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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
Form 10-Q
 
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
Or
 
o         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
397867940_ladrlogo3312017a22.jpg
(Exact name of registrant as specified in its charter)
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
80-0925494
(IRS Employer
Identification No.)
 
 
 
345 Park Avenue, New York
(Address of principal executive offices)
 
10154
(Zip Code)
 
(212) 715-3170
(Registrant’s telephone number, including area code)
 
 

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  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  ý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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 ý
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
Yes o  No ý

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Class A common stock, $0.001 par value
LADR
New York Stock Exchange

 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at April 30, 2019
Class A Common Stock, $0.001 par value
 
106,558,171
Class B Common Stock, $0.001 par value
 
13,198,344

 



Table of Contents

LADDER CAPITAL CORP
 
FORM 10-Q
March 31, 2019

Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (this “Quarterly 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 Quarterly 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:
 
risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”), as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly 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.
 

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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 Quarterly Report are made as of the date hereof, and the Company assumes no obligation to update or supplement any forward-looking statements.

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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.


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Table of Contents

Part I - Financial Information
 
Item 1. Financial Statements (Unaudited)
 
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 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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Ladder Capital Corp
Consolidated Balance Sheets
(Dollars in Thousands)
 
March 31, 2019(1)
 
December 31, 2018(1)
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
45,158

 
$
67,878

Restricted cash
80,075

 
30,572

Mortgage loan receivables held for investment, net, at amortized cost:
 
 
 
Mortgage loans held by consolidated subsidiaries
3,302,753

 
3,318,390

Mortgage loans transferred but not considered sold
15,504

 

Provision for loan losses
(18,200
)
 
(17,900
)
Mortgage loan receivables held for sale
189,525

 
182,439

Real estate securities
1,619,128

 
1,410,126

Real estate and related lease intangibles, net
1,005,997

 
998,022

Investments in and advances to unconsolidated joint ventures
93,841

 
40,354

FHLB stock
61,619

 
57,915

Derivative instruments
1,632

 

Due from brokers
5,514

 

Accrued interest receivable
26,627

 
27,214

Other assets
96,246

 
157,862

Total assets
$
6,525,419

 
$
6,272,872

Liabilities and Equity
 

 
 

Liabilities
 

 
 

Debt obligations, net:
 
 
 
Secured and unsecured debt obligations
$
4,716,450

 
$
4,452,574

       Liability for transfers not considered sales
15,840

 

Due to brokers
49,766

 
1,301

Derivative instruments

 
975

Amount payable pursuant to tax receivable agreement
1,559

 
1,570

Dividends payable
1,409

 
37,316

Accrued expenses
34,330

 
82,425

Other liabilities
61,822

 
53,076

Total liabilities
4,881,176

 
4,629,237

Commitments and contingencies (Note 18)

 

Equity
 

 
 

Class A common stock, par value $0.001 per share, 600,000,000 shares authorized; 109,654,421 and 106,642,335 shares issued and 106,561,917 and 103,941,173 shares outstanding
107

 
105

Class B common stock, par value $0.001 per share, 100,000,000 shares authorized; 13,198,344 and 13,117,419 shares issued and outstanding
13

 
13

Additional paid-in capital
1,508,452

 
1,471,157

Treasury stock, 3,092,504 and 2,701,162 shares, at cost
(40,799
)
 
(32,815
)
Retained earnings (dividends in excess of earnings)
(26,549
)
 
11,342

Accumulated other comprehensive income (loss)
7,080

 
(4,649
)
Total shareholders’ equity
1,448,304

 
1,445,153

Noncontrolling interest in operating partnership
186,310

 
188,427

Noncontrolling interest in consolidated joint ventures
9,629

 
10,055

Total equity
1,644,243

 
1,643,635

 
 
 
 
Total liabilities and equity
$
6,525,419

 
$
6,272,872

 
(1)
Includes amounts relating to consolidated variable interest entities. See Note 3.
 
The accompanying notes are an integral part of these consolidated financial statements.

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Ladder Capital Corp
Consolidated Statements of Income
(Dollars in Thousands, Except Per Share and Dividend Data)
(Unaudited)

 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Net interest income
 

 
 

Interest income
$
86,466

 
$
78,206

Interest expense
51,248

 
44,713

Net interest income
35,218

 
33,493

Provision for loan losses
300

 
3,000

Net interest income after provision for loan losses
34,918

 
30,493

 
 
 
 
Other income (loss)
 

 
 

Operating lease income
28,921

 
28,137

Sale of loans, net
7,079

 
4,888

Realized gain (loss) on securities
2,865

 
(1,099
)
Unrealized gain (loss) on equity securities
2,078

 

Unrealized gain (loss) on Agency interest-only securities
11

 
204

Realized gain on sale of real estate, net
4

 
31,010

Impairment of real estate
(1,350
)
 

Fee and other income
4,685

 
6,252

Net result from derivative transactions
(11,034
)
 
14,959

Earnings (loss) from investment in unconsolidated joint ventures
959

 
52

Gain (loss) on extinguishment/defeasance of debt
(1,070
)
 
