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As filed with the Securities and Exchange Commission on January 21, 2014

Registration No. 333-193071

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 3

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

LADDER CAPITAL CORP

(Exact Name of Each Registrant as Specified in Its Charter)

 

Delaware    6500    80-0925494

(State or Other Jurisdiction of

Incorporation or Organization)

  

(Primary Standard Industrial

Classification Code Number)

  

(I.R.S. employer

identification number)

 

 

345 Park Avenue, 8th Floor

New York, New York 10154

(212) 715-3170

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Marc Fox

Chief Financial Officer

Ladder Capital Corp

345 Park Avenue, 8th Floor

New York, New York 10154

(212) 715-3170

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Joshua N. Korff, Esq.

Michael Kim, Esq.

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

(212) 446-4900 (facsimile)

 

David J. Goldschmidt, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

4 Times Square

New York, New York 10036

(212) 735-3000

(212) 735-2000 (facsimile)

 

 

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as reasonably practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:   ¨

If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):   ¨

 

Large accelerated filer   ¨   Accelerated filer   ¨   Non-accelerated filer   x   Smaller reporting company   ¨

(Do not check if a smaller reporting company)

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell and does not seek an offer to buy these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale thereof is not permitted.

 

Subject to Completion, dated January 21, 2014

Preliminary Prospectus

             Shares

 

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Ladder Capital Corp

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Ladder Capital Corp, par value $0.001 per share.

Ladder Capital Corp is offering              shares of Class A common stock to be sold in the offering.

Prior to the offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We have applied to list our Class A common stock on the New York Stock Exchange (“NYSE”) under the symbol “LADR.”

We have two authorized classes of common stock: Class A and Class B. Holders of our Class A common stock and holders of our Class B common stock are each entitled to one vote per share of the applicable class of common stock all such holders will vote together as a single class. However, holders of our Class B common stock do not have any right to receive dividends or distributions upon our liquidation or winding up. Each share of Class B common stock is, from time to time, exchangeable, when paired together with one LP Unit (as defined herein) of our operating partnership, for one share of Class A common stock, subject to equitable adjustment for stock splits, stock dividends and reclassifications.

Immediately following the offering, the holders of our Class A common stock will collectively own 100% of the economic interests in Ladder Capital Corp and have     % of the voting power of Ladder Capital Corp. The holders of our Class B common stock will have the remaining     % of the voting power of Ladder Capital Corp.

We are an “emerging growth company,” as that term is defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements.

See “ Risk Factors ” on page 25 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share        Total  

Initial public offering price

   $                      $                

Underwriting discount

   $                      $                

Proceeds, before expenses, to us

   $                      $                

The underwriters have the option to purchase up to an              additional shares from us at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

The underwriters expect to deliver the shares of Class A common stock against payment therefore in New York, New York on or about                     , 2014.

Joint Book-Running Managers

 

Deutsche Bank Securities   Citigroup   Wells Fargo Securities   BofA Merrill Lynch   J.P. Morgan

Co-Managers

 

FBR   JMP Securities  

Keefe, Bruyette & Woods

A Stifel Company

Prospectus dated                     , 2014.


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     25   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     69   

ORGANIZATIONAL STRUCTURE

     71   

USE OF PROCEEDS

     78   

DIVIDEND POLICY

     79   

CAPITALIZATION

     80   

DILUTION

     81   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

     83   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     85   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     94   

BUSINESS

     140   

MANAGEMENT

     164   

EXECUTIVE COMPENSATION

     171   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     185   

PRINCIPAL STOCKHOLDERS

     191   

DESCRIPTION OF CAPITAL STOCK

     193   

SHARES ELIGIBLE FOR FUTURE SALE

     199   

U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     202   

UNDERWRITING

     206   

MARKET, INDUSTRY AND OTHER DATA

     215   

LEGAL MATTERS

     215   

EXPERTS

     215   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     215   

INDEX TO FINANCIAL STATEMENTS

     F-1   

Through and including                     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in the offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to any unsold allotment or subscription.

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor the underwriters take any responsibility for, nor can we or they provide any assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, prospects, financial condition and results of operations may have changed since that date.

 

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PROSPECTUS SUMMARY

This summary highlights material information about our business and the offering of our Class A common stock. This is a summary of material information contained elsewhere in this prospectus and is not complete and does not contain all of the information that may be important to you. For a more complete understanding of our business and the offering, you should read this entire prospectus, including the section entitled “Risk Factors,” as well as the consolidated financial statements and the related notes thereto.

Unless otherwise noted or indicated by the context, the terms “Ladder,” “Company,” “we,” “our,” and “us” refer (1) prior to the consummation of the Offering Transactions described under “Organizational Structure—Offering Transactions,” to Ladder Capital Finance Holdings LLLP (“LCFH”) and its consolidated subsidiaries, and (2) after the Offering Transactions described under “Organizational Structure—Offering Transactions,” to Ladder Capital Corp and its consolidated subsidiaries, including LCFH.

Our Company

We are a leading commercial real estate finance company with a proprietary loan origination platform and an established national footprint. As a non-bank operating company, we believe that we are well-positioned to benefit from the opportunities arising from the diminished supply of commercial real estate debt capital and the substantial demand for new financings in the sector. We believe our comprehensive, fully-integrated in-house infrastructure, access to a diverse array of committed financing sources and highly experienced management team of industry veterans will allow us to continue to prudently grow our business as we endeavor to capitalize on profitable opportunities in various market conditions.

We conduct our business through three major business lines: commercial mortgage lending, investments in securities secured by first mortgage loans, and investments in selected net leased and other commercial real estate assets. We have historically been able to generate attractive risk-adjusted returns by flexibly allocating capital among these well-established, complementary business lines. We believe that we have a competitive advantage through our ability to offer a wide range of products, providing complete solutions across the capital structure to our borrowers. We apply a comprehensive best practices underwriting approach to every loan and investment that we make, rooted in management’s deep understanding of fundamental real estate values and proven expertise in these complementary business lines through multiple economic and credit cycles.

Our primary business strategy is originating first mortgage loans, which we refer to as conduit loans, on stabilized, income producing commercial real estate properties that are available for sale in securitizations. From our inception in October 2008 through September 30, 2013, we originated $5.4 billion of conduit commercial real estate loans, $5.1 billion of which were sold into 16 securitizations, making us, by volume, the second largest non-bank contributor of loans to Commercial Mortgage-Backed Securities (“CMBS”) securitizations in the United States for that period according to Commercial Mortgage Alert. The securitization of conduit loans has been a consistently profitable business for us and enables us to reinvest our equity capital into new loan originations or allocate it to other investments. In addition to conduit loans, we originated $1.1 billion of balance sheet loans held for investment from inception through September 30, 2013. During that timeframe, we also acquired $5.2 billion of investment grade-rated securities secured by first mortgage loans on commercial real estate and $654.2 million of selected net leased and other commercial real estate assets.

 

 

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Although our securities investments and real estate assets remain available for opportunistic sales, these balance sheet business lines provide for a stable base of net interest and rental income and are complementary to our conduit lending activities. As of September 30, 2013, we had $2.5 billion in total assets and $1.2 billion in total book equity.

We seek to operate an adaptable and sustainable business model by retaining and reinvesting earnings in complementary commercial real estate investments. We are structured as a C-Corp to allow us to reinvest our equity capital, which we believe enhances our overall growth prospects and return on equity and facilitates our securitization business.

We are led by a disciplined and highly aligned management team, the core of which has worked together for more than a decade. As of September 30, 2013, our management team and chairman held equity capital accounts in our company comprising $92.1 million of book equity, or 7.9% of our total partners’ capital. On average, our management team members have 25 years of experience in the industry. Our management team includes Brian Harris, Chief Executive Officer; Michael Mazzei, President; Greta Guggenheim, Chief Investment Officer; Pamela McCormack, General Counsel and Co-Head of Securitization; Marc Fox, Chief Financial Officer; Thomas Harney, Head of Merchant Banking & Capital Markets; and Robert Perelman, Head of Asset Management.

Ladder was founded in October 2008 and we are currently capitalized by our management team and a group of leading global institutional investors, including affiliates of Alberta Investment Management Corp., GI International L.P. (“GI Partners”), Ontario Municipal Employees Retirement System and TowerBrook Capital Partners (“TowerBrook”). We have built our operating business to include 59 full-time industry professionals by hiring experienced personnel known to us in the commercial mortgage industry. Doing so has allowed us to maintain consistency in our culture and operations and to focus on strong credit practices and disciplined growth.

