensation expense for stock granted to Brian Harris will be expensed immediately in accordance with the
Harris Retirement Eligibility Date.
2. Compensation expense for restricted stock subject to time-based vesting criteria granted to Pamela
McCormack will be expensed 1/3 each year, for three years, on an annual basis in advance of the McCormack
Retirement Eligibility Date.
3. Compensation expense for restricted stock subject to time-based vesting criteria granted to the Management
Grantees other than Mr. Harris and Ms. McCormack will be expensed 1/3 each year, for three years, on an
annual basis in advance of the Executive Retirement Eligibility Date.
Accruals of compensation cost for an award with a performance condition is accrued if it is probable that the
performance condition will be achieved and shall not be accrued if it is not probable that the performance condition will
be achieved.
Upon a change in control (as defined in the respective award agreements), all restricted stock awards will become fully
vested, if (1) the Management Grantee continues to be employed through the closing of the change in control or (2) after
the signing of definitive documentation related to the change in control, but prior to its closing, the Management
Grantee’s employment is terminated without cause or due to death or disability or the Management Grantee resigns for
Good Reason. The compensation committee retains the right, in its sole discretion, to provide for the accelerated vesting
(in whole or in part) of the restricted stock and option awards granted.
On December 21, 2017, Restricted Stock Awards were granted to certain non-management employees (each, a “Non-
Management Grantee”) with an aggregate value of $5.0 million which represents 369,328 shares of restricted Class A
common stock in connection with 2017 compensation. Fifty percent of each Restricted Stock Award granted is subject to
time-based vesting criteria, and the remaining 50% of each Restricted Stock Award is subject to attainment of the
Performance Target for the applicable years. The time-vesting restricted stock granted to Non-Management Grantees will
vest in three installments on February 18 of each of 2019, 2020 and 2021 subject to continued employment on the
applicable vesting dates. The performance-vesting restricted stock will vest in three equal installments upon the
compensation committee’s confirmation that the Company achieves the Performance Target for the years ended
December 31, 2018, 2019 and 2020, respectively. The Catch-Up Provision applies to the performance vesting portion of
this award. The Company has elected to recognize the compensation expense related to the time-based vesting criteria of
these Restricted Stock Awards for the entire award on a straight-line basis over the requisite service period. As such, the
compensation expense related to the December 21, 2017 Restricted Stock Awards to Non-Management Grantees shall be
recognized 1/3 for the period December 21, 2017 through February 18, 2019, 1/3 for the period February 19, 2019
through February 18, 2020 and 1/3 for the period February 19, 2020 through February 18, 2021.
193
In the event a Non-Management Grantee is terminated by the Company without cause within six months of certain
changes in control, all unvested time shares shall vest on the termination date and all unvested performance shares shall
remain outstanding and be eligible to vest (and be forfeited) in accordance with the performance conditions; provided
that if such change in control is for more than 50% of the shares of the Company, then all restricted stock awards will
become fully vested if the Non-Management Grantee continues to be employed through the closing of the change in
control.
Accruals of compensation cost for an award with a performance condition shall be based on the probable outcome of that
performance condition. Therefore, compensation cost shall be accrued if it is probable that the performance condition
will be achieved and shall not be accrued if it is not probable that the performance condition will be achieved.
Summary of Restricted Stock and Stock Option Expense and Shares/Options Nonvested/Outstanding
A summary of the grants is presented below ($ in thousands):
Year Ended December 31,
2017
2016
2015
Number
of Shares/
Options
Weighted
Average
Fair Value
Number
of Shares/
Options
Weighted
Average
Fair Value
Number
of Shares/
Options
Weighted
Average
Fair Value
Grants - Class A Common Stock (restricted)
1,996,594
$
27,489
793,598
$
Grants - Class A Common Stock (restricted) dividends
15,560
Stock Options
—
216
—
166,934
380,949
9,118
1,908
1,356
726,327
$
13,353
—
670,256
—
1,441
Amortization to compensation expense
LP Units compensation expense
Ladder compensation expense
—
(18,965)
—
(17,640)
(124)
(13,664)
Total amortization to compensation expense
$
(18,965)
$
(17,640)
$
(13,788)
The table below presents the number of unvested shares and outstanding stock options at December 31, 2017 and
changes during 2017 of the (i) Class A Common stock and Stock Options of Ladder Capital Corp granted under the 2014
Omnibus Incentive Plan:
Nonvested/Outstanding at December 31, 2016
Granted
Exercised
Vested
Forfeited
Expired
Restricted
Stock
Stock Options
1,475,865
2,012,154
(2,225,654)
(10,000)
982,135
—
—
—
—
Nonvested/Outstanding at December 31, 2017
1,252,365
982,135
Exercisable at December 31, 2017
752,017
At December 31, 2017 there was $14.5 million of total unrecognized compensation cost related to certain share-based
compensation awards that is expected to be recognized over a period of up to 38 months, with a weighted-average
remaining vesting period of 27.9 months.
194
The table below presents the number of unvested shares and outstanding stock options at December 31, 2016 and
changes during 2016 of the (i) Class A Common stock and Stock Options of Ladder Capital Corp granted under the 2014
Omnibus Incentive Plan and (ii) Series B Participating Preferred Units of LCFH granted under the 2008 Plan, which
were subsequently converted to LP Units of LCFH in connection with the IPO:
Restricted
Stock
Stock Options
LP Units(1)
Nonvested/Outstanding at December 31, 2015
Granted
Exercised
Vested
Forfeited
Expired
1,334,369
960,531
601,186
380,949
(770,568)
(48,467)
—
—
—
Nonvested/Outstanding at December 31, 2016
1,475,865
982,135
Exercisable at December 31, 2016
230,936
504
—
(504)
—
—
(1) Converted to LP Units of LCFH on February 11, 2014 in connection with IPO. LCFH LP Unitholders also received
an equal number of shares of Class B Common stock of the Company at IPO. The LP Units converted to an equal
number of Series REIT LP Units and Series TRS LP Units on December 31, 2014 in connection with the
Company’s conversion to a REIT.
As of December 31, 2016 there was $6.1 million of total unrecognized compensation cost related to certain share-based
compensation awards that is expected to be recognized over a period of up to 26 months, with a weighted-average
remaining vesting period of 19.3 months.
Phantom Equity Investment Plan
LCFH maintains a Phantom Equity Investment Plan, effective on June 30, 2011 (the “Phantom Equity Plan”) in which
certain eligible employees of LCFH, LCF and their subsidiaries participate. On July 3, 2014, the Board of Directors
froze the Phantom Equity Plan, as further described below. The Phantom Equity Plan is an annual deferred compensation
plan pursuant to which participants could elect, or in some cases, non-management participants could be required,
depending upon the participant’s specific level of compensation, to defer all or a portion of their annual cash
performance-based bonuses as elective or mandatory contributions. Generally, if a participant’s total compensation was
in excess of a certain threshold, a portion of such participant’s annual bonus, was required to be deferred into the
Phantom Equity Plan. Otherwise, amounts could be deferred into the Phantom Equity Plan at the election of the
participant, so long as such election was timely made in accordance with the terms and procedures of the Phantom
Equity Plan.
In the event that a participant elected to (or was required to) defer a portion of his or her compensation pursuant to the
Phantom Equity Plan, such amount was not paid to the participant and was instead credited to such participant’s notional
account under the Phantom Equity Plan. Prior to the closing of our IPO, such amounts were invested, on a phantom
basis, in the Series B Participating Preferred Units issued by LCFH until such amounts were eventually paid to the
participant pursuant to the Phantom Equity Plan. Following our IPO, as described below, such amounts were invested on
a phantom basis in shares of the Company’s Class A common stock. Mandatory contributions are subject to one-third
vesting over a three year period following the applicable Phantom Equity Plan year in which the related compensation
was earned. Elective contributions were immediately vested upon contribution. Unvested amounts are generally forfeited
upon the participant’s involuntary termination for cause, a voluntary termination for which the participant’s employer
would have grounds to terminate the participant for cause or a voluntary termination within one year of which the
participant obtains employment with a financial services organization.
195
The date that the amounts deferred into the Phantom Equity Plan are paid to a participant depends upon whether such
deferral is a mandatory deferral or an elective deferral. Elective deferrals are paid upon the earliest to occur of (1) a
change in control (as defined in the Phantom Equity Plan), (2) the end of the participant’s employment, or (3) December
31, 2017. The vested amounts of the mandatory contributions are paid upon the first to occur of (A) a change in control
and (B) the first to occur of (x) December 31, 2017 or (y) the date of payment of the annual bonus payments following
December 31 of the third calendar year following the applicable plan year to which the underlying deferred annual bonus
relates. The Company could elect to make, and did make, payments pursuant to the Phantom Equity Plan in the form of
cash in an amount equal to the then fair market value of such shares of the Company’s Class A common stock (or, prior
to our IPO, the Series B Participating Preferred Units), and on May 14, 2014, the Compensation Committee made a
global election to make all payments pursuant to the Phantom Equity Plan in the form of cash. Mandatory contributions
that were paid at the time specified in clause 2(B) above were made in cash.
Upon the closing of our IPO, each participant in the Phantom Equity Plan had his or her notional interest in LCFH’s
Series B Participating Preferred Units converted into a notional interest in the Company’s Class A common stock, which
notional conversion was based on the issuance price of our Class A common stock at the time of the IPO. On July 3,
2014, the board of directors froze the Phantom Equity Plan, effective as of such date, so that there will neither be future
participants in the Phantom Equity Plan nor additional amounts contributed to any accounts outstanding under the
Phantom Equity Plan. Amounts previously outstanding under the Phantom Equity Plan will be paid in accordance with
their original payment terms, including limiting payment to the dates and events specified above. In connection with
freezing the Phantom Equity Plan, the board of directors also updated the definition of fair market value for purposes of
measuring the value of its Class A Common Stock, to provide that, generally, such value would be the closing price of
such stock on the principal national securities exchange on which it is then traded.
As of December 31, 2017, there were 42,270 phantom units that have been withdrawn from the plan, resulting in a
liability of $1.0 million, which is included in accrued expenses on the consolidated balance sheets. As of December 31,
2016, there were 373,871 phantom units outstanding, all of which are vested, resulting in a liability of $6.1 million,
which is included in accrued expenses on the consolidated balance sheets.
Ladder Capital Corp Deferred Compensation Plan
On July 3, 2014, the Company adopted a new, nonqualified deferred compensation plan, which was amended and
restated on March 17, 2015 (the “2014 Deferred Compensation Plan”), in which certain eligible employees participate.
Pursuant to the 2014 Deferred Compensation Plan, participants may elect, or in some cases non-management
participants may be required, to defer all or a portion of their annual cash performance-based bonuses into the 2014
Deferred Compensation Plan. Generally, if a participant’s total compensation is in excess of a certain threshold, a
portion of a participant’s performance-based annual bonus is required to be deferred into the 2014 Deferred
Compensation Plan. Otherwise, a portion of the participant’s annual bonus may be deferred into the 2014 Deferred
Compensation Plan at the election of the participant, so long as such elections are timely made in accordance with the
terms and procedures of the 2014 Deferred Compensation Plan.