(69
)
Total other income (loss)
33,148

 
84,334

Costs and expenses
 

 
 

Salaries and employee benefits
23,574

 
17,096

Operating expenses
5,403

 
5,548

Real estate operating expenses
5,474

 
8,817

Fee expense
1,712

 
843

Depreciation and amortization
10,227

 
10,823

Total costs and expenses
46,390

 
43,127

Income (loss) before taxes
21,676

 
71,700

Income tax expense (benefit)
(2,854
)
 
3,902

Net income (loss)
24,530

 
67,798

Net (income) loss attributable to noncontrolling interest in consolidated joint ventures
447

 
(8,422
)
Net (income) loss attributable to noncontrolling interest in operating partnership
(2,802
)
 
(8,501
)
Net income (loss) attributable to Class A common shareholders
$
22,175

 
$
50,875

 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 

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Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.21

 
$
0.53

Diluted
$
0.21

 
$
0.53

 
 
 
 
Weighted average shares outstanding:
 

 
 

Basic
104,259,549

 
95,187,316

Diluted
105,006,315

 
95,389,219

 
 
 
 
Dividends per share of Class A common stock (Note 12)
$
0.340

 
$
0.315


The accompanying notes are an integral part of these consolidated financial statements.

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Ladder Capital Corp
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Net income (loss)
$
24,530

 
$
67,798

 
 
 
 
Other comprehensive income (loss)
 

 
 

Unrealized gain (loss) on securities, net of tax:
 

 
 

Unrealized gain (loss) on real estate securities, available for sale
15,971

 
(9,956
)
Reclassification adjustment for (gains) included in net income
(2,778
)
 
1,099

 
 
 
 
Total other comprehensive income (loss)
13,193

 
(8,857
)
 
 
 
 
Comprehensive income
37,723

 
58,941

Comprehensive (income) loss attributable to noncontrolling interest in consolidated joint ventures
447

 
(8,422
)
Comprehensive income of combined Class A common shareholders and Operating Partnership unitholders
$
38,170

 
$
50,519

Comprehensive (income) attributable to noncontrolling interest in operating partnership
(4,265
)
 
(7,172
)
Comprehensive income attributable to Class A common shareholders
$
33,905

 
$
43,347




The accompanying notes are an integral part of these consolidated financial statements.

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Ladder Capital Corp
Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)


 
Shareholders’ Equity
 
 
 
 
 
 
 
Class A Common Stock 
  
Class B Common Stock 
  
Additional Paid- 
in-Capital 
  
Treasury Stock 
 
Retained Earnings (Dividends in Excess of Earnings) 
  
Accumulated 
Other 
Comprehensive 
Income (Loss) 
  
Noncontrolling Interests 
  
Total Equity 
Shares 
  
Par 
  
Shares 
  
Par 
  
  
 
  
  
Operating 
Partnership 
  
Consolidated 
Joint Ventures 
  
 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Balance, December 31, 2018
103,941

 
$
105

 
13,118

 
$
13

 
$
1,471,157

 
$
(32,815
)
 
$
11,342

 
$
(4,649
)
 
$
188,427

 
$
10,055

 
$
1,643,635

Contributions

 

 

 

 

 

 

 

 

 
77

 
77

Distributions

 

 

 

 

 

 

 

 
(4,253
)
 
(56
)
 
(4,309
)
Equity based compensation

 

 

 

 
11,292

 

 

 

 

 

 
11,292

Grants of restricted stock
1,478

 
1

 

 

 
(1
)
 

 

 

 

 

 

Re-issuance of treasury stock
63

 

 

 

 

 

 

 

 

 

 

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock and units
(455
)
 

 

 

 

 
(7,984
)
 

 

 

 

 
(7,984
)
Dividends declared

 

 

 

 

 

 
(36,243
)
 

 

 

 
(36,243
)
Stock dividends
1,434

 
1

 
181

 

 
23,822

 

 
(23,823
)
 

 

 

 

Exchange of noncontrolling interest for common stock
101

 

 
(101
)
 

 
1,493

 

 

 
(5
)
 
(1,436
)
 

 
52

Net income (loss)

 

 

 

 

 

 
22,175

 

 
2,802

 
(447
)
 
24,530

Other comprehensive income

 

 

 

 

 

 

 
11,731

 
1,462

 

 
13,193

Rebalancing of ownership percentage between Company and Operating Partnership

 

 

 

 
689

 

 

 
3

 
(692
)
 

 

Balance, March 31, 2019
106,562

 
$
107

 
13,198

 
$
13

 
$
1,508,452

 
$
(40,799
)
 
$
(26,549
)
 
$
7,080

 
$
186,310

 
$
9,629

 
$
1,644,243


The accompanying notes are an integral part of these consolidated financial statements.