We have a diversified and flexible financing strategy supporting our business operations, including significant committed term financing from leading financial institutions. As of September 30, 2013, we had $1.2 billion of debt financing outstanding, including $608.0 million of financing from the FHLB (with an additional $797.0 million of committed term financing available to us), $291.2 million of third-party, non-recourse mortgage debt, $6.2 million of other securities financing, and $325.0 million of our 7.375% Senior Notes due October 1, 2017 (“Notes”). We had no committed secured term repurchase agreement financing outstanding (with an additional $1.9 billion of committed secured term financing available to us) as of September 30, 2013. As of September 30, 2013, our debt-to-equity ratio was 1.0:1.0, as we employ leverage prudently to maximize financial flexibility.

Our Market Opportunity

Commercial real estate is a capital-intensive business that relies heavily on debt capital to develop, acquire, maintain and refinance commercial properties. We believe that demand for commercial real estate debt financing, together with a reduction in the supply of traditional bank financing, presents compelling opportunities to generate attractive returns for an established, well-financed, non-bank lender like our firm.

There were $3.1 trillion of commercial mortgage loans outstanding in the United States as of September 30, 2013. The commercial real estate market faces significant near-term debt

 

 

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maturities, with over $1.6 trillion of commercial and multifamily real estate debt scheduled to mature from 2014 through 2018. The following chart shows commercial real estate debt maturities as of September 30, 2013:

 

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Source: Trepp LLC

Improving commercial property values as well as a growing CMBS market have contributed to a more positive environment for commercial real estate assets over the last several years and created a substantial opportunity for new loan origination. New issuances in the CMBS market expanded from $11.6 billion in 2010 to $48.4 billion in 2012. In the first nine months of 2013, this growth trend showed signs of accelerating as $60.5 billion of new CMBS were issued, but is still a fraction of historical issuance levels. The following chart shows historical CMBS issuance from 1995 through the first nine months of 2013:

 

LOGO

Source: Commercial Mortgage Alert

 

 

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Additionally, many traditional commercial real estate lenders that have historically competed for loans within our target market are facing tighter capital constraints due to changes in banking regulations. Given this confluence of market dynamics, we believe that we are well positioned to capitalize and profit from these industry trends.

Our Business and Growth Strategies

We have steadily built our business to capitalize on opportunities in the commercial real estate finance market, generating profitable growth while creating the diversified, national lending and investment platform we have today. We intend to utilize the net proceeds of the offering and the earnings we retain to expand our business by focusing on the following strategies:

 

   

Increasing the volume and frequency of our conduit loan securitizations .    Our primary business strategy is to originate conduit loans for sale into CMBS securitizations. We expect to be able to increase the volume and frequency of our conduit loan securitizations as a result of the growth in new CMBS issuance driven by favorable supply and demand dynamics. We believe we are well-positioned to continue to increase our market share of new U.S. CMBS issuance, which was 2.8% in 2010, 3.1% in 2011, 3.3% in 2012, and 3.6% in the first nine months of 2013, while maintaining our high credit standards and pricing discipline.

 

   

Originating more loans and increasing the average size of the loans we originate.     We expect our lending business to continue to grow as we build larger and more diverse portfolios of conduit loans for securitization, originate selected large loans for single-asset securitizations and originate additional, larger balance sheet loans held for investment. Our origination of balance sheet loans held for investment will support the growth of our conduit lending business in the future as the properties that secure these loans become eligible for longer-term conduit financing from us upon maturity. We believe that we have a competitive advantage through our ability to offer this wide range of products.

 

   

Expanding investments in selected net leased and other commercial real estate equity.     We expect to grow our net leased and other real estate investment business through direct investments as well as investments in real estate partnerships with experienced managers and co-investors. Our net leased strategy is generally to purchase real estate, originate a non-recourse conduit loan secured by that real estate and subsequently securitize that loan. This strategy has enabled us to realize an attractive levered return on our net leased real estate investments while garnering a control position in the underlying properties. We may also sell such properties for a profit. In addition, as we grow our balance sheet loan portfolio, we expect to make loans with equity-linked participations to capture a portion of any appreciation in the value of such properties.

 

   

Pursuing other attractive opportunities .    We expect to pursue other complementary growth opportunities as they arise. Such opportunities may include growing our third party asset management business as well as opportunistic acquisitions of third party commercial real estate finance-related businesses or assets that we view as synergistic with our current operations.

 

 

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Our Competitive Strengths

Our competitive strengths include:

 

   

Recognized national lending franchise.     Ladder is a recognized and well-regarded brand name in the U.S. commercial real estate lending market. From inception through September 30, 2013, we originated $5.4 billion of conduit commercial real estate loans, $5.1 billion of which were sold into 16 CMBS securitizations, making us the second largest non-bank contributor by volume to CMBS securitizations in the United States for that period, according to Commercial Mortgage Alert. We have partnered in CMBS securitizations as a loan seller and co-manager with prominent commercial real estate platforms, including affiliates of Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC. We believe our reputation as an established lender helps us access new borrowers in our origination business, and makes us an attractive partner to investors in the CMBS market as well as our lenders and securitization partners.

 

   

Established, fully-integrated commercial real estate finance platform .    Since our inception, we have operated an internally managed and vertically integrated commercial mortgage origination platform. Our staff of 59 full-time industry professionals specializing in loan origination, underwriting, structuring, securitization, trading, financing and asset management allows us to manage and control the loan process from origination through closing and, when appropriate, sale or other disposition. In an industry characterized by high barriers to entry, including requisite relationships with borrowers, mortgage brokers, securitization partners, investors (including CMBS investors), and financing sources, we are a well-established operating business with a comprehensive in-house infrastructure.

 

   

Complementary, diverse business lines.     We apply our knowledge of commercial real estate across the commercial real estate investing spectrum, including to whole loans, securities and real estate equity. We believe our ability to offer borrowers a diverse range of financing products, including interim balance sheet loans, gives us a competitive advantage compared to certain of our competitors who focus more exclusively on conduit loans. In addition, our robust and diversified investment platform provides us with the ability to capture relative value opportunities among the various products in different market environments. It affords us market presence and insight, as well as the ability to flexibly allocate our capital among our business lines to hedge risk and achieve attractive risk-adjusted returns.

 

   

Strong credit culture, experienced management team and alignment of interests.     We conduct a comprehensive credit and underwriting review prior to closing any transaction and we have not had an event of default declared or credit loss on the loans and investments we have made since our inception. Our focus on strong credit practices is supported and monitored by our experienced management team, who together with our chairman, held equity capital accounts in our company comprising $92.1 million of book equity value, representing 7.9% of total partners’ capital, as of September 30, 2013. Our credit culture is further reinforced by the alignment of our loan origination team, whose members are compensated based on loan profitability and performance and not on volume.

 

   

Operating flexibility resulting from our corporate structure and moderate leverage.     Our corporate structure facilitates our securitization business and allows us to retain and reinvest earnings. In addition, our access to diverse, long term and low-cost financing,

 

 

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particularly via our FHLB membership, is a mark of distinction compared to our non-bank competitors, allowing us to better match the characteristics of our funding liabilities with those of our investment assets at an attractive cost of funds. We also deploy leverage prudently. As of September 30, 2013, our debt-to-equity ratio was 1.0:1.0, and we had $2.7 billion of committed, undrawn funding capacity available to finance our business and $1.0 billion in unencumbered assets.

Our Business Segments

We invest primarily in loans, securities and other interests in U.S. commercial real estate, with a focus on senior secured assets. Our mix of business segments is 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:

 

     As of
September 30,
2013
     As of December 31,  
        2012      2011      2010  
     ($ in thousands)  

Loans

           

Conduit first mortgage loans

   $ 93,031       $ 623,333       $ 258,842       $ 353,946   

Balance sheet first mortgage loans

     266,180         229,926         229,378         149,104   

Other commercial real estate-related loans

     103,429         96,392         25,819         6,754   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 462,640       $ 949,651       $ 514,039       $ 509,804   

Securities

           

CMBS investments

     1,084,791         833,916         1,664,001         1,736,043   

U.S. Agency Securities investments

     232,185         291,646         281,069         189,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 1,316,976       $ 1,125,562       $ 1,945,070       $ 1,925,510   

Real Estate

           

Total real estate, net

     510,147         380,022         28,835         25,669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 2,289,763       $ 2,455,235       $ 2,487,944       $ 2,460,983   

Cash, cash equivalents and cash collateral held by broker

     98,716         109,169         138,630         105,138   

Other assets

     117,688         64,626         27,815         21,667   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,506,167       $ 2,629,030       $ 2,654,389       $ 2,587,788   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans

Conduit First Mortgage Loans .    We originate first mortgage loans, which we refer to as conduit 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 five- to ten-year terms. 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. Conduit first mortgage loans in excess of $50.0 million also require approval of our Board of Directors’ Risk and Underwriting Committee.