In the event that a participant elects to (or is required to) defer a portion of his or her compensation pursuant to the 2014
Deferred Compensation Plan, such amount is not paid to the participant and is instead credited to such participant’s
notional account under the 2014 Deferred Compensation Plan. Such amounts are then invested on a phantom basis in
Class A common stock of the Company, or the phantom units, and a participant’s account is credited with any dividends
or other distributions received by holders of Class A common stock of the Company, which are subject to the same
vesting and payment conditions as the applicable contributions. Elective contributions are immediately vested upon
contribution. Mandatory contributions are subject to one-third vesting over a three-year period on a straight-line basis
following the applicable year in which the related compensation was earned.
196
If a participant’s employment with the Company is terminated by the Company other than for cause and such termination
is within six months following a change in control (each, as defined in the 2014 Deferred Compensation Plan), then the
participant will fully vest in his or her unvested account balances. Furthermore, the unvested account balances will fully
vest in the event of the participant’s death, disability, retirement (as defined in the 2014 Deferred Compensation Plan) or
in the event of certain hostile takeovers of the board of directors of the Company. In the event that a participant’s
employment is terminated by the Company other than for cause, the participant will vest in the portion of the
participant’s account that would have vested had the participant remained employed through the end of the year in which
such termination occurs, subject to, in such case or in the case of retirement, the participant’s timely execution of a
general release of claims in favor of the Company. Unvested amounts are otherwise generally forfeited upon the
participant’s resignation or termination of employment, and vested mandatory contributions are generally forfeited upon
the participant’s termination for cause.
Amounts deferred into the 2014 Deferred Compensation Plan are paid upon the earliest to occur of (1) a change in
control, (2) within sixty days following the end of the participant’s employment with the Company, or (3) the date of
payment of the annual bonus payments following December 31 of the third calendar year following the applicable year
to which the underlying deferred annual compensation relates. Payment is made in cash equal to the fair market value of
the number of phantom units credited to a participant’s account, provided that, if the participant’s termination was by the
Company for cause or was a voluntary resignation other than on account of such participant’s retirement, the amount
paid is based on the lowest fair market value of a share of Class A common stock during the forty-five day period
following such termination of employment. The amount of the final cash payment may be more or less than the amount
initially deferred into the 2014 Deferred Compensation Plan, depending upon the change in the value of the Class A
common stock of the Company during such period.
As of December 31, 2017, there are 321,476 phantom units outstanding, of which 182,983 are unvested and 53,848
phantom units which have been withdrawn from the plan, resulting in a liability of $3.8 million, which is included in
accrued expenses on the consolidated balance sheets. As of December 31, 2016, there were 273,709 phantom units
outstanding, of which 134,281 are unvested, resulting in a liability of $3.6 million, which is included in accrued
expenses on the consolidated balance sheets.
Bonus Payments
On December 19, 2017, the board of directors of Ladder Capital Corp approved 2017 bonus payments to employees,
including officers, totaling $49.3 million, which included $15.5 million of equity based compensation, which was
granted on December 21, 2017. Cash bonuses of $17.1 million were paid on December 29, 2017. The remaining $16.8
million of cash bonuses were accrued for as of December 31, 2017 and paid to employees in full on January 5, 2018. On
February 8, 2017, the board of directors of Ladder Capital Corp approved 2016 bonus payments to employees, including
officers, totaling $39.5 million, which included $10.2 million of equity based compensation. The bonuses were accrued
for as of December 31, 2016 and paid to employees in full on February 21, 2017. During the years ended December 31,
2017, 2016 and 2015, the Company recorded compensation expense of $33.7 million, $29.2 million, and $34.4 million,
respectively, related to bonuses.
197
16. INCOME TAXES
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended, commencing with the taxable year ended December 31, 2015. As such, the Company’s income is generally not
subject to U.S. Federal, state and local corporate income taxes other than as described below.
Certain of the Company’s subsidiaries have elected to be treated as TRSs. TRSs permit the Company to participate in
certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are
conducted within the parameters of certain limitations established by the Code, and are conducted in entities which elect
to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, the Company will continue to
maintain its qualification as a REIT. The Company’s TRSs are not consolidated for U.S. federal income tax purposes, but
are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is
established for the portion of earnings recognized by the Company with respect to its interest in TRSs.
As part of the recently enacted Tax Cuts and Jobs Act, the federal income tax rate applicable to TRS activities has been
reduced. The Company has adjusted its deferred tax positions at the TRSs (including those resulting from the TRA) to
reflect the reduced tax rate as part of its 2017 tax provision.
Components of the provision for income taxes consist of the following ($ in thousands):
Year Ended December 31,
2017
2016
2015
Current expense (benefit)
U.S. Federal
State and local
Total current expense (benefit)
Deferred expense (benefit)
U.S. Federal
State and local
$
1,845
$
276
2,121
4,632
959
5,591
7,712
$
(386) $
4,838
4,452
1,417
451
1,868
6,320
$
9,020
2,637
11,657
2,247
653
2,900
14,557
Total deferred expense (benefit)
Provision for income tax expense (benefit)
$
There were $2.6 million, corporate taxes payable (receivable) as of December 31, 2017. Corporate taxes payable
(receivable) as of December 31, 2016 were $0.8 million. There were $0.5 million NYC UBT taxes payable (receivable)
at December 31, 2017. NYC UBT taxes payable (receivable) at December 31, 2016 were $0.4 million. Prepaid corporate
taxes as of December 31, 2017 and December 31, 2016 were $12.4 million and $13.4 million, respectively.
198
A reconciliation between the U.S. federal statutory income tax rate and the effective tax rate for the years ended
December 31, 2017, 2016 and 2015 is as follows:
US statutory tax rate
REIT income not subject to corporate income tax
Increase due to state and local taxes
Deferred tax asset write-off upon conversion to REIT
Change in valuation allowance
Impact of Tax Cuts and Jobs Act
Other
Effective income tax rate
Year Ended December 31,
2017
2016
2015
35.00 %
(29.53)%
0.74 %
— %
2.13 %
(2.53)%
(0.04)%
5.77 %
35.00 %
(34.38)%
4.41 % (1)
— %
0.42 %
— %
(0.19)%
5.26 %
35.00 %
(32.37)%
1.40 %
1.44 %
3.29 %
— %
0.39 %
9.15 %
(1) The increase in state taxes shown above is primarily related to additional tax expense of $3.3 million pertaining to a
New York State tax audit, further discussed below.
The differences between the Company’s statutory rate and effective tax rate are largely determined by the amount of
income subject to tax by the Company’s TRS subsidiaries. The Company expects that its future effective tax rate will be
determined in a similar manner.
As of December 31, 2017 and 2016, the Company’s net deferred tax assets (liabilities) were $(5.7) million and $2.1
million, respectively, and are included in other assets (liabilities) in the Company’s consolidated balance sheets. The
Company believes it is more likely than not that the net deferred tax assets will be realized in the future. Realization of
the net deferred tax assets (liabilities) is dependent upon our generation of sufficient taxable income in future years in
appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences. The amount of net deferred tax
assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.
The components of the Company’s deferred tax assets and liabilities are as follows ($ in thousands):
Deferred Tax Assets
Basis difference in operating partnerships
Unrealized gains (losses)
Unrealized gains (losses) - derivatives
Valuation allowance
Total Deferred Tax Assets
Deferred Tax Liability
Basis difference in operating partnerships
Unrealized gains (losses)
Unrealized gains (losses) - derivatives
Valuation allowance
Total Deferred Tax Liability
199
December 31, 2017
December 31, 2016
$
$
— $
1,461
5,781
(5,781)
1,461
$
2,023
99
5,668
(5,668)
2,122
December 31, 2017
December 31, 2016
$
$
7,134
$
—
—
—
7,134
$
—
—
—
—
—
As of December 31, 2017 and 2016, the Company has a deferred tax asset of $5.8 million and $5.7 million, respectively,
relating to capital losses which it may only use to offset capital gains. These tax attributes will expire if unused in 2020.
As the realization of these assets are not more likely than not before their expiration, the Company has provided a full
valuation allowance against this deferred tax asset.
The Company’s tax returns are subject to audit by taxing authorities. Generally, as of December 31, 2017, the tax years
2013, 2014, 2015 and 2016 remain open to examination by the major taxing jurisdictions in which the Company is
subject to taxes. The Company acquired certain corporate entities at the time of its IPO. The related acquisition
agreements provided an indemnification to the Company by the transferor of any amounts due for any potential tax
liabilities owed by these entities for tax years prior to their acquisition. During the three months ended September 30,
2016, management proposed a settlement pertaining to a New York State tax audit for these corporate entities for the
years 2010-2012 (which are now wholly owned). As a result of the settlement, management recorded income tax
expense in the amount of $3.3 million and a corresponding payable to the State of New York. The settlement was
finalized during the three months ended December 31, 2016. Pursuant to the indemnification, Management expected to
recover such amounts and, accordingly, recorded fee and other income in the amount of $3.3 million as well as a
corresponding receivable from the indemnity counterparties. As of January, 31, 2017, the Company had recovered all
amounts owed by the indemnity counterparties related to the 2010-2012 audit. The IRS and New York State have
recently begun routine audits of the Company’s U.S. federal and state income tax returns for tax year 2014 and
2013-2015 respectively. The Company does not expect the audits to result in any material changes to the Company’s
financial position. The Company does not expect tax expense to have an impact on either short or long-term liquidity or
capital needs.
Under U.S. GAAP, a tax benefit related to an income tax position may be recognized when it is more likely than not that
the position will be sustained upon examination by the tax authorities based on the technical merits of the position. A
position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized
upon settlement. As of December 31, 2017 and 2016, the Company’s unrecognized tax benefit is a liability for $0.8
million and is included in the accrued expenses in the Company’s consolidated balance sheets. This unrecognized tax
benefit, if recognized, would have a favorable impact on our effective income tax rate in future periods. As of
December 31, 2017, the Company has not recognized a significant amount of any interest or penalties related to
uncertain tax positions. In addition, the Company does not believe that it has any tax positions for which it is reasonably
possible that it will be required to record a significant liability for unrecognized tax benefits within the next twelve
months.
Tax Receivable Agreement
Upon consummation of the IPO, the Company entered into a Tax Receivable Agreement with the Continuing LCFH
Limited Partners. Under the Tax Receivable Agreement the Company generally is required to pay to those Continuing
LCFH Limited Partners that exchange their interests in LCFH and Class B shares of the Company for Class A shares of
the Company, 85% of the applicable cash savings, if any, in U.S. federal, state and local income tax that the Company
realizes (or is deemed to realize in certain circumstances) as a result of (i) the increase in tax basis in its proportionate
share of LCFH’s assets that is attributable to the Company as a result of the exchanges and (ii) payments under the Tax
Receivable Agreement, including any tax benefits related to imputed interest deemed to be paid by the Company as a
result of such agreement. The Company may make future payments under the Tax Receivable Agreement if the tax
benefits are realized. We would then benefit from the remaining 15% of cash savings in income tax that we realize. For
purposes of the Tax Receivable Agreement, cash savings in income tax will be computed by comparing our actual
income tax liability to the amount of such taxes that we would have been required to pay had there been no increase to
the tax basis of the assets of LCFH as a result of the exchanges and had we not entered into the Tax Receivable
Agreement.
Payments to a Continuing LCFH Limited Partner under the Tax Receivable Agreement are triggered by each exchange
and are payable annually commencing following the Company’s filing of its income tax return for the year of such
exchange. The timing of the payments may be subject to certain contingencies, including the Company having sufficient
taxable income to utilize all of the tax benefits defined in the Tax Receivable Agreement.