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Ladder Capital Corp
Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)

 
Shareholders’ Equity
 
 
 
 
 
 
 
Class A Common Stock 
  
Class B Common Stock 
  
Additional Paid- 
in-Capital 
  
Treasury Stock 
 
Retained Earnings (Dividends in Excess of Earnings) 
  
Accumulated 
Other 
Comprehensive 
Income (Loss) 
  
Noncontrolling Interests 
  
Total Equity 
Shares 
  
Par 
  
Shares 
  
Par 
  
  
 
  
  
Operating 
Partnership 
  
Consolidated 
Joint Ventures 
  
 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

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

Contributions

 

 

 

 

 

 

 

 

 
2,635

 
2,635

Distributions

 

 

 

 

 

 

 

 
(4,273
)
 
(13,720
)
 
(17,993
)
Equity based compensation

 

 

 

 
2,400

 

 

 

 

 

 
2,400

Grants of restricted stock
25

 

 

 

 

 

 

 

 

 

 

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock and units
(49
)
 

 

 

 

 
(728
)
 

 

 

 

 
(728
)
Forfeitures
(11
)
 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

 

 
(30,422
)
 

 

 

 
(30,422
)
Exchange of noncontrolling interest for common stock
4,350

 
5

 
(4,350
)
 
(5
)
 
60,110

 

 

 
(143
)
 
(59,654
)
 

 
313

Net income (loss)

 

 

 

 

 

 
50,875

 

 
8,501

 
8,422

 
67,798

Other comprehensive income

 

 

 

 

 

 

 
(7,528
)
 
(1,329
)
 

 
(8,857
)
Rebalancing of ownership percentage between Company and Operating Partnership

 

 

 

 
(98
)
 

 

 
3

 
95

 

 

Balance, March 31, 2018
97,956

 
$
99

 
13,318

 
$
13

 
$
1,368,548

 
$
(32,684
)
 
$
(18,659
)
 
$
(7,880
)
 
$
184,201

 
$
9,654

 
$
1,503,292


The accompanying notes are an integral part of these consolidated financial statements.



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Ladder Capital Corp
Consolidated Statements of Cash Flows
(Dollars in Thousands)
 (Unaudited)
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
 
 
 
 
Cash flows from operating activities:
 

 
 

 
Net income (loss)
$
24,530

 
$
67,798

 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 

 
(Gain) loss on extinguishment/defeasance of debt
1,070

 
69

 
Depreciation and amortization
10,227

 
10,823

 
Unrealized (gain) loss on derivative instruments
(2,491
)
 
(1,772
)
 
Unrealized (gain) loss on equity securities
(2,078
)
 

 
Unrealized (gain) loss on Agency interest-only securities
(11
)
 
(204
)
 
Unrealized (gain) loss on investment in mutual fund
(151
)
 
(43
)
 
Provision for loan losses
300

 
3,000

 
Impairment of real estate
1,350

 

 
Amortization of equity based compensation
11,292

 
2,400

 
Amortization of deferred financing costs included in interest expense
2,738

 
2,328

 
Amortization of premium on mortgage loan financing
(386
)
 
(253
)
 
Amortization of above- and below-market lease intangibles
(144
)
 
(382
)
 
Amortization of premium/(accretion) of discount and other fees on loans
(5,389
)
 
(4,794
)
 
Amortization of premium/(accretion) of discount and other fees on securities
(113
)
 
1,000

 
Realized (gain) loss on sale of mortgage loan receivables held for sale
(7,079
)
 
(4,888
)
 
Realized (gain) loss on real estate securities
(2,865
)
 
1,099

 
Realized gain on sale of real estate, net
(4
)
 
(31,010
)
 
Realized gain on sale of derivative instruments
(8
)
 
(13
)
 
Origination of mortgage loan receivables held for sale
(175,256
)
 
(532,878
)
 
Repayment of mortgage loan receivables held for sale
193

 
133

 
Proceeds from sales of mortgage loan receivables held for sale
159,424

 
439,261

 
(Income) loss from investments in unconsolidated joint ventures in excess of distributions received
(959
)
 
(52
)
 
Distributions from operations of investment in unconsolidated joint ventures
3,067

 

 
Deferred tax asset (liability)
3,139

 
443

 
Changes in operating assets and liabilities:
 

 
 

 
Accrued interest receivable
347

 
(1,349
)
 
Other assets
92

 
6,157

 
Accrued expenses and other liabilities
(42,869
)
 
(21,991
)
 
Net cash provided by (used in) operating activities
(22,034
)
 
(65,118
)
 
 
 
 
 
 

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Three Months Ended March 31,
 
 
2019
 
2018
 
 
 
 
 
 
Cash flows from investing activities:
 

 
 

 
Purchase of derivative instruments
(159
)
 

 
Sale of derivative instruments
50

 
114

 
Purchases of real estate securities
(384,478
)
 
(135,072
)
 
Repayment of real estate securities
24,188

 
2,954

 
Proceeds from sales of real estate securities
209,166

 
122,356

 
Purchase of FHLB stock
(3,704
)
 

 
Origination of mortgage loan receivables held for investment
(224,418
)
 
(434,632
)
 
Repayment of mortgage loan receivables held for investment
294,074

 
194,303

 
Basis recovery of Agency interest-only securities
3,333

 
5,407

 
Capital contributions and advances to investment in unconsolidated joint ventures
(56,424
)
 

 
Capital distribution from investment in unconsolidated joint ventures

 
1,250

 
Capitalization of interest on investment in unconsolidated joint ventures
(142
)
 