 

 

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Although our primary intent is to sell our conduit first mortgage loans to CMBS securitization trusts, we generally seek to maintain the flexibility to keep them on our balance sheet, offer them for sale to CMBS trusts as part of a securitization process or otherwise sell them as whole loans to third-party institutional investors. From our inception in 2008 through September 30, 2013, we originated and funded $5.4 billion of conduit first mortgage loans, and securitized $5.1 billion of such mortgage loans in 16 separate transactions, including two securitizations in 2010, three securitizations in 2011, six securitizations in 2012 and five securitizations in the nine months ended September 30, 2013. 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, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC, and we have also completed a single-asset securitization. During 2012 and the first nine months of 2013, conduit first mortgage loans have remained on our balance sheet for a weighted average of 80 and 75 days, respectively, prior to securitization, respectively. As of September 30, 2013, we held four first mortgage loans that were available to be offered for sale into a securitization with an aggregate book value of $93.0 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 64.1% at September 30, 2013.

Balance Sheet First Mortgage Loans .    We also originate and invest in balance sheet first mortgage loans secured by commercial real estate properties that are undergoing transition, including lease-up, sell-out, renovation or repositioning. These mortgage loans are structured to fit the needs and business plans of the borrowers, and generally have floating rates and terms (including extension options) ranging from one to three years. Balance sheet first mortgage loans are originated, underwritten, approved and funded using the same comprehensive legal and underwriting approach, process and personnel used to originate our conduit first mortgage loans. Balance sheet first mortgage loans in excess of $20.0 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, or offer them for sale to our institutional bridge loan partnership. From our inception in October 2008 through September 30, 2013, we originated and funded $1.1 billion of balance sheet first mortgage 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) or sold to our institutional bridge loan partnership. As of September 30, 2013, we held a portfolio of 18 balance sheet first mortgage loans with an aggregate book value of $266.2 million. 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 58.4% at September 30, 2013.

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. As of September 30, 2013, we held $103.4 million of other commercial real estate-related loans. 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 74.9%.

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

 

 

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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. CMBS investments in excess of $26.0 million require the approval of our Board of Directors’ Risk and Underwriting Committee. As of September 30, 2013, the estimated fair value of our portfolio of CMBS investments totaled $1.1 billion in 100 CUSIPs ($10.8 million average investment per CUSIP). As of that date, all of our CMBS investments were rated investment grade by Standard & Poor’s Ratings Group (“Standard & Poor’s”), Moody’s Investors Service, Inc. (“Moody’s”) or Fitch Ratings Inc. (“Fitch”), consisting of 78.9% AAA/Aaa-rated securities and 21.1% of other investment grade-rated securities, including 12.1% rated AA/Aa, 3.0% rated A/A and 6.0% rated BBB/Baa. In the future, we may invest in CMBS securities that are not rated. As of September 30, 2013, our CMBS investments had a weighted average duration of 4.3 years.

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 (“Ginnie Mae”), or by a government-sponsored enterprise (a “GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). As of September 30, 2013, the estimated fair value of our portfolio of U.S. Agency Securities was $232.2 million in 52 CUSIPs ($4.5 million average investment per CUSIP), with a weighted average duration of 3.4 years.

Real estate

Commercial real estate properties .    As of September 30, 2013, we owned 34 single tenant retail properties with an aggregate book value of $259.4 million. These properties are leased on a net basis where the tenant is generally responsible for payment of real estate taxes, building insurance and maintenance expenses. Sixteen of our properties are leased to a national pharmacy chain, and the remaining properties are leased to a national discount retailer, a regional sporting goods store, and a regional membership warehouse club. As of September 30, 2013, our net leased properties comprised a total of 1.4 million square feet, had a 100% occupancy rate, had an average age since construction of 6.6 years and a weighted average remaining lease term of 19.0 years. In addition, as of September 30, 2013, we owned a 13 story office building with a book value of $18.0 million through a joint venture with an operating partner, and a portfolio of office properties with a book value of $132.7 million through a separate joint venture with an operating partner.

Residential real estate.     As of September 30, 2013, we owned 356 residential condominium units at Veer Towers in Las Vegas with a book value of $100.2 million through a joint venture with an operating partner. As of September 30, 2013, the units were 59% rented and occupied. We sold 71 units during the nine months ended September 30, 2013, generating aggregate gains on sale of $10.9 million, and we intend to sell the remaining units over time.

Other Investments

Institutional bridge loan partnership.     In 2011, we established an institutional partnership with a Canadian sovereign pension fund to invest in first mortgage bridge loans that meet pre-defined criteria. Our partner owns 90% of the limited partnership interest and we own the remaining 10% on a pari passu basis as well as 100% of the general partnership interest. Our partner retains the discretion to accept or reject individual loans and following the expiration of an exclusivity period, we retain discretion on which loans to present to the partnership. As the

 

 

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general partner, we earn management fees and incentive fees from the partnership. In addition, we are entitled to retain origination fees of up to 1% on loans that we sell to the partnership. As of September 30, 2013, the partnership owned $146.2 million of first mortgage bridge loan assets that were financed by $50.1 million of term debt. Debt of the partnership is nonrecourse to the limited and general partners, except for customary nonrecourse carve-outs for certain actions and environmental liability. As of September 30, 2013, the book value of our investment in the institutional partnership was $9.9 million.

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, the loan was refinanced and we converted our kicker into a 25% limited liability company interest in Grace Lake JV, LLC (the “LLC”). As of September 30, 2013, the LLC owned an office building with a carrying value of $78.4 million that is financed by $78.2 million of long-term debt. Debt of the LLC is nonrecourse to the limited liability company members, except for customary nonrecourse carve-outs for certain actions and environmental liability. As of September 30, 2013, the book value of our investment in the LLC was $2.1 million.

Other asset management activities.     As of September 30, 2013, we also managed three separate CMBS investment accounts for private investors with combined total assets of $7.0 million. As of October 2012, we are no longer purchasing any new investments for these accounts, however, we will continue to manage the existing investments until their full repayment or other disposition.

Our Current 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, current and future earnings and cash flow from operations, existing debt facilities, and other borrowing programs in which we participate, including as a member of the FHLB.

We finance our portfolio of commercial real estate loans using committed term facilities provided by multiple financial institutions, with total commitments of $1.3 billion at September 30, 2013, a $50.0 million credit agreement, and through our FHLB membership. As of September 30, 2013, there was no debt outstanding under the term facilities or credit agreement. We finance our securities portfolio, including CMBS and U.S. Agency Securities, through our FHLB membership, a $600.0 million committed term master repurchase agreement from a leading domestic financial institution and uncommitted master repurchase agreements with numerous counterparties. As of September 30, 2013, we had total outstanding balances of $6.2 million under all securities master repurchase agreements. We finance our real estate investments with nonrecourse first mortgage loans. As of September 30, 2013, we had outstanding balances of $291.2 million on these nonrecourse mortgage loans. In addition to the amounts outstanding on our other facilities, we had $608.0 million of borrowings from the FHLB outstanding at September 30, 2013. We also had $325.0 million of Notes issued and outstanding as of September 30, 2013. In addition, at the closing of the offering, we intend to enter into the

 

 

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$75.0 million New Revolving Credit Facility (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources–The New Revolving Credit Facility”). See Note 7 to our consolidated financial statements for the nine months ended September 30, 2013 included elsewhere in this prospectus for more information about our financing arrangements.