200
As of December 31, 2017 and 2016, pursuant to the Tax Receivable Agreement, the Company recorded a liability of $1.7
million and $2.5 million, respectively, included in amount payable pursuant to tax receivable agreement in the
consolidated balance sheets for Continuing LCFH Limited Partners. The amount and timing of any payments may vary
based on a number of factors, including the absence of any material change in the relevant tax law, the Company
continuing to earn sufficient taxable income to realize all tax benefits, and assuming no additional exchanges that are
subject to the Tax Receivable Agreement. Depending upon the outcome of these factors, the Company may be obligated
to make substantial payments pursuant to the Tax Receivable Agreement. The actual payment amounts may differ from
these estimated amounts, as the liability will reflect changes in prevailing tax rates, the actual benefit the Company
realizes on its annual income tax returns, and any additional exchanges.
To determine the current amount of the payments due, the Company estimates the amount of the Tax Receivable
Agreement payments that will be made within twelve months of the balance sheet date. As described in Note 1 above,
the Tax Receivable Agreement was amended and restated in connection with our REIT Election, effective as of
December 31, 2014, in order to preserve a portion of the potential tax benefits currently existing under the Tax
Receivable Agreement that would otherwise be reduced in connection with our REIT Election. The purpose of the TRA
Amendment was to preserve the benefits of the Tax Receivable Agreement to the extent possible in a REIT, although, as
a result, the amount of payments made to the TRA Members under the TRA Amendment is expected to be less than the
amount that would have been paid under the original Tax Receivable Agreement. The TRA Amendment continues to
share such benefits in the same proportions and otherwise has substantially the same terms and provisions as the prior
Tax Receivable Agreement.
17. RELATED PARTY TRANSACTIONS
Ladder Select Bond Fund
On October 18, 2016, Ladder Capital Asset Management LLC (“LCAM”), a subsidiary of the Company and a registered
investment adviser, launched the Ladder Select Bond Fund (the “Fund”), a mutual fund. In addition, on October 18,
2016, the Company made a $10.0 million investment in the Fund, which is included in other assets in the consolidated
balance sheets. As of December 31, 2017, members of senior management have $0.9 million invested in the Fund.
LCAM earns a 0.75% fee on assets under management, which may be reduced for expenses incurred in excess of the
Fund’s expense cap of 0.95%.
Stockholders Agreement
On March 3, 2017, Ladder, RREF II Ladder LLC, an entity affiliated with The Related Companies, and certain pre-IPO
stockholders of Ladder, including affiliates of TowerBrook Capital Partners, L.P. and GI Partners L.P., closed a purchase
by Related of $80.0 million of Ladder’s Class A common stock from the pre-IPO stockholders. As part of the closing of
the transaction, Ladder and Related entered into a Stockholders Agreement, dated as of March 3, 2017, pursuant to
which Jonathan Bilzin resigned from the Board, and all committees thereof, and Ladder appointed Richard O’Toole to
replace Mr. Bilzin as a Class II Director on Ladder’s Board, each effective as of March 3, 2017. Pursuant to the
Stockholders Agreement, Ladder granted to Related a right of first offer with respect to certain horizontal risk retention
investments in which Ladder intends to retain an interest and Related agreed to certain standstill provisions.
Commercial Real Estate Loans
From time to time, the Company may provide commercial real estate loans to entities affiliated with certain of our
directors, officers or large shareholders who are, as part of their ordinary course of business, commercial real estate
investors. These loans are made in the ordinary course of the Company’s business on the same terms and conditions as
would be offered to any other borrower of similar type and standing on a similar property.
201
On May 20, 2015, the Company provided a $25.0 million, 9.0% fixed rate, approximately one year, interest-only
mezzanine loan, to Halletts Investors LLC (“Borrower”), an entity affiliated with Douglas Durst, one of the Company’s
directors and chairman of The Durst Organization. The loan, which was approved by the Audit Committee and Risk and
Underwriting Committee in accordance with the Company’s policies regarding related party transactions, was secured
by Borrower’s ownership interest in Durst Halletts Member LLC (“Guarantor”). Borrower and Guarantor indirectly own
a controlling interest in the three entities that collectively own approximately 9.66 acres of undeveloped land located
along the East River waterfront on Hallets Point Peninsula in Astoria Queens, New York. Douglas Durst and members of
his family, including trusts for which Douglas Durst is a trustee, have a controlling interest in Borrower and Guarantor.
The loan matured on and was repaid in full as of June 3, 2016. For the years ended December 31, 2016 and
December 31, 2015, the Company earned $1.0 million and $1.4 million, respectively, in interest income related to this
loan.
On March 13, 2017, Related Reserve IV LLC, an affiliate of Related Fund Management LLC (the “B Participation
Holder”), purchased a $4.0 million subordinate participation interest (the “B Participation Interest”) in the up to $136.5
million mortgage loan (the “Loan”) secured by the Conrad hotels and condominiums in Fort Lauderdale, Florida from a
subsidiary of the Company. The B Participation Interest earns interest at an annual rate of 17%, with the Company’s
participation interest (the “A Participation Interest”) receiving the balance of all interest paid under the Loan. Upon an
event of default under the Loan, all receipts will be applied to the payment of interest and principal on the Company’s
share of the principal balance before the B Participation Holder receives any sums. The Company retains all control over
the administration and servicing of the whole loan, except that upon the occurrence of certain Loan defaults and other
events, the B Participation Holder will have the option to trigger a buy-sell option, whereupon the Company shall have
the right to either repurchase the B Participation Interest at par or sell the A Participation Interest to the B Participation
Holder at par plus exit fees that would have been payable upon a borrower repayment. Because the participation interest
was not pari passu and effective control continued to reside with the retained portions of the loans the transfers of any
portion of this loan asset is considered a non-recourse secured borrowing in which the full loan asset remains on the
Company’s consolidated balance sheets in mortgage loan receivables held for investment, net, at amortized cost and the
sale proceeds are reported as debt obligations. For the year ended December 31, 2017, the Company incurred $0.5
million in interest expense related to this loan which is included in accrued expenses on the Company’s consolidated
balance sheets.
On July 6, 2017, Ladder provided a $21.0 million first mortgage loan to a borrower affiliated with The Related
Companies to facilitate the acquisition of two commercial condominium units in the Brickell Heights mixed use
development in Miami, Florida. The borrowing entity, Brickell Heights Commercial LLC, is 80% owned by a joint
venture between Related Special Assets LLC, a personal investment vehicle for certain principals of The Related
Companies, and another investor, with the remaining 20% interest belonging to an affiliate of The Related Group of
Florida. For the year ended December 31, 2017, the Company earned $0.3 million in interest income related to this loan.
18. COMMITMENTS AND CONTINGENCIES
Leases
In 2011, the Company entered into a lease for its primary office space, which commenced on October 1, 2011 and
expires on January 31, 2022 with no extension option. In 2012, the Company entered into a lease for secondary office
space. The lease commenced on May 15, 2012 and would have expired on May 14, 2015 with no extension option. This
lease was amended, however, on October 2, 2014, extending the expiration date from May 14, 2015 to May 14, 2018.
The Company recorded $1.1 million, $1.2 million and $1.5 million, of rental expense for the years ended December 31,
2017, 2016 and 2015, respectively, which is included in operating expenses in the consolidated statements of income.
202
The following is a schedule of future minimum rental payments required under the above operating leases ($ in
thousands):
Period Ending December 31,
Amount
2018
2019
2020
2021
2022
Thereafter
Total
$
$
1,205
1,180
1,180
1,180
100
—
4,845
Unfunded Loan Commitments
As of December 31, 2017, the Company’s off-balance sheet arrangements consisted of $157.0 million of unfunded
commitments on mortgage loan receivables held for investment to provide additional first mortgage loan financing, at
rates to be determined at the time of funding, which consisted of $157.0 million to provide additional first mortgage loan
financing. As of December 31, 2016, the Company’s off-balance sheet arrangements consisted of $147.7 million of
unfunded commitments of mortgage loan receivables held for investment, at rates to be determined at the time of
funding, which was composed of $146.3 million to provide additional first mortgage loan financing and $1.4 million to
provide additional mezzanine loan financing. Such commitments are subject to our loan borrowers’ satisfaction of
certain financial and nonfinancial covenants and may or may not be funded depending on a variety of circumstances
including timing, credit metric hurdles, and other nonfinancial events occurring. These commitments are not reflected on
the consolidated balance sheets.
Hurricanes Harvey, Irma and Maria
During 2017, Hurricanes Harvey, Irma and Maria inflicted damage on certain of the properties owned by the Company
or securing loans held by the Company with carrying amounts of $13.0 million, $291.3 million and $23.8 million,
respectively, as of December 31, 2017. The damage to individual properties owned by the Company was not significant
and all properties are open and operating. The Company has insurance coverage on the properties it owns and expects to
fully recover amounts for necessary repairs in excess of its deductibles. The Company’s loan agreements require
adequate insurance to be maintained by the respective borrowers. The Company understands that the damages to the
affected collateral underlying the Company’s mortgage loans were not significant and that all properties are open and
operating. Accordingly, the Company does not believe it is exposed to any additional loan losses as a result of each
hurricane’s impact on its borrowers and the underlying property collateral.
203
19. SEGMENT REPORTING
The Company has determined that it has three reportable segments based on how the chief operating decision maker
reviews and manages the business. These reportable segments include loans, securities, and real estate. The loans
segment includes mortgage loan receivables held for investment (balance sheet loans) and mortgage loan receivables
held for sale (conduit loans). The securities segment is composed of all of the Company’s activities related to
commercial real estate securities, which include investments in CMBS and U.S. Agency Securities. The real estate
segment includes net leased properties, office buildings, a mobile home community, a warehouse, a shopping center and
condominium units. Corporate/other includes the Company’s investments in joint ventures, other asset management
activities and operating expenses.