(322
)
 
Purchases of real estate
(2,406
)
 
(24,466
)
 
Capital improvements of real estate
(907
)
 
(1,883
)
 
Proceeds from sale of real estate
1,688

 
87,885

 
Net cash provided by (used in) investing activities
(140,139
)
 
(182,106
)
 
Cash flows from financing activities:
 

 
 

 
Deferred financing costs paid
(3,899
)
 
(1,240
)
 
Proceeds from borrowings under debt obligations
4,042,942

 
1,312,451

 
Repayment of borrowings under debt obligations
(3,765,720
)
 
(1,057,704
)
 
Cash dividends paid to Class A common shareholders
(72,150
)
 
(59,721
)
 
Capital distributed to noncontrolling interests in operating partnership
(4,253
)
 
(4,273
)
 
Capital contributed by noncontrolling interests in consolidated joint ventures
77

 
2,635

 
Capital distributed to noncontrolling interests in consolidated joint ventures
(56
)
 
(13,720
)
 
Payment of liability assumed in exchange for shares for the minimum withholding taxes on vesting restricted stock
(7,985
)
 
(728
)
 
Net cash provided by (used in) financing activities
188,956

 
177,700

 
Net increase (decrease) in cash, cash equivalents and restricted cash
26,783

 
(69,524
)
 
Cash, cash equivalents and restricted cash at beginning of period
98,450

 
182,683

 
Cash, cash equivalents and restricted cash at end of period
$
125,233

 
$
113,159

 
 
 
 
 
 
 
 
 
 
 

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Three Months Ended March 31,
 
 
2019
 
2018
 
 
 
 
 
 
Supplemental information:
 

 
 

 
Cash paid for interest, net of amounts capitalized
$
63,985

 
$
57,406

 
Cash paid (received) for income taxes
1,102

 
90

 
 
 
 
 
 
Non-cash investing and financing activities:
 

 
 

 
Securities and derivatives purchased, not settled
49,766

 
14

 
Securities and derivatives sold, not settled
5,514

 

 
Repayment in transit of mortgage loans receivable held for investment (other assets)
20,653

 
54,803

 
Settlement of mortgage loan receivable held for investment by real estate, net
(17,851
)
 

 
Transfer from mortgage loans receivable held for sale to mortgage loans receivable held for investment, at amortized cost
15,504

 
55,403

 
Real estate acquired in settlement of mortgage loan receivable held for investment, net
17,851

 

 
Capital distributions from investment in unconsolidated joint ventures
970

 

 
Reduction in proceeds from sales of real estate

 
11,050

 
Assumption of debt obligations by real estate buyer/defeasance of debt and related costs

 
(11,050
)
 
Exchange of noncontrolling interest for common stock
1,437

 
59,658

 
Dividends declared, not paid
1,409

 
1,228

 
Stock dividends
23,824

 

 

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):
 
March 31, 2019
 
March 31, 2018
 
December 31, 2018
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
45,158

 
$
68,373

 
$
67,878

 
Restricted cash
80,075

 
44,786

 
30,572

 
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows
$
125,233

 
$
113,159

 
$
98,450

 


The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

Ladder Capital Corp
Notes to Consolidated Financial Statements
(Unaudited)
 
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 March 31, 2019, Ladder Capital Corp has a 89.0% 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.”

In anticipation of the Company’s election to be subject to tax as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) beginning with its 2015 taxable year (the “REIT Election”), the Company effected an internal realignment as of December 31, 2014. 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. Series REIT and Series TRS have separate boards, officers, books and records, bank accounts, and tax identification numbers. 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”). Ladder Capital Corp remains the general partner 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 and Series TRS LP Units are exchangeable for an equal number of shares (“TRS Shares”) of LC TRS I (a “TRS Exchange”).

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 Series Units and Ladder Capital Corp Class B common stock, is reflected as a noncontrolling interest in Ladder Capital Corp’s consolidated financial statements.
 

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Pursuant to LCFH’s Third Amended and Restated LLLP Agreement, dated as of December 31, 2014 and as amended from time to time, 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)
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. However, such exchange 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 Series Units, including TRS Shares as applicable, will be exchanged.
 
As a result of the Company’s ownership interest in LCFH and LCFH’s election under Section 754 of 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.

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”). In the opinion of management, the unaudited financial information for the interim periods presented in this report reflects all normal and recurring adjustments necessary for a fair statement of results of operations, financial position and cash flows. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2018, which are included in the Company’s Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this interim report. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. The interim consolidated financial statements have been prepared, without audit, and do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with 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.
 
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.


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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;
valuation of mortgage loan receivables held for sale;
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 including the valuation of underlying collateral for collateral dependent loans;
determination of other than temporary impairment of real estate securities and investments in and advances to 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 March 31, 2019 and 2018. At March 31, 2019 and 2018, 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.