The following table shows our sources of capital, including our financing arrangements, and our investment portfolio as of September 30, 2013:

 

Sources of Capital

  

($ in thousands)

 

Debt:

  

Repurchase agreements

   $ 6,151   

Borrowings under credit agreement

       

Long term financing

     291,238   

Borrowings from the FHLB

     608,000   

Senior unsecured notes

     325,000   

New Revolving Credit Facility

       
  

 

 

 

Total debt

     1,230,389   

Other liabilities

     98,458   

Capital (equity)

     1,177,321   
  

 

 

 

Total sources of capital

   $ 2,506,168   
  

 

 

 

Assets

  

($ in thousands)

 

Loans:

  

Conduit first mortgage loans

   $ 93,031   

Balance sheet first mortgage loans

     266,180   

Other commercial real estate-related loans

     103,429   
  

 

 

 

Total loans

   $ 462,640   

Securities:

  
  

CMBS investments

     1,084,791   

U.S. Agency Securities investments

     232,185   
  

 

 

 

Total securities

   $ 1,316,976   
  

Real estate:

  
  

Total real estate, net

     510,147   
  

 

 

 

Total investments

   $ 2,289,763   

Cash, cash equivalents and cash held by broker

     98,716   

Other assets

     117,689   
  

 

 

 

Total assets

   $ 2,506,168   
  

 

 

 
 

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 assets that have a duration longer than two 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 seek to match fund our assets according to the liquidity characteristics and expected holding periods of our assets.

We seek to maintain a debt-to-equity ratio of 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 loans at intervals, and also because of changes in our asset mix, due in part to such securitizations. As of September 30, 2013, our debt-to-equity ratio was 1.0:1.0. 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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Organizational Structure

Following the offering, Ladder Capital Corp will be a holding company and its sole material asset will be a controlling equity interest in LCFH. Through its ability to appoint the board of LCFH, Ladder Capital Corp will indirectly operate and control all of the business and affairs and consolidate the financial results of LCFH and its subsidiaries. Prior to the completion of the offering, the limited liability limited partnership agreement of LCFH will be amended and restated to, among other things, modify its capital structure by replacing the different classes of interests currently held by the existing owners of LCFH with a single new class of units that we refer to as “LP Units.” Certain existing owners of LCFH will own LP Units and an equivalent number of shares of Ladder Capital Corp Class B common stock as of the completion of the offering (the “Continuing LCFH Limited Partners”). Our Class B common stock will entitle holders to one vote per share and will vote as a single class with our Class A common stock issued in the offering. However, the Class B common stock will not have any economic rights. Other existing owners of LCFH have elected to receive, at or prior to the closing of this offering, shares of our Class A common stock in lieu of any and all LP units and shares of Class B common stock that would otherwise be issued to such existing investors (“Exchanging Existing Owners”). The Continuing LCFH Limited Partners will have the right to exchange an equal number of LP Units and our shares of Class B common stock for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Any of our shares of Class B common stock exchanged under the exchange provisions described above will be cancelled and any LP Units exchanged under the exchange provisions described above will thereafter be owned by Ladder Capital Corp. See “Organizational Structure.”

Investment Company Act Exemption

We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

We are organized as a holding company and conduct our businesses primarily through our wholly-owned and majority-owned subsidiaries. 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,” which excludes, among other things, 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 set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. 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 wholly-owned and majority-owned subsidiaries.

We expect that certain of our subsidiaries 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.”

 

 

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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” (as that term is interpreted under Section 3(c)(5)(C) of the Investment Company Act) 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, at the time of this offering we expect each of our subsidiaries 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 and investments in selected net leased and other commercial real estate assets. We expect each of our subsidiaries 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.

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 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. 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.

Certain of our other subsidiaries, particularly those holding significant amount of CMBS or mezzanine loans, may rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(1) or 3(c)(7) of the Investment Company Act. The securities issued by any such subsidiary exempted from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7), together with any other investment securities owned by the relevant entity, may not have a value in excess of 40% of the value of the Company or any of our subsidiaries relying Section 3(a)(1)(C), as applicable, on an unconsolidated basis.

Qualification for exemption from registration under the Investment Company Act will limit our ability to make certain investments. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such tests and/or exceptions, 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 that we have chosen. See “Business—Regulation—Investment Company Act Exemption” and “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.”

Recent Developments

The information below summarizes our preliminary financial data as of and for the three months and year ended December 31, 2013, for which consolidated financial statements are not yet available and for which the audit has not been completed. Our independent registered

 

 

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public accounting firm, PricewaterhouseCoopers LLP, has not audited, reviewed, compiled or performed any procedures on this preliminary financial data, and accordingly, does not express an opinion or other form of assurance with respect to this preliminary financial data. The estimated ranges for the three months and year ended December 31, 2013 are preliminary and may change. There can be no assurance that our final audited results of operations for such periods will not differ from these estimates. Any such changes could be material. These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with GAAP, which will be filed with the SEC pursuant to the Securities Exchange Act of 1934. In addition, these preliminary results of operations for the three months and year ended December 31, 2013 are not necessarily indicative of the results to be achieved for any future period.

Preliminary Estimates of Key Financial Metrics for the Three Months and the Year ended December 31, 2013:

As shown in the table below, for the year ended December 31, 2013 compared to the year ended December 31, 2012:

 

   

Loan originations and purchases, which includes both loans held for sale and held for investment, increased ($                 in 2013 vs. $2.4 billion in 2012), reflecting greater liquidity in the commercial mortgage loan securitization market and attractive credit spreads on originations and at securitization execution.

 

   

Proceeds from sales of loans ($                 in 2013 vs. $1.8 billion in 2012) were higher in 2013 than in the preceding year, reflecting higher loan origination volume and generally more favorable conditions prevailing in the commercial mortgage loan securitization market in 2013.

 

   

Net interest income decreased in 2013 versus the prior year due to lower average balances of interest-earning assets in 2013.

 

   

Sales of loans, net reflects the gains (losses) on loans sold during the period net of expenses related to such sales. We maintained interest rate and credit spread risk hedging positions to protect the value of loans we sold. While GAAP requires the related hedging gains (losses) to be presented on a separate income statement line, in evaluating the profitability of loan sales by comparing results across periods, sales of loans, net in conjunction with net results from derivative transactions are also considered. In that regard, sales of loans, net decreased slightly in 2013 ($                 versus $152 million) while results from derivative transactions increased versus the prior year (gain of $                 in 2013 versus loss of $31 million in 2012). Although loan sales volume (as reflected in the proceeds from sales of loans shown above) was higher in 2013, the gains included in sales of loans, net were lower and results from derivative transactions were higher due to the impact of rising interest rates during the period between origination and sale of loans into securitizations.

 

   

Net income before taxes, net income attributable to preferred and common unit holders and core earnings increased in 2013 versus the prior year due to higher loan securitization profits resulting from an increase in profitability and volume from sales of loans.

 

   

Total assets at December 31, 2013 were higher than total assets at December 31, 2012 due to lower sales of loans in the fourth quarter of 2013 coupled with strong loan origination activity in December 2013, as well as net acquisitions of CMBS and real estate during 2013.

 

 

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The estimated increase in total partners’ capital was due primarily to net income earned during 2013, which was partially offset by distributions.

As shown in the table below, for the three months ended December 31, 2013 compared to the three months ended December 31, 2012:

 

   

Loan originations and purchases in the fourth quarter of 2013 were lower than during the same period a year before ($                 in 2013 versus $867 million in the same period in 2012) primarily due to the widening of credit spreads experienced early in the fourth quarter of 2013 which had the effect of dampening loan origination activity and driving increased investment in CMBS. In the comparable period a year earlier, market conditions for originations were more favorable as credit spreads were relatively stable. Origination activity increased at the end of the fourth quarter of 2013 as credit spreads stabilized and in anticipation of increased securitization activity in 2014.

 

   

Proceeds from sales of loans during the fourth quarter of 2013 were lower than in the same period in 2012 ($                 in 2013 versus $402 million in the same period in 2012) primarily due to lower loan origination activity during the latter part of the third quarter of 2013 and the early part of the fourth quarter of 2013.

 

   

Net interest income in the fourth quarter of 2013 was lower than during the same period in 2012 primarily due to lower average balances of interest earning assets in the fourth quarter of 2013.

 

   

Sales of loans, net decreased in the fourth quarter of 2013 in comparison to the fourth quarter of 2012 as loan sales during that quarter in 2013 were $                  versus $33 million in the fourth quarter of 2012. Results from derivative transactions in the fourth quarter of 2013 reflect the rising interest rates prevailing during that period while fourth quarter results from derivative transactions reflect a rising interest rate trend.