The Company evaluates performance based on the following financial measures for each segment ($ in thousands):
Loans
Securities
Real
Estate(1)
Corporate/
Other(2)
Company
Total
Year ended December 31, 2017
Interest income
Interest expense
Net interest income (expense)
Provision for loan losses
$ 219,892
$
(39,530)
180,362
—
$
43,542
(5,800)
37,742
—
$
15
(28,679)
(28,664)
—
218
(72,109)
(71,891)
—
$ 263,667
(146,118)
117,549
—
Net interest income (expense) after provision for
loan losses
180,362
37,742
(28,664)
(71,891)
117,549
Operating lease income
Tenant recoveries
Sale of loans, net
Realized gain on securities
Unrealized gain (loss) on Agency interest-only
securities
Realized gain (loss) on sale of real estate, net
Fee and other income
Net result from derivative transactions
Earnings from investment in unconsolidated
joint ventures
Gain (loss) on extinguishment of debt
—
—
54,046
—
—
—
6,859
(8,425)
—
(19)
—
—
—
17,209
1,405
—
—
(4,216)
—
—
89,492
7,179
—
—
—
11,423
7,865
—
89
—
Total other income (expense)
52,461
14,398
116,048
Salaries and employee benefits
Operating expenses
Real estate operating expenses
Fee expense
Depreciation and amortization
Total costs and expenses
—
302
—
(3,649)
—
(3,347)
—
—
—
(280)
—
(280)
—
—
(33,216)
(1,067)
(40,239)
(74,522)
—
—
—
—
—
—
3,617
—
—
(54)
3,563
(70,463)
(21,723)
—
(93)
(92,279)
89,492
7,179
54,046
17,209
1,405
11,423
18,341
(12,641)
89
(73)
186,470
(70,463)
(21,421)
(33,216)
(4,996)
(40,332)
(170,428)
Tax (expense) benefit
Segment profit (loss)
—
$ 229,476
$
—
51,860
$
—
12,862
(7,712)
(7,712)
$ (168,319) $ 125,879
Total assets as of December 31, 2017
$ 3,508,642
$ 1,106,517
$ 1,067,482
$ 342,974
$ 6,025,615
204
Loans
Securities
Real
Estate(1)
Corporate/
Other(2)
Company
Total
Year ended December 31, 2016
Interest income
Interest expense
Net interest income (expense)
Provision for loan losses
$ 161,315
$
(25,531)
135,784
(300)
$
74,987
(9,740)
65,247
—
$
10
(25,333)
(25,323)
—
60
(60,223)
(60,163)
—
$ 236,372
(120,827)
115,545
(300)
Net interest income (expense) after provision for
loan losses
135,484
65,247
(25,323)
(60,163)
115,245
Operating lease income
Tenant recoveries
Sale of loans, net
Realized gain on securities
Unrealized gain (loss) on Agency interest-only
securities
Realized gain on sale of real estate, net
Fee and other income
Net result from derivative transactions
Earnings from investment in unconsolidated
joint ventures
Loss on extinguishment of debt
Total other income
Salaries and employee benefits
Operating expenses
Real estate operating expenses
Fee expense
Depreciation and amortization
Total costs and expenses
—
—
26,009
—
—
—
7,547
8,371
—
—
41,927
(11,000)
—
—
(2,343)
—
(13,343)
—
—
—
7,724
(56)
—
—
(9,780)
—
—
(2,112)
—
—
—
(166)
—
(166)
77,277
5,958
—
—
—
20,636
7,253
—
(466)
—
—
—
—
—
—
—
6,565
—
892
5,382
77,277
5,958
26,009
7,724
(56)
20,636
21,365
(1,409)
426
5,382
110,658
12,839
163,312
—
—
(30,545)
(618)
(39,354)
(70,517)
(53,270)
(20,552)
—
(576)
(93)
(74,491)
(64,270)
(20,552)
(30,545)
(3,703)
(39,447)
(158,517)
Income tax (expense) benefit
Segment profit (loss)
—
$ 164,068
$
—
62,969
$
—
14,818
(6,320)
(6,320)
$ (128,135) $ 113,720
Total assets as of December 31, 2016
$ 2,353,977
$ 2,100,947
$ 856,363
$ 267,050
$ 5,578,337
205
Loans
Securities
Real
Estate(1)
Corporate/
Other(2)
Company
Total
Year ended December 31, 2015
Interest income
Interest expense
Net interest income (expense)
Provision for loan losses
$ 165,403
$
(24,039)
141,364
(600)
76,083
(7,256)
68,827
—
$
— $
(23,873)
(23,873)
—
53
(58,135)
(58,082)
—
$ 241,539
(113,303)
128,236
(600)
Net interest income (expense) after provision for
loan losses
140,764
68,827
(23,873)
(58,082)
127,636
Operating lease income
Tenant recoveries
Sale of loans, net
Gain on securities
Unrealized gain (loss) on Agency interest-only
securities
Sale of real estate, net
Fee and other income
Net result from derivative transactions
Earnings from investment in unconsolidated
joint ventures
Total other income
Salaries and employee benefits
Operating expenses
Real estate operating expenses
Fee expense
Depreciation and amortization
Total costs and expenses
—
—
71,066
—
—
2,346
5,999
(12,609)
—
66,802
(16,531)
381
—
(1,693)
—
(17,843)
—
—
—
24,007
(1,249)
—
230
(26,328)
—
(3,340)
—
—
—
(40)
—
(40)
80,465
9,907
—
—
—
38,040
5,989
—
255
134,656
—
—
(37,868)
(470)
(38,953)
(77,291)
—
—
—
—
—
—
2,987
—
116
3,103
(45,081)
(25,484)
(1)
(2,318)
(108)
(72,992)
80,465
9,907
71,066
24,007
(1,249)
40,386
15,205
(38,937)
371
201,221
(61,612)
(25,103)
(37,869)
(4,521)
(39,061)
(168,166)
Tax (expense) benefit
Segment profit (loss)
—
$ 189,723
$
—
65,447
$
—
33,492
(14,557)
(14,557)
$ (142,528) $ 146,134
Total assets as of December 31, 2015
$ 2,310,409
$ 2,407,217
$ 868,528
$ 309,058
$ 5,895,212
(1)
(2)
Includes the Company’s investment in unconsolidated joint ventures that held real estate of $35.4 million and
$34.0 million as of December 31, 2017 and 2016, respectively.
Corporate/Other represents all corporate level and unallocated items including any intercompany eliminations
necessary to reconcile to consolidated Company totals. This caption also includes the Company’s investment in
unconsolidated joint ventures and strategic investments that are not related to the other reportable segments
above, including the Company’s investment in FHLB stock of $77.9 million as of December 31, 2017 and 2016,
the Company’s deferred tax asset (liability) of $(5.7) million and $2.1 million as of December 31, 2017 and 2016,
respectively and the Company’s senior unsecured notes of $1.2 billion and $559.8 million as of December 31,
2017 and 2016, respectively.
206
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
As more fully discussed in Notes 2 and 4, in the fourth quarter of 2017, the Company changed its method of accounting
for transfers of commercial mortgage loans to securitization trusts that issue risk retention securities to a TPP in
accordance with the Dodd-Frank Act. In accordance with generally accepted accounting principles, the Company
reflected this change in accounting principle retrospectively to prior interim periods within 2017. The tables below
present selected financial information “as adjusted for the impact of change in accounting principle” for all periods and
“as historically reported” for the three month periods ended June 30, 2017 and September 30, 2017 previously presented.
The following summarizes the consolidated quarterly financial information for the Company ($ in thousands except per
share and dividend amounts):
Q4 2017
Q3 2017
Q2 2017
Q1 2017(1)
(as adjusted for the impact of change in accounting principle)
Interest income
$
73,352
$
66,833
$
65,970
$
31,795
69,436
52,804
48,427
3,057
45,370
29,348
39,141
39,244
29,245
(576)
29,821
30,309
47,475
40,120
37,664
6,606
31,058
57,512
26,097
30,418
38,260
18,255
(1,375)
19,630
(92)
265
(77)
(322)
(9,172)
(6,499)
(8,868)
(5,838)
36,106
$
23,587
$
22,113
$
13,470
0.41
0.40
0.315
$
$
$
0.28
0.28
0.300
$
$
$
0.28
0.26
0.300
$
$
$
0.18
0.18
0.300
Net interest income after provision for loan losses
Other income (loss)
Costs and expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Net (income) loss attributable to noncontrolling
interest in consolidated joint ventures
Net (income) loss attributable to noncontrolling
interest in operating partnership
Net income (loss) attributable to Class A common
shareholders
Earnings per share:
Basic
Diluted
Dividends per share of common stock
$
$
$
$
207
Q4 2016(2)
Q3 2016
Q2 2016
Q1 2016(2)
(as historically reported - no adjustments)
Interest income
$
60,721
$
60,284
$
55,766
$
59,601
Net interest income after provision for loan losses
Other income (loss)
Costs and expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Net (income) loss attributable to noncontrolling
interest in consolidated joint ventures
Net (income) loss attributable to predecessor
unitholders
Net (income) loss attributable to noncontrolling
interest in operating partnership
Net income (loss) attributable to Class A common
shareholders
Earnings per share:
Basic
Diluted
Dividends per share of common stock
$
$
$
$
28,517
89,212
45,335
72,394
773
71,621
(298)
—
29,599
69,335
40,615
58,319
8,721
49,598
439
—
27,214
11,835
37,405
1,644
(2,301)
3,945
(235)
—
29,915
(7,070)
35,162
(12,317)
(873)
(11,444)
232
—
(29,467)
(22,429)
(908)
5,673
41,856
$
27,608
$
2,802
$
(5,539)
0.64
0.63
0.460
$
$
$
0.44
0.44
0.275
$
$
$
0.05
0.05
0.275
$
$
$
(0.09)
(0.09)
0.275
(1)
(2)
See Note 2. Significant Accounting Policies, “Out-of-Period Adjustments” for out-of-period adjustments included
in the three month periods ended March 31, 2017.
See Note 2. Significant Accounting Policies, “Out-of-Period Adjustments” for out-of-period adjustments included
in the three month periods ended March 31, 2016 and December 31, 2016.
Interest income
Net interest income after provision for loan losses
Other income (loss)
Costs and expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Net (income) loss attributable to noncontrolling
interest in consolidated joint ventures
Net (income) loss attributable to noncontrolling
interest in operating partnership
Net income (loss) attributable to Class A common
shareholders
Earnings per share:
Basic
Diluted
Dividends per share of common stock
208
Q3 2017
Q2 2017
(as historically reported)
$
72,763
$
30,156
39,141
39,244
30,053
(400)
30,453
66,136
30,532
21,571
40,120
11,983
(1,449)
13,432
265
(77)
(6,679)
(2,693)
24,039
$
10,662
0.28
0.28
0.300
$
$
$
0.13
0.13
0.300
$
$
$
$
21. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the issuance date of the financial statements and determined that
no disclosure is necessary.