Recognition of Operating Lease Income and Tenant Recoveries

The Company adopted ASC Topic 842 on January 1, 2019. The primary impact of applying ASC Topic 842 was the initial recognition of a $3.5 million lease liability and a $3.3 million right-of-use asset (including previously accrued straight line rent) on the Company’s consolidated financial statements, for leases classified as operating leases under ASC Topic 840, primarily for the Company’s corporate headquarters and other identified leases. There is no cumulative effect on retained earnings or other components of equity recognized as of January 1, 2019.


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Certain arrangements may contain both lease and non-lease components. The Company determines if an arrangement is, or contains, a lease at contract inception. Only the lease components of these contractual arrangements are subject to the provisions of ASC Topic 842. Any non-lease components are subject to other applicable accounting guidance. We have elected, however, to adopt the optional practical expedient not to separate lease components from non-lease components for accounting purposes. This policy election has been adopted for each of the Company’s leased asset classes existing as of the effective date and subject to the transition provisions of ASC Topic 842, will be applied to all new or modified leases executed on or after January 1, 2019. For contractual arrangements executed in subsequent periods involving a new leased asset class, the Company will determine at contract inception whether it will apply the optional practical expedient to the new leased asset class.

Leases are evaluated for classification as operating or finance leases at the commencement date of the lease. Right-of-use assets and corresponding liabilities are recognized on the Company’s consolidated balance sheet based on the present value of future lease payments relating to the use of the underlying asset during the lease term. Future lease payments include fixed lease payments as well as variable lease payments that depend upon an index or rate using the index or rate at the commencement date and probable amounts owed under residual value guarantees. The amount of future lease payments may be increased to include additional payments related to lease extension, termination, and/or purchase options when the Company has determined, at or subsequent to lease commencement, generally due to limited asset availability or operating commitments, it is reasonably certain of exercising such options.

The Company uses its incremental borrowing rate as the discount rate in determining the present value of future lease payments, unless the interest rate implicit in the lease arrangement is readily determinable. Lease payments that vary based on future usage levels, the nature of leased asset activities, or certain other contingencies, are not included in the measurement of lease right-of-use assets and corresponding liabilities. The Company has elected not to record assets and liabilities on its consolidated balance sheet for lease arrangements with terms of 12 months or less. 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.

Out-of-Period Adjustments

During the first quarter of 2018, the Company recorded an out-of-period adjustment to increase tenant real estate tax recoveries on a net lease property by $1.1 million, which was not billed until the three month period ended March 31, 2018, but 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, 2018 or any prior periods; accordingly, the Company recorded the related adjustment in the three month period ended March 31, 2018.


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Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“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 or financing 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). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases) (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new leasing standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which provides a new transition method at the adoption date through a cumulative-effect adjustment to the opening balance of retained earnings, prior periods will not require restatement. ASU 2018-11 also provides a new practical expedient for lessors adopting the new lease standard. Lessors have the option to aggregate nonlease components with the related lease component upon adoption of the new standard if the following conditions are met: (1) the timing and pattern of transfer for the nonlease component and the related lease component are the same and (2) the stand-alone lease component would be classified as an operating lease if accounted for separately. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842) (“ASU 2018-20”), which provides narrow amendments to clarify how to apply certain aspects of the new leasing standard. Each of the standards are effective for the Company on January 1, 2019, with early adoption permitted. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”), which aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value in Topic 820, Fair Value Measurement should be applied. ASU 2019-01 also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities.

The Company adopted ASU 2016-02, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, collectively FASB ASC Topic 842, Leases (“ASC Topic 842”), beginning January 1, 2019. The Company adopted ASU Topic 842 using the modified retrospective approach and elected to utilize the Optional Transition Method, which permits the Company to apply the provisions of ASC Topic 842 to leasing arrangements existing at or entered into after January 1, 2019, and present in its financial statements comparative periods prior to January 1, 2019 under the historical requirements of ASC Topic 840. In addition, the Company elected to adopt the package of optional transition-related practical expedients, which among other things, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. Furthermore, the Company elected not to record assets and liabilities on its consolidated balance sheets for new or existing lease arrangements with terms of 12 months or less.

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. Historically, entities generally amortized 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 adoption of ASU 2017-08 on January 1, 2019 had no material impact on the Company’s consolidated financial statements.


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Table of Contents

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 adoption of ASU 2017-11 on January 1, 2019 had no material impact on the Company’s consolidated financial statements.

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 adoption of ASU 2018-01 on January 1, 2019, had no material impact on the Company’s consolidated financial statements.

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 adoption of ASU 2018-02 on January 1, 2019 had no material impact on the Company’s consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, (“ASU 2018-09”). This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The adoption of ASU 2018-09 had no material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Pending Adoption

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. In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of ASU 2016-13. 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.

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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-02 to have a material impact on its financial statements and related disclosures.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, (“ASU 2018-17”). ASU 2018-17 requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety for determining whether a decision-making fee is a variable interest. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Entities are required to apply the amendments in ASU 2018-17 retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, (“ASU 2019-04”). ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period; early adoption is permitted. The Company previously adopted ASU 2016-01 and does not expect the amendments of ASU 2019-04 to have a material impact on its consolidated financial statements.

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.