 

   

The estimated year-over-year decreases in fourth quarter income before taxes, net income attributable to preferred and common unit holders and core earnings were primarily the result of decreased profitability and volume of loan sales from in the same period in 2013.

 

 

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Based on management’s analysis for the period ended December 31, 2013, we expect to report our financial results and position within the estimated range set forth in the following table (The corresponding metrics for the prior period are provided for the basis of comparison):

 

    Year Ended     Three Months Ended  
    December 31,
2013
    December 31,
2012
    December 31,
2013
    December 31,
2012
 

($ in thousands)

  High (est.)     Low (est.)     Actual     High (est.)     Low (est.)     Actual  

Loan originations and purchases

  $        $        $ 2,378,086      $        $        $ 867,424   

Proceeds from sale of loans

  $        $        $ 1,815,996      $        $        $ 401,929   

Net Interest Income

  $
 
  
  $        $ 99,758      $        $        $ 19,543   

Income from sale of loans, net

  $
 
  
  $        $ 151,661      $        $        $ 33,317   

Net result from derivative transactions

  $
 
  
  $        $ (30,651   $        $        $ 3,042   

Income before taxes

  $        $        $ 172,039      $        $        $ 34,529   

Net income attributable to preferred and common unitholders

  $        $        $ 169,503      $        $        $ 32,755   

Core earnings

  $        $        $ 177,528      $        $        $ 31,048   

Total assets

  $        $        $ 2,629,030      $        $        $ 2,629,030   

Total partners’ capital

  $                       $                       $ 1,097,688      $                       $                       $ 1,097,688   

We present core earnings, which is a non-GAAP financial measure, as a supplemental measure of our performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for a definition of core earnings. 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 attributable to preferred and common unit holders of LCFH or as an alternative to cash flow as a measure of our liquidity or any other performance measures calculated in accordance with GAAP.

 

 

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Set forth below is a reconciliation of income before taxes to core earnings:

 

     Year Ended     Three Months Ended  
     December 31,
2013
     December 31,
2012
    December 31,
2013
     December 31,
2012
 

($ in thousands)

   High (est.)      Low (est.)      Actual     High
(est.)
     Low
(est.)
     Actual  

Income before taxes

   $                      $                      $ 172,039      $                      $                      $ 34,529   

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

           49              61   

Real estate depreciation and amortization

           3,093              1,886   

Adjustments for unrecognized derivative results

           (8,662           (10,298

Unrealized (gain) loss on agency IO securities, net

           5,681              1,739   

Premium (discount) on long-term financing, net of amortization thereon

           2,920              2,518   

Non-cash stock-based compensation

           2,408              613   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Core Earnings

   $                      $                      $ 177,528      $                      $                      $ 31,048   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Master Repurchase Agreement

On January 15, 2014, the Company amended its term master repurchase agreement with a major U.S. insurance company to finance loans it originates. The material changes from the prior agreement include (a) extending the termination date of the facility for six months from January 24, 2014 to July 24, 2014 and (b) reducing the maximum aggregate facility amount from $300,000,000 to $150,000,000.

Corporate Information

Ladder Capital Corp was incorporated on May 21, 2013 in Delaware. 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 at www.laddercapital.com. The information on our website is not intended to form a part of or be incorporated by reference into this prospectus.

 

 

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THE OFFERING

 

Class A common stock offered by us

            shares of Class A common stock.

 

Underwriter option to purchase additional shares

            shares of Class A common stock.

 

Common stock to be outstanding

            shares of Class A common stock (or             shares if the underwriters’ option is exercised in full), including              shares of Class A common stock (or              shares if the underwriters’ option is exercised in full) to be issued in this offering and              shares of Class A common stock to be held by the Exchanging Existing Owners. If all outstanding LP Units and Class B common stock held by our existing owners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis,             shares of Class A common stock (or shares if the underwriters’ option is exercised in full) would be outstanding.

 

              shares of Class B common stock, equal to one share per LP Unit (other than any LP Units owned by Ladder Capital Corp or any of its wholly owned subsidiaries).

 

Voting

One vote per share; Class A and Class B common stock voting together as a single class.

 

Use of proceeds

We estimate that the net proceeds to us from the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us will be approximately $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A common stock). We intend to use all of the net proceeds from the offering to purchase newly issued LP Units from LCFH, as described under “Organizational Structure—Offering Transactions.”

 

The proceeds received by LCFH in connection with the sale of newly issued LP Units will be used to grow our loan origination and related commercial real estate business lines, and for general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. The declaration and payment of all future dividends, if any, will be at the discretion of our board of directors and will

 

 

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depend upon our financial condition, earnings, contractual conditions, restrictions imposed by our credit facilities and the indenture governing our Notes or applicable laws and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Listing

We have applied to list our Class A common stock on the New York Stock Exchange.

 

Proposed symbol

LADR

 

Risk factors

Please read the section entitled “Risk Factors” for a discussion of some of the factors you should carefully consider before deciding to invest in our Class A common stock.

 

Voting power held by holders of Class A

    % (or 100% if all outstanding LP Units and Class B common stock held by the Continuing LCFH Limited Partners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis).

 

Voting power held by holders of Class B

    % (or 0% if all outstanding LP Units and Class B common stock held by the Continuing LCFH Limited Partners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis).

 

Exchange rights of the Continuing LCFH Limited Partners

Prior to the offering, we will amend and restate our limited liability limited partnership agreement to provide, among other things, that each Continuing LCFH Limited Partner will have the right to cause us and LCFH to exchange an equal number of its LP Units and our shares of Class B common stock for shares of Class A common stock of Ladder Capital Corp on a one-for-one basis, subject to equitable adjustment for stock splits, stock dividends and reclassifications. Any Class B shares exchanged will be cancelled. See “Certain Relationships and Related Party Transactions—Amended and Restated Limited Liability Limited Partnership Agreement of LCFH.”

 

Tax receivable agreement

Future exchanges of LP Units for our Class A common stock pursuant to the exchange rights described above are expected to result in increases in Ladder Capital Corp’s allocable tax basis in the tangible and intangible assets of LCFH. These increases in tax basis will increase (for tax purposes) depreciation and amortization deductions allocable to Ladder Capital Corp and therefore reduce the amount of tax that Ladder Capital Corp otherwise would be required to pay in the future. This increase in tax basis may

 

 

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also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We will enter into a tax receivable agreement with the Continuing LCFH Limited Partners whereby Ladder Capital Corp will agree to pay to the Continuing LCFH Limited Partners 85% of the amount of cash tax savings, if any, in U.S. federal, state and local taxes that Ladder Capital Corp realizes as a result of these increases in tax basis, increases in basis from such payments and deemed interest deductions arising from such payments. Ladder Capital Corp 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 the Continuing LCFH Limited Partners would have been entitled to receive under the tax receivable agreement using certain valuation assumptions, including assumptions that any LP Units that have not been exchanged are deemed exchanged for the market value of the Class A common stock at the time of termination and that LCFH will have sufficient taxable income in each future taxable year to fully realize all potential tax savings.

Unless otherwise indicated, the information presented in this prospectus:

 

   

assumes an initial offering price of $         per share, the midpoint of the estimated price range set forth on the cover of this prospectus;

 

   

assumes that the underwriters’ option to purchase             additional shares of Class A common stock from us to cover over-allotments, if any, is not exercised;

 

   

assumes that certain direct or indirect existing investors in LCFH elect prior to the closing of this offering to receive              shares of our Class A common stock in lieu of any or all LP Units and shares of Class B common stock that would otherwise be issued to such existing investors, or for their benefit, in the Reorganization Transactions (see “Organizational Structure—Reorganization Transactions at LCFH”);

 

   

includes                  million of restricted Class A common stock expected to be granted under our 2014 Omnibus Incentive Plan, which represents                  shares based on the midpoint of the price range set forth on the cover of this prospectus, including              shares of restricted Class A common stock to certain of our employees, including our executive officers, and              shares of restricted Class A common stock to our directors;

 

   

excludes                 shares of Class A common stock reserved for future issuance under our 2014 Omnibus Incentive Plan, after giving effect to the expected grants detailed above; and

 

   

excludes the notional shares of our Class A common stock under the Phantom Equity Investment Plan (see “Certain Relationships and Related Party Transactions—Phantom Equity Investment Plan (Deferred Compensation Plan)”).