209
Schedule III-Real Estate and Accumulated Depreciation
Ladder Capital Corp
December 31, 2017
($ in thousands)
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
2
1
0
Real Estate:
Retail Property in
Rockford, MN
Retail Property in
Winterset, IA
Retail Property in
Kawkawlin, MI
Retail Property in
Aroma Park, IL
Retail Property in
East Peoria, IL
Retail Property in
Milford, IA
Retail Property in
Jefferson City, MO
Retail Property in
Denver, IA
Retail Property in
Port O'Connor, TX
Retail Property in
Wabasha, MN
Office in
Jacksonville, FL
Retail Property in
Shelbyville, IL
Retail Property in
Jesup, IA
Retail Property in
Hanna City, IL
Retail Property in
Ridgedale, MO
Retail Property in
Peoria, IL
Retail Property in
Carmi, IL
Retail Property in
Springfield, IL
Retail Property in
Fayetteville, NC
$
—
—
—
950
1,020
989
954
908
959
974
$
187
$
850
$
206
$
— $
187
$
850
$
206
$
1,243
$
(2)
12/08/17
2017
15-30yrs
272
242
223
233
254
164
198
167
237
830
871
869
998
883
966
840
937
912
200
179
165
161
217
205
191
200
214
—
—
—
—
—
—
—
—
—
272
242
223
233
254
164
198
167
237
830
871
869
998
883
966
840
937
912
200
179
165
161
217
205
191
200
214
1,302
1,292
1,257
1,392
1,354
1,335
1,229
1,304
1,363
(2)
12/08/17
2017
15-35yrs
(9)
10/05/17
2017
15-30yrs
(8)
10/05/17
2017
15-35yrs
(9)
10/05/17
2017
15-40yrs
(11)
09/08/17
2017
15-40yrs
(20)
06/02/17
2016
15-40yrs
(20)
05/31/17
2017
15-35yrs
(22)
05/25/17
2017
15-35yrs
(24)
05/25/17
2016
15-35yrs
83,516
13,290
106,601
21,361
102
13,290
106,702
21,363
141,355
(2,792)
05/23/17
1989
9-36yrs
872
893
874
1,002
913
1,111
1,011
4,933
189
119
174
250
209
286
391
849
890
925
928
933
916
784
199
191
132
187
133
239
231
1,379
3,121
2,471
—
—
—
—
—
—
—
—
189
119
174
250
209
286
393
849
890
925
928
933
916
789
198
191
131
187
131
238
224
1,236
1,200
1,230
1,365
1,273
1,440
1,406
(19)
05/23/17
2016
15-40yrs
(23)
05/05/17
2017
15-35yrs
(24)
04/11/17
2016
14-39yrs
(28)
03/09/17
2016
15-40yrs
(31)
02/06/17
2016
14-35yrs
(30)
02/03/17
2016
15-40yrs
(33)
11/16/16
2016
15-40yrs
1,379
3,121
2,471
6,971
(268)
11/15/16
2008
12-37yrs
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
2
1
1
Retail Property in
Dryden Township,
MI
Retail Property in
Lamar, MO
Retail Property in
Union, MO
Retail Property in
Pawnee, IL
Retail Property in
Linn, MO
Retail Property in
Cape Girardeau,
MO
Retail Property in
Decatur-Pershing,
IL
Retail Property in
Rantoul, IL
Retail Property in
Flora Vista, NM
Retail Property in
Mountain Grove,
MO
Retail Property in
Decatur-Sunnyside,
IL
Retail Property in
Champaign, IL
Retail Property in
San Antonio, TX
Retail Property in
Borger, TX
Retail Property in
Dimmitt, TX
Retail Property in
St. Charles, MN
Retail Property in
Philo, IL
Retail Property in
Radford, VA
Retail Property in
Rural Retreat, VA
Retail Property in
Albion, PA
920
910
954
954
868
178
164
267
249
89
893
903
867
775
920
1,018
453
702
1,061
932
1,010
990
946
1,026
887
784
1,048
961
924
1,137
1,044
1,132
395
100
272
924
1,023
864
163
1,026
182
365
252
68
86
200
160
411
328
100
954
915
703
800
1,077
843
889
896
811
1,033
209
170
207
205
183
217
155
178
198
212
138
149
194
180
233
226
188
256
260
392
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
178
164
267
249
89
899
903
867
775
920
203
170
207
205
183
1,280
1,237
1,341
1,229
1,192
(38)
10/26/16
2016
15-40yrs
(45)
07/22/16
2016
15-40yrs
(50)
07/01/16
2016
15-40yrs
(45)
07/01/16
2016
15-40yrs
(49)
06/30/16
2016
15-40yrs
453
702
217
1,372
(43)
06/30/16
2016
15-40yrs
395
100
272
924
1,023
864
155
178
198
1,474
1,301
1,334
(49)
06/30/16
2016
15-40yrs
(51)
06/21/16
2016
15-40yrs
(62)
06/06/16
2016
15-35yrs
163
1,026
212
1,401
(58)
06/03/16
2016
15-40yrs
182
365
251
68
85
200
160
411
328
100
954
915
702
800
1,074
843
889
896
811
1,033
138
149
196
180
237
226
188
256
260
392
1,274
1,429
1,149
1,048
1,396
1,269
1,237
1,563
1,399
1,525
(51)
06/03/16
2016
15-40yrs
(48)
06/03/16
2016
15-40yrs
(51)
05/06/16
2015
15-35yrs
(50)
05/06/16
2016
15-40yrs
(67)
04/26/16
2016
15-40yrs
(66)
04/26/16
2016
15-30yrs
(50)
04/26/16
2016
15-40yrs
(84)
12/23/15
2015
15-40yrs
(73)
12/23/15
2015
15-40yrs
(124)
12/23/15
2015
14-50yrs
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
2
1
2
Retail Property in
Mount Vernon, AL
Retail Property in
Malone, NY
Retail Property in
Mercedes, TX
Retail Property in
Gordonville, MO
Retail Property in
Rice, MN
Retail Property in
Bixby, OK
Retail Property in
Farmington, IL
Retail Property in
Grove, OK
Retail Property in
Jenks, OK
Retail Property in
Bloomington, IL
Retail Property in
Montrose, MN
Retail Property in
Lincoln County ,
MO
Retail Property in
Wilmington, IL
Retail Property in
Danville, IL
Retail Property in
Moultrie, GA
Retail Property in
Rose Hill, NC
Retail Property in
Rockingham, NC
Retail Property in
Biscoe, NC
Retail Property in
De Soto, IA
Retail Property in
Kerrville, TX
Retail Property in
Floresville, TX
Retail Property in
Minot, ND
949
1,087
838
774
820
187
183
257
247
200
876
1,154
874
787
859
174
137
132
172
183
7,984
2,609
7,776
1,765
96
1,161
402
4,364
150
816
2,617
8,694
2,107
173
149
149
161
158
170
245
73
147
139
186
268
984
876
800
1,078
870
962
972
922
905
796
849
828
137
168
187
160
132
173
204
163
164
176
200
216
618
4,701
1,856
4,472
899
3,639
8,834
820
787
741
906
742
933
1,004
824
863
706
769
815
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
187
183
257
247
200
876
1,154
874
787
859
174
137
132
172
183
1,237
1,474
1,263
1,206
1,242
(71)
12/23/15
2015
14-44yrs
(82)
12/16/15
2015
14-39yrs
(59)
12/16/15
2015
15-45yrs
(61)
11/10/15
2015
15-40yrs
(90)
10/28/15
2015
15-30yrs
2,609
7,776
1,765
12,150
(632)
10/27/15
2012
12-37yrs
96
1,161
402
4,364
150
816
1,407
5,582
(81)
10/23/15
2015
15-40yrs
(374)
10/20/15
2012
12-37yrs
2,617
8,694
2,107
13,418
(754)
10/19/15
2009
9-38yrs
173
149
149
161
158
170
245
73
147
139
186
268
984
876
800
1,078
870
962
972
922
905
796
849
828
1,856
4,472
137
168
187
160
132
173
204
163
164
176
200
216
618
1,294
1,193
1,136
1,399
1,160
1,305
1,421
1,158
1,216
1,111
1,235
1,312
6,946
(73)
10/14/15
2015
15-40yrs
(92)
10/14/15
2015
15-30yrs
(64)
10/14/15
2015
15-40yrs
(80)
10/07/15
2015
15-40yrs
(61)
10/07/15
2015
15-40yrs
(101)
09/22/15
2014
14-44yrs
(98)
09/22/15
2014
14-44yrs
(87)
09/22/15
2014
14-44yrs
(89)
09/22/15
2014
14-44yrs
(71)
09/08/15
2015
15-35yrs
(89)
08/28/15
2015
15-35yrs
(91)
08/28/15
2015
15-35yrs
(358)
08/19/15
2012
13-38yrs
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
2
1
3
Retail Property in
Lebanon, MO
Retail Property in
Effingham County,
IL
Retail Property in
Ponce, Puerto Rico
Retail Property in
Tremont, IL
Retail Property in
Pleasanton, TX
Retail Property in
Peoria, IL
Retail Property in
Bridgeport, IL
Retail Property in
Warren, MN
Retail Property in
Canyon Lake, TX
Retail Property in
Wheeler, TX
Retail Property in
Aurora, MN
Retail Property in
Red Oak, IA
Retail Property in
Zapata, TX
Retail Property in
St. Francis, MN
Retail Property in
Yorktown, TX
Retail Property in
Battle Lake, MN
Retail Property in
Paynesville, MN
Retail Property in
Wheaton, MO
Retail Property in
Rotterdam, NY
Retail Property in
Hilliard, OH
Retail Property in
Niles, OH
Retail Property in
Youngstown, OH
821
821
359
724
273
774
179
204
6,526
1,365
6,662
1,318
791
867
857
824
697
910
718
630
778
746
732
784
719
804
651
8,905
4,579
3,721
3,838
164
311
180
192
108
291
53
126
190
62
105
860
850
934
874
825
932
887
709
839
998
911
97
1,005
136
246
73
875
816
800
168
216
179
176
156
220
187
157
180
144
163
198
156
191
96
2,530
7,924
2,165
654
437
380
4,870
4,084
4,363
860
679
657
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
359
724
179
1,262
(65)
08/14/15
2015
15-40yrs
273
774
204
1,251
(74)
08/10/15
2015
15-40yrs
1,365
6,662
1,318
9,345
(550)
08/03/15
2012
12-37yrs
164
311
180
192
108
291
53
126
190
62
105
860
850
934
874
825
932
887
709
839
998
911
97
1,005
136
246
73
875
816
800
168
216
179
176
156
220
187
157
180
144
163
198
156
191
96
1,192
1,377
1,293
1,242
1,089
1,443
1,127
992
1,209
1,204
1,179
1,300
1,167
1,253
969
(82)
06/25/15
2015
15-35yrs
(95)
06/24/15
2015
15-35yrs
(90)
06/24/15
2015
15-35yrs
(84)
06/24/15
2015
15-35yrs
(95)
06/24/15
2015
15-30yrs
(100)
06/18/15
2015
15-35yrs
(94)
06/18/15
2015
15-35yrs
(68)
06/18/15
2015
15-40yrs
(102)
05/07/15
2014
15-35yrs
(126)
05/07/15
2015
15-35yrs
(126)
03/26/15
2014
15-35yrs
(136)