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3. CONSOLIDATED VARIABLE INTEREST ENTITIES

FASB 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 two collateralized loan obligation (“CLO”) VIEs with the following aggregate balance sheets ($ in thousands):

 
March 31, 2019
 
December 31, 2018
 
Notes 4 & 8
 
Notes 4 & 8
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost
$
680,031

 
710,502

Accrued interest receivable
3,740

 
3,921

Other assets(1)
3,315

 
81,390

Total assets
$
687,086

 
$
795,813

 
 
 
 
Senior and unsecured debt obligations
$
503,231

 
$
607,440

Accrued expenses
1,305

 
1,471

Other liabilities
2

 
2

Total liabilities
504,538

 
608,913

 
 
 
 
Net equity in VIEs (eliminated in consolidation)
182,549

 
186,900

Total equity
182,549

 
186,900

 
 
 
 
Total liabilities and equity
$
687,087

 
$
795,813

 
(1)
Primarily consists of loan repayments in transit as of March 31, 2019.


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4. MORTGAGE LOAN RECEIVABLES
 
March 31, 2019 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries(2)
$
3,321,828

 
$
3,302,753

 
7.68
%
 
1.20
Mortgage loans transferred but not considered sold(3)
15,350

 
15,504

 
5.29
%
 
9.78
Provision for loan losses
N/A

 
(18,200
)
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost
3,337,178

 
3,300,057

 
 
 
 
Mortgage loan receivables held for sale
189,334

 
189,525

 
5.53
%
 
9.56
Total
$
3,526,512

 
$
3,489,582

 
7.57
%
 
1.69
 
(1)
March 31, 2019 London Interbank Offered Rate (“LIBOR”) rates are used to calculate weighted average yield for floating rate loans.
(2)
Includes amounts relating to consolidated variable interest entities. See Note 3.
(3)
We sell certain loans into securitizations; however, for a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860 under which the Company must surrender control over the transferred assets which must qualify as recognized financial assets at the time of transfer. The assets must be isolated from the Company, even in bankruptcy or other receivership, the purchaser must have the right to pledge or sell the assets transferred and the Company may 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. As of March 31, 2019, our portfolio included one of these loans with an outstanding face amount of $15.4 million and a carrying value of $15.5 million.

As of March 31, 2019, $798.7 million, or 24.1%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.5 billion, or 75.9% 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 March 31, 2019, $189.5 million, or 100.0%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.
 
December 31, 2018 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries
$
3,340,381

 
$
3,318,390

 
7.84
%
 
1.32
Provision for loan losses
N/A

 
(17,900
)
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost
3,340,381

 
3,300,490

 
 
 
 
Mortgage loan receivables held for sale
181,905

 
182,439

 
5.46
%
 
9.75
Total
3,522,286

 
3,482,929

 
7.76
%
 
1.77
 
(1)
December 31, 2018 LIBOR rates are used to calculate weighted average yield for floating rate loans.
(2)
Includes amounts relating to consolidated variable interest entities. See Note 3.
 

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As of December 31, 2018, $816.8 million, or 24.6%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.5 billion, or 75.4%, 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, 2018, $182.4 million, or 100%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.

The following table summarizes mortgage loan receivables by loan type ($ in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount
 
Carrying
Value
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost:
 

 
 

 
 

 
 

First mortgage loans
$
3,177,676

 
$
3,159,154

 
$
3,192,160

 
$
3,170,788

Mezzanine loans
144,152

 
143,599

 
148,221

 
147,602

Mortgage loans transferred but not considered sold(1)(2)
15,350

 
15,504

 

 

Mortgage loan receivables held for investment, net, at amortized cost
3,337,178

 
3,318,257

 
3,340,381

 
3,318,390

Mortgage loan receivables held for sale
 

 
 

 
 

 
 

First mortgage loans
189,334

 
189,525

 
181,905

 
182,439

Total mortgage loan receivables held for sale
189,334

 
189,525

 
181,905

 
182,439

 
 
 
 
 
 
 
 
Provision for loan losses
N/A

 
(18,200
)
 
N/A

 
(17,900
)
Total
$
3,526,512

 
$
3,489,582

 
$
3,522,286

 
$
3,482,929

 

(1)
As more fully described earlier in this Note, as of March 31, 2019, included in mortgage loans transferred but not considered sold is one non-controlling loan interest with an outstanding face amount of $15.4 million and a carrying value of $15.5 million that was sold to the WFCM 2019-C49 securitization trust. This transaction is considered a financing for accounting purposes.
(2)
First mortgage loans.