 

 

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SUMMARY FINANCIAL AND OTHER DATA

The following tables set forth our summary historical consolidated financial information and other data at the dates and for the periods indicated. The historical financial information and other data is that of LCFH. LCFH will be considered our predecessor for accounting purposes, and its consolidated financial statements will be our historical consolidated financial statements following the offering. The statements of operating data for the years ended December 31, 2012, 2011 and 2010 and balance sheet data as of December 31, 2012 and 2011 are derived from the audited consolidated financial statements of LCFH and related notes included in this prospectus. The statements of operating data for the nine months ended September 30, 2013 and 2012 and the balance sheet data as of September 30, 2013 are derived from the unaudited consolidated financial statements of LCFH and related notes included in this prospectus. The unaudited consolidated financial statements of LCFH have been prepared on substantially the same basis as the audited consolidated financial statements of LCFH and include all adjustments that we consider necessary for a fair presentation of LCFH’s consolidated financial position and results of operations for all periods presented. The balance sheet data as of December 31, 2010 is derived from the audited consolidated financial statements of LCFH and related notes that are not included in this prospectus. The balance sheet data as of September 30, 2012 has been derived from the unaudited consolidated financial statements of LCFH and related notes that are not included in this prospectus. The following consolidated financial information has been revised as described in Note 2 of the audited consolidated financial statements included elsewhere in this prospectus.

The summary unaudited pro forma consolidated statement of income data for the fiscal year ended December 31, 2012 and the nine months ended September 30, 2013 present our consolidated results of operations after giving pro forma effect to the Reorganization Transactions and Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from the offering as described under “Use of Proceeds,” as if such transactions occurred on January 1, 2012. The summary unaudited pro forma consolidated balance sheet data as of September 30, 2013 presents our consolidated financial position giving pro forma effect to the Reorganization Transactions and Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from the offering as described under “Use of Proceeds,” as if such transaction occurred on September 30, 2013. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of LCFH. The summary unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Ladder Capital Corp that would have occurred had we been in existence or operated as a public company or otherwise during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Reorganization Transactions and Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from the offering as described under “Use of Proceeds” occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The following summary financial and other data are qualified in their entirety by reference to, and should be read in conjunction with, our audited consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial

 

 

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Condition and Results of Operations,” “Selected Historical Consolidated Financial Information,” “Unaudited Pro Forma Consolidated Financial Information” and other financial information included in this prospectus. Historical results included below and elsewhere in this prospectus are not necessarily indicative of our future performance and the results for any interim period are not necessarily indicative of the operating results to be expected for the full fiscal year.

 

    Historical     Pro Forma(1)
    For the nine
months
ended

September 30,
    For the year ended
December 31,
    For the
nine
months
ended
September  30,
2013
  For the
year ended
December 31,
2012
    2013     2012     2012     2011     2010      
    (unaudited)                       (unaudited)
   

($ in thousands)

Operating Data:

             

Net interest income

  $ 55,359      $ 80,215      $ 99,758      $ 97,461      $ 80,427       

Provision for loan losses

    (450     (299     (449     —          (885    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    54,909        79,916        99,309        97,461        79,542       

Total other income

    205,478        107,611        148,994        12,350        39,251       

Total costs and expenses

    (87,947     (50,018     (76,264     (36,570     (27,149    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    172,440        137,510        172,039        73,241        91,644       

Tax expense

    (3,451     (750     (2,584     (1,510     (600    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    168,989        136,760        169,455        71,731        91,044       

Net (income) loss attributable to noncontrolling interest

    (698     (12     49        (16     —         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to preferred and common unit holders

  $ 168,291      $ 136,748      $ 169,504      $ 71,715      $ 91,044       

Net income attributable to Ladder Capital Corp

  $ —        $ —        $ —        $ —        $ —         

Balance Sheet Data (at end of period) (unaudited):

             

Cash and cash equivalents

  $ 62,527      $ 251,803      $ 45,179      $ 84,351      $ 86,991       

Mortgage loan receivables

    462,640        525,715        949,651        514,038        509,804       

Real estate securities

    1,316,976        1,288,685        1,125,562        1,945,070        1,925,510       

Real estate, net

    510,147        205,217        380,022        28,835        25,669       

Total assets

    2,506,168        2,383,480        2,629,030        2,654,389        2,587,788       

Total debt outstanding

    1,230,389        1,220,891        1,487,592        1,615,641        1,839,720       

Total liabilities

    1,328,847        1,295,745        1,530,760        1,665,326        1,869,282       

Total capital (equity)

    1,177,321        1,087,736        1,098,270        989,062        718,506       

Other Financial Data (unaudited):

             

Core earnings(2)

  $ 181,416      $ 146,480      $ 177,528      $ 104,449      $ 91,986       

Return on average equity (net income)(3)

    14.7     13.2     16.2     8.9     12.7    

Return on average equity (core earnings)(3)

    15.8     14.1     16.9     13.3     13.2    

Cost of funds(5)

  $ (42,367   $ (38,230   $ (52,994   $ (50,760   $ (55,859    

Interest income, net of cost of
funds(5)

    48,695        67,031        83,204        82,538        73,443       

Net revenues(7)

    260,387        187,528        248,303        109,811        118,793       

Other Financial and Credit Metrics (at end of period) (unaudited):

             

Debt to equity

    1.0        1.1        1.4        1.6        2.6       

Tangible equity to assets(6)

    47.0     45.6     41.8     37.3     27.8    

Unrestricted cash and investment grade securities as a % of total assets

    55.0     64.6     44.5     76.5     77.8    

Amount of undrawn committed repurchase agreement financings

  $ 1,900,000      $ 1,195,612      $ 1,195,612      $ 952,616      $ 738,241       

Amount of undrawn committed FHLB financings

  $ 797,000      $ —        $ 738,000      $ —        $ —         

Cash Flow Data:

             

Net cash provided by (used in):

             

Operating activities

  $ 764,280      $ 325,811      $ (111,367   $ 340,302      $ (231,274    

Investing activities

    (405,324     295,947        283,692        (330,377     (423,717    

Financing activities

    (341,608     (454,307     (211,498     (12,564     568,717       

 

(1) See “Unaudited Pro Forma Consolidated Financial Information.”
(2)

We present core earnings, which is a non-GAAP measure, as a supplemental measure of our performance. We define core earnings as income before taxes adjusted to exclude (i) net (income) loss attributable to noncontrolling interests in our consolidated joint ventures, (ii) real estate depreciation and amortization, (iii) the impact of derivative gains and losses

 

 

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  related to the hedging of assets on our balance sheet as of the end of the specified accounting period, (iv) unrealized gains/losses related to our investments in Federal Home Loan Mortgage Corp (“FHLMC”) and GNMA interest-only securities (together “Agency interest-only securities”), (v) the premium (discount) on long-term financing, and the related amortization of premium on long-term financing, (vi) non-cash stock-based compensation and (vii) certain one-time items. As discussed in Note 2, 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.” We exclude the results on the hedges from core earnings until the related asset is sold, and the hedge position is considered “closed.” As more fully discussed in Note 2 to the consolidated financial statements included elsewhere in this prospectus, 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 open hedging positions adjusts for timing differences between when we recognize changes in the fair values of our assets and derivatives which we use to hedge asset values.

 

   Set forth below is a reconciliation of income before taxes to core earnings:

 

      Nine months
ended September  30,
    For the year ended
December 31,
 
          2013             2012         2012     2011     2010  
   

(unaudited)

                   
   

($ in thousands)

 

Income before taxes

  $ 172,440      $ 137,510      $ 172,039      $ 73,241      $ 91,644   

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

    (698     (12     49        (16  

Real estate depreciation and amortization(1)

    11,199        1,207        3,093        703        263   

Adjustments for unrecognized derivative results(2)

    (7,026     1,636        (8,662     31,961        2,452   

Unrealized (gain) loss on agency IO securities, net

    1,850        3,942        5,681        (1,591     (2,547

Premium (discount) on long-term financing, net of amortization thereon

    1,019        402        2,920                 

Non-cash stock-based compensation

    2,632        1,795        2,408        151        174   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core earnings

  $ 181,416      $ 146,480      $ 177,528      $ 104,449      $ 91,986   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

        Nine months
ended September 30,
    For the year
ended December  31,
 
            2013             2012         2012     2011     2010  
        ($ in thousands)  

(1)

 

Depreciation – real estate

  $ 11,199      $ 1,207      $ 3,094      $ 715      $ 263   
 

Depreciation – fixed assets

    410        411        547        329        145   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Depreciation

  $ 11,609      $ 1,618      $ 3,641      $ 1,044      $ 408   
        Nine months
ended September 30,
    For the year
ended December 31,
 
        2013     2012     2012     2011     2010  

(2)

 

Hedging interest expense

  $ (6,664   $ (13,184   $ (16,554   $ (14,924   $ (6,985
  Hedging realized result (futures)     24,441        (17,005     (20,886     (32,227     (3,088
  Hedging realized result (swaps)     (8,168     (1,868     (6,872     (2,263     (8,222
  Hedging unrecognized result     7,026        (1,636     8,662        (31,961     (2,452
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Net results from derivative transactions   $ 16,635      $ (33,693   $ (35,650   $ (81,375   $ (20,747
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     We present core earnings because we believe it 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.