03/25/15
2015
15-35yrs
(131)
03/25/15
2014
15-30yrs
(110)
03/05/15
2015
15-40yrs
(93)
03/05/15
2015
15-40yrs
2,530
7,924
2,165
12,619
(1,795)
03/03/15
1996
8-20yrs
654
437
380
4,870
4,084
4,363
860
679
657
6,384
5,200
5,400
(513)
03/02/15
2007
12-41yrs
(427)
03/02/15
2007
12-41yrs
(469)
02/20/15
2005
12-40yrs
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
2
1
4
Retail Property in
Kings Mountain,
NC
Retail Property in
Iberia, MO
Retail Property in
Pine Island, MN
Retail Property in
Isle, MN
Retail Property in
Jacksonville, NC
Retail Property in
Evansville, IN
Retail Property in
Woodland Park, CO
Retail Property in
Bellport, NY
Retail Property in
Ankeny, IA
Retail Property in
Springfield, MO
Retail Property in
Cedar Rapids, IA
Retail Property in
Fairfield, IA
Retail Property in
Owatonna, MN
Retail Property in
Muscatine, IA
Retail Property in
Sheldon, IA
Retail Property in
Memphis, TN
Retail Property in
Bennett, CO
Retail Property in
Conyers, GA
Retail Property in
O'Fallon, IL
Retail Property in El
Centro, CA
Retail Property in
Durant, OK
Retail Property in
Gallatin, TN
18,674
1,368
19,533
3,266
4,850
1,368
24,383
3,266
29,017
(3,137)
01/29/15
1995
10-35yrs
896
771
725
5,688
6,436
2,804
130
112
120
1,033
845
787
165
186
171
1,863
5,749
1,020
1,788
6,348
668
2,681
12,848
3,601
12,465
11,719
3,180
10,513
8,366
7,808
7,595
7,129
5,113
3,075
3,922
2,490
3,658
6,296
1,569
7,553
1,132
7,779
1,398
7,125
1,060
6,636
633
3,053
1,986
2,800
470
2,503
22,837
876
27,396
5,686
2,984
3,233
3,304
2,488
5,388
569
594
3,133
3,900
1,725
2,616
865
621
2,035
2,843
1,870
1,878
1,800
1,564
1,307
709
804
563
4,258
1,063
575
497
721
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
130
112
120
1,033
845
787
165
186
171
1,328
1,143
1,078
(127)
01/23/15
2015
14-39yrs
(123)
01/23/15
2014
15-40yrs
(118)
01/23/15
2014
15-40yrs
1,863
5,749
1,020
8,632
(670)
01/22/15
2014
15-44yrs
1,788
6,348
668
2,681
865
621
9,001
3,970
(808)
11/26/14
2014
15-35yrs
(434)
11/14/14
2014
15-35yrs
3,601
12,465
2,035
18,101
(1,693)
11/13/14
2014
15-35yrs
3,180
10,513
2,843
16,536
(1,497)
11/04/14
2013
14-39yrs
3,658
6,296
1,870
11,824
(978)
11/04/14
2011
12-37yrs
1,569
7,553
1,878
11,000
(1,262)
11/04/14
2012
10-30yrs
1,132
7,779
1,800
10,711
(1,091)
11/04/14
2011
12-37yrs
1,398
7,125
1,564
10,087
(1,045)
11/04/14
2010
11-36yrs
1,060
6,636
1,307
9,003
(1,037)
11/04/14
2013
10-29yrs
633
3,053
1,986
2,800
470
2,503
709
804
563
4,395
5,590
3,536
(447)
11/04/14
2011
12-37yrs
(899)
10/24/14
1962
5-15yrs
(424)
10/02/14
2014
14-34yrs
876
27,396
4,258
32,530
(3,346)
08/28/14
2014
15-45yrs
2,488
5,388
1,063
8,939
(1,726)
08/08/14
1984
7-15yrs
569
594
3,133
3,900
1,725
2,616
575
497
721
4,277
4,991
5,062
(417)
08/08/14
2014
15-50yrs
(644)
01/28/13
2007
10-40yrs
(580)
12/28/12
2007
11-40yrs
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
2
1
5
Retail Property in
Mt. Airy, NC
Retail Property in
Aiken, SC
Retail Property in
Johnson City, TN
Retail Property in
Palmview, TX
Retail Property in
Ooltewah, TN
Retail Property in
Abingdon, VA
Retail Property in
Wichita, KS
Retail Property in
North Dartmouth,
MA
Retail Property in
Vineland, NJ
Retail Property in
Saratoga Springs,
NY
Retail Property in
Waldorf, MD
Retail Property in
Mooresville, NC
Retail Property in
Sennett, NY
Retail Property in
DeLeon Springs, FL
Retail Property in
Orange City, FL
Retail Property in
Satsuma, FL
Retail Property in
Greenwood, AR
Retail Property in
Snellville, GA
Retail Property in
Columbia, SC
Retail Property in
Millbrook, AL
Retail Property in
Pittsfield, MA
2,934
3,865
3,435
4,562
3,821
3,068
4,781
729
3,353
1,588
3,480
917
938
903
682
3,607
4,837
3,957
3,733
621
858
739
1,045
842
665
1,187
4,850
1,162
3,187
3,282
5,538
2,882
2,567
1,849
222
235
192
694
983
18,948
7,033
19,745
13,909
1,482
17,742
12,497
748
13,936
11,620
4,933
11,684
10,904
2,615
12,462
4,727
1,147
4,480
239
229
79
782
853
821
1,038
3,415
1,293
5,724
818
797
718
3,409
5,314
5,169
4,596
2,148
4,629
1,023
970
5,971
—
11,109
1,801
11,556
1,344
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
729
3,353
1,588
3,480
917
938
903
682
3,607
4,837
3,957
3,733
621
858
739
4,703
5,926
5,263
(663)
12/27/12
2007
9-39yrs
(708)
12/21/12
2008
11-41yrs
(713)
12/21/12
2007
11-40yrs
1,045
6,820
(818)
12/19/12
2012
11-44yrs
842
665
5,702
5,080
(763)
12/18/12
2008
11-41yrs
(727)
12/18/12
2006
11-41yrs
1,187
4,850
1,162
7,199
(1,230)
12/14/12
2012
14-34yrs
7,033
19,745
3,187
29,965
(6,448)
09/21/12
1989
10-20yrs
1,482
17,742
3,282
22,506
(4,509)
09/21/12
2003
12-30yrs
748
13,936
5,538
20,222
(4,209)
09/21/12
1994
15-27yrs
4,933
11,684
2,882
19,499
(3,610)
09/21/12
1999
10-25yrs
2,615
12,462
2,567
17,644
(3,803)
09/21/12
2000
12-24yrs
1,147
4,480
1,849
7,476
(1,678)
09/21/12
1996
10-23yrs
239
229
79
782
853
821
1,038
3,415
1,293
5,724
222
235
192
694
983
1,243
1,317
1,092
5,147
8,000
(266)
08/13/12
2011
15-35yrs
(280)
05/23/12
2011
15-35yrs
(272)
04/19/12
2011
15-35yrs
(740)
04/12/12
2009
13-43yrs
(1,496)
04/04/12
2011
14-34yrs
2,148
4,629
1,023
7,800
(1,264)
04/04/12
2001
14-34yrs
970
5,971
—
6,941
(1,083)
03/28/12
2008
32yrs
1,801
11,556
1,343
14,700
(2,568)
02/17/12
2011
14-34yrs
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
Retail Property in
Spartanburg, SC
Retail Property in
Tupelo, MS
Retail Property in
Lilburn, GA
Retail Property in
Douglasville, GA
Retail Property in
Elkton, MD
Retail Property in
Lexington, SC
Total Net Lease
2,652
3,090
3,474
3,264
2,928
2,898
495,949
828
2,567
1,119
3,070
772
939
1,090
3,669
1,028
1,717
2,705
963
3,049
1,644
2,219
987
860
869
—
—
—
—
—
—
828
2,566
1,120
3,070
772
938
4,166
5,128
(798)
01/14/11
2007
12-42yrs
(933)
08/13/10
2007
12-47yrs
1,090
3,673
1,028
5,791
(1,078)
08/12/10
2007
12-47yrs
1,717
2,705
963
3,050
1,644
2,219
987
860
870
5,409
4,873
4,733
(851)
08/12/10
2008
13-48yrs
(902)
07/27/10
2008
14-49yrs
(770)
06/28/10
2009
13-48yrs
112,998
532,124
112,381
4,952
112,999
537,086
112,370
762,455
(79,195)
2
1
6
Description
Encumbrances
Land
Building
Intangibles
Initial Cost to Company
Costs
Capitalized
Subsequent
to
Gross Amount at which Carried at Close of
Period
Land
Building
Intangibles
Total
Accumulated
Depreciation
and
Amortization
Date
Acquired
Year
Built
Life on
which
Depreciation
in Latest
Office in Crum
Lynne, PA
Apartment Building
in Miami, FL
Mobile Home Park
in El Monte, CA
Office in Peoria, IL
Office in Wayne, NJ
Shopping Center in
Carmel, NY
Office in Wayne, NJ
Warehouse in Grand
Rapids, MI
Office in Grand
Rapids, MI
Office in St. Paul,
MN
Office in Richmond,
VA
Office in Richmond,
VA
Office in Oakland
County, MI
Total Other
Condominium in
Miami, FL
Condominium in
Las Vegas, NV
Total
Condominium
2
1
7
6,034
1,403
7,518
1,666
—
—
—
21,818
—
6,658
7,226
4,918
12,643
24,532
41,168
940
2,744
2,041
1,386
497
547
4,873
439
20,212
3,632
5,474
8,157
5,157
968
8,069
1,507
8,323
1,033
2,839
1,077
597
—
10
—
340
—
509
—
—
—
1,403
7,518
1,666
10,587
(78)
09/29/17
1999
12-35yrs
12,643
24,357
968
37,968
(963)
08/31/17
1987
5-35yrs
41,168
939
2,743
2,041
1,385
497
547
4,873
779
20,212
4,141
5,474
8,157
5,157
8,069
1,508
8,324
1,033
2,840
54,110
3,226
31,279
7,215
9,699
(1,218)
04/12/17
(177)
10/21/16
(1,805)
08/04/16
(653)
10/14/15
(1,057)
06/24/15
1968
1926
2009
1985
1980
5-25yrs
5-15yrs
15-45yrs
5-20yrs
10-40yrs
1,077
9,731
(968)
06/18/15
1963
8-35yrs
597
6,301
(850)
06/18/15
1992
6-28yrs
47,620
9,415
33,679
20,570
5,020
10,715
37,448
20,521
68,684
(18,076)
09/22/14
1900
7-19yrs
15,796
4,539
12,633
2,707
1,135
4,539
13,771
2,704
21,014
(4,912)
08/14/14
1986
4-33yrs
86,679
14,632
87,629
17,657
5,758
14,633
93,433
17,610
125,676
(35,104)
06/07/13
1984
4-41yrs
—
1,148
7,707
196,749
93,103
221,642
9,930
76,943
6,766
19,538
1,147
14,472
9,932
25,551
(14,073)
02/01/13
1989
4-35yrs
94,400
239,792
76,849
411,041
(79,934)
—
—
—
10,487
67,903
1,618
1,522
1,693
12,127
271
14,091
(1,313)
11/21/13
2010
7-47yrs
4,900
114,100
—
1,342
4,900
617
—
5,517
(621)
12/20/12
2006
40yrs
15,387
182,003
1,618
2,864
6,593
12,744
271
19,608 (1)
(1,934)
Total Real Estate
$
692,698
$221,488
$ 935,769
$
190,942
$
27,354
$213,992
$ 789,622
$
189,490
$1,193,104 (2) $
(161,063)
(1) Gross carrying value amounts are charged off as cost of sales upon delivery of condo units.
(2) The aggregate cost for U.S. federal income tax purposes is $1.1 billion at December 31, 2017.