For the three months ended March 31, 2019 and 2018, 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
 
Mortgage loans transferred but not considered sold
 
Provision for loan losses
 
Mortgage loan 
receivables held
for sale
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
3,318,390

 
$

 
$
(17,900
)
 
$
182,439

Origination of mortgage loan receivables
224,418

 

 

 
175,256

Repayment of mortgage loan receivables
(245,444
)
 

 

 
(321
)
Proceeds from sales of mortgage loan receivables

 

 

 
(159,424
)
Realized gain on sale of mortgage loan receivables

 

 

 
7,079

Transfer between held for investment and held for sale(1)

 
15,504

 

 
(15,504
)
Accretion/amortization of discount, premium and other fees
5,389

 

 

 

Loan loss provision

 

 
(300
)
 

Balance, March 31, 2019
$
3,302,753

 
$
15,504

 
$
(18,200
)
 
$
189,525

 

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(1)
As more fully described earlier in this Note, during the three months ended March 31, 2019, the Company reclassified from mortgage loan receivables held for sale to mortgage loan receivables held for investment, net, at amortized cost, one loan with a combined outstanding face amount of $15.4 million, a combined book value of $15.5 million (fair value at date of reclassification) and a remaining maturity of 9.8 years which was sold to the WFCM 2019-C49 securitization trust. This transaction is considered a financing for accounting purposes. This transfer has been reflected as a non-cash item on the consolidated statement of cash flows for the three months ended March 31, 2019.

 
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, 2017
$
3,282,462

 
$
(4,000
)
 
$
230,180

Origination of mortgage loan receivables
434,632

 

 
532,878

Repayment of mortgage loan receivables(1)
(249,105
)
 

 
(133
)
Proceeds from sales of mortgage loan receivables(2)

 

 
(438,774
)
Realized gain on sale of mortgage loan receivables(3)

 

 
4,888

Transfer between held for investment and held for sale(4)
55,403

 

 
(55,403
)
Accretion/amortization of discount, premium and other fees
4,794

 

 

Loan loss provision

 
(3,000
)
 

Balance, March 31, 2018
$
3,528,186

 
$
(7,000
)
 
$
273,636

 
(1)
Includes $54.8 million of non-cash repayment of mortgage loan receivables held for investment.
(2)
Includes $11.1 million of non-cash proceeds from sales.
(3)
Includes $0.5 million of realized losses on loans related to lower of cost or market adjustments for the three months ended March 31, 2018.
(4)
During the three months ended March 31, 2018, 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 $57.6 million, a book value of $55.4 million (fair value at date of reclassification) and a remaining maturity of 2.5 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.

During the three months ended March 31, 2019, the transfers of financial assets via sales, other than the one non-controlling loan interest that was treated as a financing discussed above, of loans were treated as sales under ASC Topic 860 Transfers and Servicing.

At March 31, 2019 and December 31, 2018, there was $0.5 million and $0.5 million, respectively, of unamortized discounts included in our mortgage loan receivables held for investment, at amortized cost, on our consolidated balance sheets. 
    

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Provision for Loan Losses and Non-Accrual Status ($ in thousands)

 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Provision for loan losses at beginning of period
$
17,900

 
$
4,000

Provision for loan losses
300

 
3,000

Provision for loan losses at end of period
$
18,200

 
$
7,000

 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Principal balance of loans on non-accrual status
$
36,850

 
$
36,850


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, other than the three loans discussed below, are individually impaired as of March 31, 2019 and December 31, 2018. It is probable, however, that Ladder’s loan portfolio as a whole incurred an impairment due to common characteristics and shared inherent risks in the portfolio. The Company determined that a provision expense for loan losses of $0.3 million was required for the three months ended March 31, 2019. This provision consisted of a portfolio-based, general loan loss provision of $0.3 million to provide reserves for expected losses over the remaining portfolio of mortgage loan receivables held for investment, and no additional asset-specific reserves.

As of March 31, 2019, 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. These loans are directly and indirectly secured by the same property and are considered collateral dependent because repayment is expected to be provided solely by the underlying collateral. The Company placed these loans on non-accrual status in July 2017. In assessing these collateral dependent loans for impairment, the most significant consideration is the fair value of the underlying real estate collateral, which includes an in-place long-dated retail lease. The value of such properties is most significantly affected by the contractual lease payments and the appropriate market capitalization rates, which are driven by the property’s market strength, the general interest rate environment and the retail tenant’s creditworthiness. In view of these considerations, the Company uses a direct capitalization rate valuation methodology to calculate the fair value of the underlying real estate collateral. These non-recurring fair values are considered Level 3 measurements in the fair value hierarchy. Through December 31, 2017, the Company believed no loss provision was necessary as the estimated fair value of the property less the cost to foreclose and sell the property exceeded the combined carrying value of the loans. The Company utilized direct capitalization rates of 4.35% to 4.65% at December 31, 2017.

The on-going bankruptcy proceedings, rising interest rates and retail tenant’s creditworthiness, resulted in a decline in the estimated value of the collateral. As a result, on March 31, 2018, the Company recorded a provision for loss on these loans of $2.7 million to reduce the carrying value of these loans to the fair value of the property less the cost to foreclose and sell the property utilizing direct capitalization rates of 4.70% to 5.00%. As of March 31, 2019, the Company believed no additional loss provision was necessary based on the application of direct capitalization rates of 4.60% to 4.90% utilized by the Company.