 

 

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     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 attributable to preferred and common unit holders of LCFH (or, on a pro forma basis, net income attributable to Ladder Capital Corp) or as an alternative to cash flow as a measure of our liquidity or any other performance measures calculated in accordance with GAAP.

 

(3) We present return on average equity as a supplemental measure for our performance. We define return on average equity as net income attributable to preferred and common unit holders divided by the average of our total capital at the end of the quarter and for the four preceding quarters. Return on average equity (core earnings) is calculated the same way except it uses core earnings as the numerator. Average capital (equity) ($ in thousands) was $1,049,410, $786,087 and $696,509 for the years ended December 31, 2012, 2011 and 2010, respectively and $1,147,983 and $1,037,340 for the nine months ended September 30, 2013 and 2012, respectively.
(4) Intentionally left blank.
(5) We present cost of funds, which is a non-GAAP 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. We net cost of funds with our interest income as presented on our consolidated statements of income to arrive at interest income, net of cost of funds, which we believe represents a more comprehensive measure of our net interest results. Set forth below is the calculation of cost of funds and interest income, net of cost of funds:

 

     For the nine months
ended September 30,
    For the year ended
December 31,
 
           2013                 2012           2012     2011     2010  
     (unaudited)  
     ($ in thousands)  

Interest expense

   $ (35,703   $ (25,046   $ (36,440   $ (35,836   $ (48,874

Net interest expense component of hedging activities(1)

     (6,664     (13,184     (16,554     (14,924     (6,985
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of funds

   $ (42,367 )     $ (38,230 )     $ (52,994 )     $ (50,760 )     $ (55,859 )  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

   $ 91,062      $ 105,261      $ 136,198      $ 133,298      $ 129,302   

Cost of funds

     (42,637     (38,230     (52,994     (50,760     (55,859
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income, net of cost of funds

   $ 48,695      $ 67,031      $ 83,204      $ 82,538      $ 73,443   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the nine months
ended September 30,
    For the year ended
December 31,
 
           2013                 2012           2012     2011     2010  

(1)   Net interest expense component of hedging activities

   $ (6,664   $ (13,184   $ (16,554   $ (14,924   $ (6,985

Hedging realized result (futures)

     24,441        (17,005     (20,886     (32,227     (3,088

Hedging realized result (swaps)

     (8,168     (1,868     (6,872     (2,263     (8,222

Hedging unrecognized result

     7,026        (1,636     8,662        (31,961     (2,452
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net result from derivative transactions

   $ 16,635      $ (33,693 )     $ (35,650 )     $ (81,375 )     $ (20,747 )  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(6) Computation excludes the impact of real estate-related intangible assets.
(7)

We present net revenues, which is a non-GAAP measure, as a supplemental measure of the Company’s performance, excluding operating expenses. We define net revenues as net interest income after provision for loan losses and total other income, which are both disclosed on the Company’s consolidated statements of income.

 

 

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  We present interest income on investments, net and income from sales of loans, net as a percent of net revenues to determine the impact of the net interest from our investments and the securitization activity on our net revenues.

 

       For the nine months ended
September 30,
     For the year ended
December 31,
 
     2013      2012      2012      2011      2010  

Net interest income after provision for loan losses

   $ 54,909       $ 79,916       $ 99,309       $ 97,461       $ 79,542   

Total other income

     205,478         107,611         148,994         12,350         39,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 260,387       $ 187,527       $ 248,303       $ 109,811       $ 118,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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RISK FACTORS

Investing in our Class A common stock involves substantial risks. In addition to the other information in this prospectus, you should carefully consider the following risk factors before investing in our Class A common stock. If any of the risks we describe below occurs, our business, financial condition or results of operations could be materially and 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 prospectus.

Risks Related to Our Operations

Our business model may not be successful. We may change our investment strategy and financing policy in the future and any such changes may not be successful.

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 have discretion regarding the assets we originate or acquire, and our management team is authorized to follow very broad investment guidelines and has great latitude within those guidelines to determine which assets make proper investments for us. In addition, at its discretion, our Board may change our investment, financing or other strategies without shareholder vote.

We are dependent on our management team, and 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

 

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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.

We may face difficulties in obtaining 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.

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.

The allocation of capital among our business lines may vary, which will affect our financial performance.

In executing our business plan, we regularly consider the allocation of capital to our various commercial real estate business lines. 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 the conduit loans we originate through securitizations, and, upon completion of a securitization, we will recognize certain non-interest revenues which are

 

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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, 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. 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.

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 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 and (iii) assessing other than temporary impairments on real estate. 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.

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.

 

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We may be subject to “lender liability” litigation.

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving 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 stockholders. 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 an “emerging growth company” under the JOBS Act we are eligible to take advantage of certain exemptions from various reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we are 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, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our securities less attractive as a result. The result may be a less active trading market for our securities and our security prices may be more volatile.

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, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Our actual operating results and financial position may differ significantly from our preliminary estimated results as of and for the three months and year ended December 31, 2013.

In this prospectus under the caption “Summary—Recent Developments,” we present certain preliminary unaudited financial data for the three months and year ended December 31, 2013. This preliminary financial data consists of estimates derived from our internal books and records and has been prepared solely by our management. Our auditors have not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial data, nor have they expressed any opinion or any other form of assurance with respect thereto. Our preliminary results are subject to change during the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for the three months and year ended December 31, 2013 are finalized. Therefore, our actual results for such periods may differ materially from these estimates. Because our financial closing procedures for the three months and year ended December 31, 2013 are not yet complete, we have provided ranges for the preliminary financial data included in this document. However, it is possible that our final reported results may not be within the ranges we currently estimate, and the differences may be material. In addition, our preliminary results for the three months and year ended December 31, 2013 are not necessarily indicative of our operating results for any future periods.

Market Risks Related to Real Estate Securities and Loans

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 over 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.

 

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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, real estate investment trusts (“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. Several other finance companies have raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for lending and investment opportunities. 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 prospectus.

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

 

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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.

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.

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 the subsequent enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007, which extended the TRIA through the end of 2014, 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.

 

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Risks Related to Our Portfolio

The value of our investments, including the CMBS in which we invest, 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:

 

   

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;

 

   

changes in interest rates and in the availability, costs and terms of financing;

 

   

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;

 

   

downturns in the markets for residential mortgage-backed securities and other asset-backed and structured products; and

 

   

civil unrest, terrorism, acts of war, nuclear or radiological disasters and natural disasters, including earthquakes, hurricanes, tornados, tsunamis and floods, which may result in uninsured and underinsured losses.

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 nonrecourse 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 nonrecourse carve-outs for certain actions and environmental liability, most commercial mortgage loans, including those underlying the CMBS in which we invest, are effectively nonrecourse 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 nonrecourse 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.

 

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The commercial mortgage 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 general 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:

 

   

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

 

   

severe weather-related damage to the property and/or its operation.

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

 

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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 generally having maturities of three years or less, 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 generally having a maturity of three years or less. Such a borrower under an interim loan often has identified a transitional asset that has been under-managed and/or is located in a recovering market. 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, 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 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.

 

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We may finance first mortgages, which may present greater risks than if we had made first mortgages directly to owners of real estate collateral.

Further, 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. 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.

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 are 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.

We may originate or acquire B-Notes, a form of subordinated mortgage loan, and we may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.

We may originate or acquire B-Notes. A B-Note is a mortgage loan typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note owners after payment to the A-Note owners. B-Notes reflect similar credit risks to comparably rated CMBS. However, since each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process following a borrower default may be limited in certain investments and circumstances. Further, B-Notes typically are secured by a single property, and so reflect the increased risks associated with a single property compared to a pool of properties. B-Notes also are less liquid than CMBS, thus we may be unable to dispose of underperforming or non-performing investments.