Reconciliation of Real Estate:
The following table reconciles real estate from December 31, 2016 to December 31, 2017 ($ in thousands):
Balance at December 31, 2016
Improvements and additions
Dispositions
Balance at December 31, 2017
Total Real Estate
Commercial Real Estate Residential Real Estate
$
$
944,346
$
270,551
(21,793)
1,193,104
$
901,797
$
233,561
—
1,135,358
$
42,549
36,990
(21,793)
57,746
The following table reconciles real estate from December 31, 2015 to December 31, 2016 ($ in thousands):
Balance at December 31, 2015
Reclassification of intangibles to accumulated amortization
Improvements and additions
2
1
8
Dispositions
Balance at December 31, 2016
Total Real Estate
Commercial Real Estate Residential Real Estate
$
$
917,835
$
1,316
75,345
(50,150)
944,346
$
842,140
$
1,316
72,963
(14,622)
901,797
$
75,695
—
2,382
(35,528)
42,549
The following table reconciles real estate from December 31, 2014 to December 31, 2015 ($ in thousands):
Balance at December 31, 2014
Improvements and additions
Acquisitions through foreclosures
Dispositions
Balance at December 31, 2015
Total Real Estate
Commercial Real Estate Residential Real Estate
$
$
819,591
$
232,582
6,706
(141,044)
917,835
$
697,965
$
230,915
6,706
(93,446)
842,140
$
121,626
1,667
—
(47,598)
75,695
Reconciliation of Accumulated Depreciation and Amortization:
The following table reconciles accumulated depreciation and amortization from December 31, 2016 to December 31, 2017 ($ in thousands):
Balance at December 31, 2016
Additions
Dispositions
Balance at December 31, 2017
Total Real Estate
Commercial Real Estate Residential Real Estate
$
$
122,008
$
41,332
(2,277)
161,063
$
118,630
$
40,508
159,138
$
3,378
824
(2,277)
1,925
The following table reconciles accumulated depreciation and amortization from December 31, 2015 to December 31, 2016 ($ in thousands):
Balance at December 31, 2015
Reclassification of intangibles to accumulated amortization
Additions
2
1
9
Dispositions
Balance at December 31, 2016
Total Real Estate
Commercial Real Estate Residential Real Estate
$
$
83,056
$
1,316
40,726
(3,090)
122,008
$
78,376
$
1,316
39,398
(460)
118,630
$
4,680
—
1,328
(2,630)
3,378
The following table reconciles accumulated depreciation and amortization from December 31, 2014 to December 31, 2015 ($ in thousands):
Balance at December 31, 2014
Additions
Dispositions
Balance at December 31, 2015
Total Real Estate
Commercial Real Estate Residential Real Estate
$
$
50,605
$
40,490
(8,039)
83,056
$
45,856
$
38,213
(5,693)
78,376
$
4,749
2,277
(2,346)
4,680
Schedule IV-Mortgage Loans on Real Estate
Ladder Capital Corp
December 31, 2017
($ in thousands)
Type of Loan
Underlying Property Type
Interest Rates (1)
Effective
Maturity
Dates
Periodic
Payment
Terms (2)
Prior Liens
Face amount
of Mortgages
Carrying
Amount of
Mortgages
Principal Amount of
Mortgages Subject to
Delinquent Principal
or Interest (3)
First Mortgages individually >3%
First Mortgage
First Mortgage
Multi-family
Hotel
First Mortgages individually <3%
2.87%
5.88%
4/6/2020
9/6/2019
IO
IO
First Mortgage
Total First Mortgages
Hotel, Industrial, Land, Mobile
Home Park, Mixed Use, Multi-
family, Office, Retail, Self Storage
3.50% - 14.50%
2017 - 2033
Subordinated Mortgages individually <3%
Subordinate Mortgage
Hotel, Industrial, Land, Mobile
Home Park, Mixed Use, Multi-
family, Office, Retail, Self Storage
Total Subordinated Mortgages
2
2
0
6.04% - 15.00%
2017 - 2027
Total Mortgages
Provision for Loan Losses
$
$
$
$
— $
120,000
$
—
110,000
119,952
109,506
$
—
3,143,315
3,123,990
— $
3,373,315
$
3,353,448
$
1,260,294
1,260,294
1,260,294
$
$
159,921
159,921
3,533,236
$
$
159,194
159,194
3,512,642
$
$
N/A
N/A $
(4,000)
—
—
26,850
26,850
—
—
26,850
N/A
Total Mortgages after Provision for Loan Losses
$
1,260,294
$
3,533,236
$
3,508,642 (4)
$
26,850
(1)
(2)
(3)
(4)
Interest rates as of December 31, 2017.
IO = Interest only.
P&I = Principal and interest.
As discussed in Note 4. Mortgage Loan Receivables, as of December 31, 2017, two of the Company’s loans, which were originated simultaneously as part of a
single transaction, and had a carrying value of $26.9 million, were in default.
The aggregate cost for U.S. federal income tax purposes is $3.5 billion.
Reconciliation of mortgage loans on real estate:
The following tables reconcile mortgage loans on real estate from December 31, 2014 to December 31, 2017 ($ in thousands):
Balance December 31, 2016
Origination of mortgage loan receivables
Purchases of mortgage loan receivables
Repayment of mortgage loan receivables
Proceeds from sales of mortgage loan receivables
Realized gain on sale of mortgage loan receivables
Transfer between held for investment and held for sale
Accretion/amortization of discount, premium and other fees
Loan loss provision
Balance December 31, 2017
2
2
1
Balance December 31, 2015
Origination of mortgage loan receivables
Purchases of mortgage loan receivables
Repayment of mortgage loan receivables
Proceeds from sales of mortgage loan receivables
Realized gain on sale of mortgage loan receivables
Accretion/amortization of discount, premium and other fees
Loan loss provision
Balance December 31, 2016
Mortgage loan receivables held for investment,
net, at amortized cost:
Mortgage loans held
by consolidated
subsidiaries
Provision for loan
losses
Mortgage loan
receivables held
for sale
Total Mortgage loan
receivables
$
2,000,095
$
(4,000) $
357,882
$
1,407,669
94,079
(384,283)
—
—
153,722
11,180
—
—
—
—
—
—
—
1,465,635
—
(2,569)
(1,491,092)
54,046
(153,722)
—
—
3,282,462
$
$
—
(4,000) $
—
230,180
$
2,353,977
2,873,304
94,079
(386,852)
(1,491,092)
54,046
—
11,180
—
3,508,642
Mortgage loan receivables held for investment,
net, at amortized cost:
Mortgage loans held
by consolidated
subsidiaries
Provision for loan
losses
Mortgage loan
receivables held
for sale
Total Mortgage loan
receivables
$
1,742,345
$
(3,700) $
571,764
$
969,401
—
(720,592)
—
—
8,941
—
—
—
—
—
—
—
2,000,095
$
$
(300)
(4,000) $
1,128,651
73,421
(1,768)
(1,440,195)
26,009
—
—
357,882
$
2,310,409
2,098,052
73,421
(722,360)
(1,440,195)
26,009
8,941
(300)
2,353,977
Mortgage loan receivables held for investment,
net, at amortized cost:
Mortgage loans held
by consolidated
subsidiaries
Provision for loan
losses
Mortgage loan
receivables held
for sale
Total Mortgage loan
receivables
$
1,524,153
$
(3,100) $
417,955
$
963,023
(752,452)
—
(4,620)
—
12,241
—
—
—
—
—
—
2,594,141
(2,308)
(2,509,090)
—
71,066
—
—
1,742,345
$
$
(600)
(3,700) $
—
571,764
$
1,939,008
3,557,164
(754,760)
(2,509,090)
(4,620)
71,066
12,241
(600)
2,310,409
Balance December 31, 2014
Origination of mortgage loan receivables
Repayment of mortgage loan receivables
Proceeds from sales of mortgage loan receivables
Non-cash disposition of loan via foreclosure
Realized gain on sale of mortgage loan receivables
Accretion/amortization of discount, premium and other fees
Loan loss provision
Balance December 31, 2015
2
2
2
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Attached as exhibits to this Annual Report are certifications of the Company’s Chief Executive Officer and Chief Financial
Officer, in accordance with Rule 13a-14 under the Exchange Act. This “Controls and Procedures” section includes information
concerning the controls and procedures evaluation referred to in the certifications. This section should be read in conjunction
with the certifications for a more complete understanding of the topics presented.
Disclosure Controls and Procedures
The management of the Company established and maintains disclosure controls and procedures that are designed to ensure that
information relating to the Company and its subsidiaries required to be disclosed in the reports that are filed or submitted under
the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, our management conducted an evaluation (as required under Rules 13a-15(b)
and 15d-15(b) under the Exchange Act, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2017, the end of the period covered by this report, our disclosure controls and procedures
are effective at the reasonable assurance level. Notwithstanding the foregoing, a control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material
information otherwise required to be set forth in our periodic reports.
Internal Control Over Financial Reporting
(a) Management’s annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in
Exchange Act Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the
supervision of, the principal executive and principal financial officer and effected by the board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial
Officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of
December 31, 2017, based on the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based upon this evaluation, management has concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein.
(b) Changes in internal control over financial reporting.
There have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the most recent fiscal quarter ended December 31, 2017 that materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting.
223
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Part III
The information required by Item 10 will be set forth in the Company’s definitive proxy statement for its annual meeting of
shareholders expected to be held on June 6, 2018, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be set forth in the Company’s definitive proxy statement for its annual meeting of
shareholders expected to be held on June 6, 2018, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item regarding security ownership of certain beneficial owners, directors and executive
officers will be set forth in the Company’s definitive proxy statement for its annual meeting of shareholders expected to be held
on June 6, 2018, and is incorporated herein by reference.
The information required by this item regarding our equity compensation plans in incorporated by reference from Item 5 of this
Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be set forth in the Company’s definitive proxy statement for its annual meeting of
shareholders expected to be held on June 6, 2018, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 will be set forth in the Company’s definitive proxy statement for its annual meeting of
shareholders expected to be held on June 6, 2018, and is incorporated herein by reference.
224
Item 15. Exhibits and Financial Statement Schedules
Part IV
The following documents are filed or incorporated by reference as part of this Annual Report:
1. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2017
Schedule IV-Mortgage Loans on Real Estate as of December 31, 2017
3. Exhibits required to be filed by Item 601 of Regulation S-K
108
110
111
113
114
117
120
210
220
The exhibits listed on the exhibit index preceding the signature page are filed as part of, or hereby incorporated by reference
into this Form 10-K.
Item 16. Form 10-K Summary
None.
225
EXHIBIT
NO.