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During the year ended December 31, 2018, management identified a loan with a carrying value of $45.0 million as potentially impaired, reflecting a decline in collateral value attributable to: (i) recent and near term tenant vacancies at the property; (ii) new information available during the three months ended September 30, 2018 regarding the addition of supply that will increase the submarket vacancy rate in the local market; and (iii) declining market conditions. As of September 30, 2018 this loan was not yet in default but the borrower was not expected to be able to pay off or refinance the loan at maturity. As part of the Company’s evaluation, it obtained an external appraisal of the loan collateral. Based on this review, a reserve of $10.0 million was recorded for this potentially impaired loan in the three months ended September 30, 2018 to reduce the carrying value of the loan to the estimated fair value of the collateral, less the estimated costs to sell. The Company has placed this loan on non-accrual status as of September 30, 2018. During the quarter ended December 31, 2018, this loan experienced a maturity default and its terms were modified in a Troubled Debt Restructuring (“TDR”) on October 17, 2018. The terms of the TDR provided for, among other things, the restructuring of the Company’s existing $45.0 million first mortgage loan into a $35.0 million A-Note and a $10.0 million B-Note and a 19.0% equity interest which is not subject to dilution and that can be increased to 25% under certain conditions. Under certain conditions, the B-Note may be forgiven or reduced. The restructured loan was extended for up to 12 months, including extensions. There have been no additional changes during the three months ended March 31, 2019.

Generally when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and in some cases lookback features or equity kickers to offset concessions granted should conditions impacting the loan improve. The Company's determination of credit losses is impacted by TDRs whereby loans that have gone through TDRs are considered impaired, assessed for specific reserves, and are not included in the Company's assessment of general loan loss reserves. Loans previously restructured under TDRs that subsequently default are reassessed to incorporate the Company's current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary. As of March 31, 2019, there were no unfunded commitments associated with modified loans considered TDRs.

As of March 31, 2019 and December 31, 2018 there were no other loans on non-accrual status.

During the three months ended March 31, 2019, the Company acquired title to real estate in a foreclosure. The real estate had a fair value of $18.2 million and previously served as collateral for a mortgage loan receivable held for investment, which was previously on non-accrual status. This loan had an amortized cost of $17.8 million, accrued interest of $0.2 million and an unamortized discount of $0.1 million. The acquisition was accounted for in real estate, net, at fair value on the date of foreclosure. There was no gain or loss resulting from the disposition of the loan.

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5. REAL ESTATE SECURITIES
 
Commercial mortgage backed securities (“CMBS”), CMBS interest-only securities, Agency securities, Government National Mortgage Association (“GNMA”) construction securities, GNMA permanent securities and corporate bonds 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. Equity securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in current period earnings. The following is a summary of the Company’s securities at March 31, 2019 and December 31, 2018 ($ in thousands):

March 31, 2019
 
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding
Face Amount
 
Amortized Cost Basis/Purchase Price

 
Gains
 
Losses
 
Carrying
Value
 
# of
Securities
 
Rating (1)
 
Coupon %
 
Yield %
 
Remaining
Duration
(years)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS(2)
 
$
1,475,469

 
$
1,475,900

 
$
7,504

 
$
(1,764
)
 
$
1,481,640

(3)
153

 
AAA
 
3.44
%
 
3.28
%
 
2.50
CMBS interest-only(2)(4)
 
2,436,543

 
52,682

 
933

 
(45
)
 
53,570

(5)
20

 
AAA
 
0.69
%
 
3.56
%
 
2.60
GNMA interest-only(4)(6)
 
123,684

 
2,694

 
107

 
(310
)
 
2,491

 
12

 
AA+
 
0.53
%
 
9.09
%
 
2.56
Agency securities(2)
 
660

 
673

 

 
(12
)
 
661

 
2

 
AA+
 
2.71
%
 
1.81
%
 
2.24
GNMA permanent securities(2)
 
32,346

 
32,592

 
424

 
(10
)
 
33,006

 
6

 
AA+
 
3.94
%
 
3.75
%
 
4.87
Corporate bonds(2)
 
36,441

 
35,682

 
927

 

 
36,609

 
2

 
BB-
 
3.80
%
 
5.00
%
 
1.88
Total debt securities
 
$
4,105,143

 
$
1,600,223

 
$
9,895

 
$
(2,141
)
 
$
1,607,977

 
195

 
 
 
1.73
%
 
3.33
%
 
2.52
Equity securities(7)
 
N/A

 
10,678

 
503

 
(30
)
 
11,151

 
2

 
N/A
 
N/A

 
N/A

 
N/A
Total real estate securities
 
$
4,105,143

 
$
1,610,901

 
$
10,398

 
$
(2,171
)
 
$
1,619,128

 
197

 
 
 
 
 
 
 
 
 
(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, GNMA permanent securities and corporate bonds 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)
Includes $11.7 million of restricted securities which are designated as risk retention securities under the Dodd-Frank Act and are therefore subject to transfer restrictions over the term of the securitization trust and are classified as held-to-maturity and reported at amortized cost.
(4)
The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the interest-only securities participate.
(5)
Includes $0.9 million of restricted securities which are designated as risk retention securities under the Dodd-Frank Act and are therefore subject to transfer restrictions over the term of the securitization trust and are classified as held-to-maturity and reported at amortized cost.
(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 has elected to account 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.
(7)
The Company has elected to account for equity securities at fair value with changes in fair value recorded in current period earnings.
  

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December 31, 2018