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
EXHIBIT INDEX
DESCRIPTION
Second Amended and Restated Certificate of Incorporation of Ladder Capital Corp (incorporated by
reference to Exhibit 3.1 to the Company’s Form 8-K filed on March 2, 2015)
Amendment to Second Amended and Restated Certificate of Incorporation of Ladder Capital Corp
(incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on June 8, 2015)
Amended and Restated Bylaws of Ladder Capital Corp (incorporated by reference to Exhibit 3.3 to the
Company’s registration statement on Form S-1 filed on December 24, 2013)
Form of Certificate of Class A Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s
registration statement on Form S-1 (Amendment No. 2, filed on January 15, 2014))
Amended and Restated Registration Rights Agreement, dated February 11, 2014 (incorporated by reference
to Exhibit 4.2 to the Company’s Form 10-K filed on March 6, 2015)
Amendment No. 1 to the Amended and Restated Registration Rights Agreement, dated as of January 28,
2015 (incorporated by reference to Exhibit 4.3 to the Company’s Form 10-K filed on March 6, 2015)
Indenture for the 2017 Notes, dated as of September 19, 2012, among Ladder Capital Finance Holdings
LLLP, and Ladder Capital Finance Corporation as co-issuers, and Wilmington Trust, National Association, as
trustee (incorporated by reference to Exhibit 4.1 to the registration statement on Form S-4 (No. 353-188224)
filed on April 30, 2013 by Ladder Capital Finance Holdings LLLP and Ladder Capital Finance Corp)
First Supplemental Indenture for the 2017 Notes, dated as of March 12, 2014, by and among certain
subsidiaries of Ladder Capital Corp, as guarantors, Ladder Capital Finance Holdings LLLP and Ladder
Capital Finance Corporation, as co-issuers, and Wilmington Trust, National Association, as trustee
(incorporated by reference to Exhibit 4.9 to the Company’s Form 10-K filed on March 6, 2015)
Second Supplemental Indenture for the 2017 Notes, dated as of March 28, 2014, by and among Ladder
Capital Corp, as guarantor, Ladder Capital Finance Holdings LLLP and Ladder Capital Finance Corporation,
as co-issuers, and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit
4.1 to the Company’s Form 8-K filed on April 3, 2014)
Third Supplemental Indenture for the 2017 Notes, dated as of December 31, 2014, by and among Lafayette
Park JV Member LLC, Series REIT of Ladder Midco LLC, Series TRS of Ladder Midco LLC, Series REIT
of Ladder Midco II LLC, Series TRS of Ladder Midco II LLC, Series REIT of Ladder Capital Finance
Holdings LLLP, Series TRS of Ladder Capital Finance Holdings LLLP, LC TRS I LLC, LC TRS III LLC
and Ladder Capital Insurance LLC, as guarantors, Ladder Capital Finance Holdings LLLP and Ladder
Capital Finance Corporation, as co-issuers, and Wilmington Trust, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on January 5, 2015)
Indenture for the 2021 Notes, dated as of August 1, 2014, among Ladder Capital Finance Holdings LLLP,
Ladder Capital Finance Corporation, the guarantors party thereto and Wilmington Trust, National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on August
1, 2014)
First Supplemental Indenture for the 2021 Notes, dated as of December 31, 2014, by and among Lafayette
Park JV Member LLC, Series REIT of Ladder Midco LLC, Series TRS of Ladder Midco LLC, Series REIT
of Ladder Midco II LLC, Series TRS of Ladder Midco II LLC, Series REIT of Ladder Capital Finance
Holdings LLLP, Series TRS of Ladder Capital Finance Holdings LLLP, LC TRS I LLC, LC TRS III LLC
and Ladder Capital Insurance LLC, as guarantors, Ladder Capital Finance Holdings LLLP and Ladder
Capital Finance Corporation, as co-issuers, and Wilmington Trust, National Association, as trustee
(incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on January 5, 2015)
Second Supplemental Indenture for the 2021 Notes, dated as of March 1, 2016, by and among Grand Rapids
JV Member LLC, Pelham JV Member LLC, CanPac JV LLC, CanPac JV Member II Partner LLC, CanPac
JV Member II LLC, as guarantors, Ladder Capital Finance Holdings LLLP and Ladder Capital Finance
Corporation, as co-issuers, and Wilmington Trust, National Association, as trustee (incorporated by reference
to Exhibit 4.10 to the Company’s Form 10-K filed on February 24, 2017)
Fourth Supplemental Indenture for the 2017 Notes, dated as of March 1, 2016, by and among Grand Rapids
JV Member LLC, Pelham JV Member LLC, CanPac JV LLC, CanPac JV Member II Partner LLC, CanPac
JV Member II LLC, as guarantors, Ladder Capital Finance Holdings LLLP and Ladder Capital Finance
Corporation, as co-issuers, and Wilmington Trust, National Association, as trustee (incorporated by reference
to Exhibit 4.11 to the Company’s Form 10-K filed on February 24, 2017)
Third Supplemental Indenture for the 2021 Notes, dated as of September 13, 2016, by and among Tuebor
TRS IV LLC, as guarantor, Ladder Capital Finance Holdings LLLP and Ladder Capital Finance Corporation,
as co-issuers, and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit
4.12 to the Company’s Form 10-K filed on February 24, 2017)
226
EXHIBIT
NO.
4.13
4.14
4.15
4.16
4.17
10.1
10.2
10.3
10.4
10.5
10.6 #
10.7 #
10.8 #
10.9 #
10.10 #
10.11 #
10.12 #
10.13 #
EXHIBIT INDEX
DESCRIPTION
Fifth Supplemental Indenture for the 2017 Notes, dated as of September 13, 2016, by and among Tuebor
TRS IV LLC, as guarantor, Ladder Capital Finance Holdings LLLP and Ladder Capital Finance Corporation,
as co-issuers, and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit
4.13 to the Company’s Form 10-K filed on February 24, 2017)
Amendment No. 2 to the Amended and Restated Registration Rights Agreement dated as of December 1,
2016 (incorporated by reference to Exhibit 4.14 to the Company’s Form 10-K filed on February 24, 2017)
Amendment No. 3 to the Amended and Restated Registration Rights Agreement dated as of February 15,
2017 (incorporated by reference to Exhibit 4.15 to the Company’s Form 10-K filed on February 24, 2017)
Indenture for the 2022 Notes, dated March 16, 2017, among Ladder Capital Finance Holdings LLLP, Ladder
Capital Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association, as
trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 16, 2017)
Indenture for the 2025 Notes, dated September 25, 2017, among Ladder Capital Finance Holdings LLLP,
Ladder Capital Finance Corporation, the guarantors party thereto and Wilmington Trust, National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on
September 25, 2017)
Third Amended and Restated Limited Liability Limited Partnership Agreement, dated as of December 31,
2014, by and among Ladder Capital Finance Holdings LLLP, each General Partner and each Person party
thereto or otherwise bound as a Limited Partner (incorporated by reference to Exhibit 10.3 to the Company’s
Form 8-K filed on January 5, 2015)
Amendment to Third Amended and Restated Limited Liability Limited Partnership Agreement, dated as of
November 30, 2015, by and among Ladder Capital Finance Holdings LLLP, each General Partner and each
Person party thereto or otherwise bound as a Limited Partner (incorporated by reference to Exhibit 10.2 to
the Company’s Form 10-K filed on March 7, 2016)
Amended and Restated Tax Receivable Agreement, dated as of December 31, 2014, by and among Ladder
Capital Corp, Ladder Capital Finance Holdings LLLP, Series TRS of Ladder Capital Finance Holdings
LLLP, LC TRS I LLC and each of the TRA Members (incorporated by reference to Exhibit 10.4 to the
Company’s Form 8-K filed on January 5, 2015)
Counterpart Agreement, dated as of December 31, 2014, by and among Lafayette Park JV Member LLC,
Series REIT of Ladder Midco LLC, Series TRS of Ladder Midco LLC, Series REIT of Ladder Midco II
LLC, Series TRS of Ladder Midco II LLC, Series REIT of Ladder Capital Finance Holdings LLLP,
Series TRS of Ladder Capital Finance Holdings LLLP, LC TRS I LLC, LC TRS III LLC and Ladder Capital
Insurance LLC, and with respect to Section 3 thereof only, Ladder Capital Finance Holdings LLLP, Ladder
Midco LLC and Ladder Midco II LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-
K filed on January 5, 2015)
Purchase Agreement for the 2021 Notes, dated as of July 29, 2014, among Ladder Capital Finance Holdings
LLLP, Ladder Capital Finance Corporation, the guarantors party thereto and the initial purchasers party
thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 1, 2014)
Form of Amended and Restated Employment Agreement (incorporated by reference to Exhibit 10.2 to the
Company’s registration statement on Form S-1 (Amendment No. 3, filed on January 21, 2014))
Harris Third Amended and Restated Employment Agreement, dated as of May 22, 2017 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 26, 2017)
Harney Amended and Restated Employment Agreement, dated as of January 23, 2014 (incorporated by
reference to Exhibit 10.4 to the Company’s registration statement on Form S-1 (Amendment No. 5, filed on
January 28, 2014))
Mazzei Amended and Restated Employment Agreement, dated as of January 23, 2014 (incorporated by
reference to Exhibit 10.5 to the Company’s registration statement on Form S-1 (Amendment No. 5, filed on
January 28, 2014))
McCormack Second Amended and Restated Employment Agreement, dated as of January 18, 2018
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 19, 2018)
2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company’s registration
statement on Form S-8 (filed on June 13, 2014))
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4 to the Company’s
registration statement on Form S-1 (Amendment No. 2, filed on January 15, 2014))
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.5 to the Company’s
registration statement on Form S-1 (Amendment No. 2, filed on January 15, 2014))
227
EXHIBIT
NO.
10.14 #
10.15 #
10.16 #
10.17 #
10.18 #
10.19
10.20
10.21
10.22
12.1
18.1
21.1
23.1
31.1
31.2
32.1*
32.2*
101
EXHIBIT INDEX
DESCRIPTION
Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.6 to the Company’s
registration statement on Form S-1 (Amendment No. 2, filed on January 15, 2014))
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7 to the Company’s
registration statement on Form S-1 (Amendment No. 2, filed on January 15, 2014))
Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.8 to the Company’s
registration statement on Form S-1 (Amendment No. 2, filed on January 15, 2014))
Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed
on August 6, 2014)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.11 to the Company’s
registration statement on Form S-1 (Amendment No. 3, filed on January 21, 2014))
Loan Referral Agreement between Ladder Capital Finance LLC and Meridian Capital Group, LLC, dated as
of September 22, 2008 (incorporated by reference to Exhibit 10.11 to the Company’s draft registration
statement on Form S-1 (filed on June 28, 2013))
Stockholders Agreement, dated as of March 3, 2017, by and between Ladder Capital Corp and RREF II
Ladder LLC (incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K filed on March 3, 2017)
Second Amended and Restated Registration Rights Agreement, dated as of March 3, 2017, by and among
Ladder Capital Corp, Ladder Capital Finance Holdings LLLP and each of the Ladder Investors (as defined
therein) (incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K filed on March 3, 2017)
Separation Agreement, dated June 22, 2017, among Ladder Capital Corp, Ladder Capital Finance LLC and
Michael Mazzei (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 22,
2017)
Ratio of Earnings to Fixed Charges
Preferability letter of Independent Registered Public Accounting Firm
Subsidiaries of Ladder Capital Corp
Consent of Independent Registered Public Accounting Firm
Certification of Brian Harris pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Marc Fox pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Brian Harris pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Marc Fox pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of
December 31, 2017 and December 31, 2016; (ii) the Consolidated Statements of Income for the years ended
December 31, 2017, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income for the
years ended December 31, 2017, 2016 and 2015; (iv) the Consolidated Statement of Changes in Equity for
the years ended December 31, 2017, 2016 and 2015; (v) the Consolidated Statements of Cash Flows for the
years ended December 31, 2017, 2016 and 2015; and (vi) the Notes to the Consolidated Financial
Statements.
* The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, nor shall
they be deemed incorporated by reference in any filing under the Securities Act, except as shall be expressly set forth
by specific reference in such filing.
# Management contract or compensatory plan or arrangement.
228
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 28, 2018
LADDER CAPITAL CORP
(Registrant)
By:
/s/ MARC FOX
Marc Fox
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ BRIAN HARRIS
Brian Harris
/s/ MARC FOX
Marc Fox
Chief Executive Officer and Director (Principal Executive
Officer)
February 28, 2018
Chief Financial Officer (Principal Financial Officer)
February 28, 2018
/s/ KEVIN MOCLAIR
Chief Accounting Officer (Principal Accounting Officer)
February 28, 2018
Kevin Moclair
/s/ ALAN FISHMAN
Alan Fishman
/s/ MARK ALEXANDER
Mark Alexander
/s/ DOUGLAS DURST
Douglas Durst
/s/ RICHARD O’TOOLE
Richard O’Toole
/s/ MICHAEL MAZZEI
Michael Mazzei
Non-Executive Chairman and Director
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
Director
Director
Director
Director
229
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Ladder Capital Corp
345 Park Avenue, 8th Floor
New York, NY 10154
NYSE: LADR
212‐715‐3170
www.laddercapital.com