 

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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 loans.

We may originate or acquire subordinate loans (including mezzanine loans), subordinate participation interests in loans and subordinate CMBS. 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 the assets of the borrower may not be sufficient to satisfy the loan. 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 mezzanine 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 then by the holder of a higher-rated security. 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 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.

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.

 

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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

 

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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.

For example, in December 2012, we entered into a joint venture to purchase 427 residential condominium units in Veer Towers. There can be no assurance that this investment will generate positive cash flows in excess of the expense of owning and operating such properties.

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.

“Negative convexity” is the inverse 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. To protect against prepayments in a falling interest rate environment, typically each newly originated multifamily loan owned by us has a combination of 10 years of call/prepayment protection. However, 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.

 

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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.

A change to the conservatorship of Fannie Mae and Freddie Mac and related actions, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. federal government, could adversely affect our business.

There continues to be substantial uncertainty regarding the future of Fannie Mae and Freddie Mac, including the length of time for which they may continue to exist and in what form they may operate during that period. Due to increased market concerns about the ability of Fannie Mae and Freddie Mac to withstand future credit losses associated with securities on which they provide guarantees and loans held in their investment portfolios without the direct support of the U.S. federal government, in September 2008, the Federal Housing Finance Agency (the “FHFA”) placed Fannie Mae and Freddie Mac into conservatorship and, together with the Treasury, established a program designed to boost investor confidence in Fannie Mae and Freddie Mac by supporting the availability of mortgage financing and protecting taxpayers. The U.S. government program includes contracts between the Treasury and each of Fannie Mae and Freddie Mac that seek to ensure that each GSE maintains a positive net worth by providing for the provision of cash by the Treasury to Fannie Mae and Freddie Mac if FHFA determines that its liabilities exceed its assets. Although the U.S. government has described some specific steps that it intends to take as part of the conservatorship process, efforts to stabilize these entities may not be successful and the outcome and impact of these events remain highly uncertain. Under the statute providing the framework for the GSE’s conservatorship, either or both GSEs could also be placed into receivership under certain circumstances.

In August 2012, the Treasury announced its intention to restructure the preferred stock agreements with the GSEs. Under the new agreement, the GSEs will (a) pass on all profits to the Treasury when they make money and pay nothing when they have losses (as opposed to paying a flat 10% dividend), (b) wind down their mortgage portfolios by 15% per annum with the goal of reaching a total portfolio size of $150 billion by 2018 and (c) submit a plan to the Treasury to reduce mortgage risk for both the guaranteed book and retained portfolio by December 15, 2012. In March 2013, Fannie Mae and Freddie Mac announced that they will build a new entity as they wind down operations and may eventually be replaced by the new entity. In June 2013, a draft bill introduced to a Senate committee entitled the “Housing Finance Reform and Taxpayer Protection Act of 2013”, gave a name to this new entity—the Federal Mortgage Insurance Corporation (the “FMIC”). As proposed in the draft bill, the FMIC would be modeled in part after the Federal Deposit Insurance Corporation and would provide catastrophic reinsurance in the secondary market for mortgage-backed securities. The FMIC would also take over multi-family guarantees as the existing portfolios of Fannie Mae and Freddie Mac are wound down over a span of five years. The effects that these plans, which are not guaranteed to take effect as stated or at all, may have on our business are yet to be determined.

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 nonrecourse long-term securitizations may expose us to risks that could result in losses to us.

Following the dislocation of credit markets that commenced in 2007, the market for nonrecourse long-term securitizations has resumed and we have generally participated in that market by contributing loans to securitizations led by various large financial institutions and by leading a single-asset securitization on a single mortgage loan we originated. We may, in the future, take a larger role in leading single-asset and multi-asset securitizations of mortgage loans. To date, when we have primarily acted as a co-manager and mortgage loan seller into securitizations, we have been obligated to assume substantially similar liabilities as were required of a mortgage loan seller prior to the credit market dislocation, including with respect to representations and warranties required to be made for the benefit of investors. In particular, 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, or to repurchase or replace any mortgage loan that we contribute to the securitization that is affected by a material breach of any such representation and warranty or a material loan document deficiency; and (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. When we lead single-asset or multi-asset securitizations as 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, the securitization industry has crafted and continues to craft proposed changes to securitization practices, including proposed new standard representations and warranties, underwriting guidelines and disclosure guidelines. In addition, the securitization industry is becoming more regulated. For example, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), various federal agencies have promulgated, or are in the process of promulgating regulations with respect to various issues that affect securitizations, including (i) a requirement under the Dodd-Frank Act that issuers in securitizations retain 5% of the risk associated with securities they issue, (ii) requirements for additional disclosure, (iii) requirements for additional review and reporting and (iv) certain restrictions designed to prevent conflicts of interest. The implementation of any regulations ultimately adopted will occur over a time period that could range from two months to as long as two years. Certain regulations have already been adopted and others remain under consideration by various governmental agencies, in some cases past the deadlines set in the Dodd-Frank Act for adoption. It is expected that the risk-retention regulations will be adopted in early 2014 and that, pursuant to the Dodd-Frank Act as presently in effect, those regulations would take effect two years after adoption. Certain proposed regulations, if adopted, could alter the structure of securitizations in the future and could pose additional risks to our participation in future securitizations or could reduce or eliminate the economic benefits of participating in future securitizations.

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 we might not be able to obtain new short-term facilities or would not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets for a securitization. Our inability to refinance any short-term facilities 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-

 

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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.

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, 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. 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 stockholders’ equity, in the case of available-for-sale securities that are subject only to temporary impairments.

In many cases, our determination of the fair value of our investments will be based on valuations provided by third-party dealers and pricing services. Valuations of certain of our assets are often difficult to obtain or unreliable. 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 the 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 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

 

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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.

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, and borrowers on, 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 nonrecourse carveouts for bankruptcy and special purpose entity/separateness covenants and/or non-consolidation opinions for borrowing entities, the owners of, and borrowers on, 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 borrowers or owners is a stay of legal proceedings against such borrowers or owners, 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 and owners 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 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,

 

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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 conditions. 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 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.

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.

 

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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 and special servicers and such agents and servicers 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, generally 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.

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.

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

 

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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.

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 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 my 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 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.

 

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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.

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

 

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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.

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our Notes and other indebtedness, and could have a material adverse effect on the value of our common stock.

We have, and will continue to have, a significant amount of indebtedness. At September 30, 2013, we and our subsidiaries had approximately $1.2 billion of aggregate principal amount of indebtedness outstanding, of which $905.4 million was secured indebtedness. The New Revolving Credit Facility (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources–The New Revolving Credit Facility”) would permit us to borrow up to an additional $75 million, although we have no plans to borrow that much at this time. Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have other important consequences to you and significant effects on our business. For example, it could;

 

   

make it more difficult for us to satisfy our obligations with respect to our Notes and other debt securities, and our other debt;

 

   

increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

restrict us from capitalizing on business opportunities;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt; and

 

   

limit our ability to borrow additional funds for working capital, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.

The occurrence of any one or more of these effects could have a material adverse effect on the value of our common stock.

 

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In addition, the credit agreements governing our funding debt and the indenture governing our Notes contain, and the agreements governing future indebtedness and future debt securities may contain, restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness, which could lead to a substantial loss and a material adverse effect on the value of our common stock.

We will depend on distributions from our subsidiaries to fulfill our obligations under our indebtedness.

Our ability to service debt obligations, including our ability to pay the interest on and principal of our credit facilities, Notes and other debt securities when due, will be dependent upon cash distributions or other transfers from our subsidiaries. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us, including limitations imposed by individual debt arrangements at these subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to make any funds available to us.

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional debt in the future. Although we are subject to certain restrictions on our ability to incur additional debt in the indenture governing the senior notes and our other debt agreements, such restrictions would allow us to incur significant additional debt and are subject to significant qualifications and restrictions.

To the extent that we incur additional indebtedness or such other obligations, the risk associated with our substantial indebtedness described above, including our possible inability to service our debt, will increase. In addition, because certain of our outstanding indebtedness bears interest at variable rates of interest, we are exposed to risk from fluctuations in interest rates. We may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk, or may create additional risks.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.

Generally, the debt we have incurred to finance the mortgage loans we originate matures sooner than those mortgage loans. Our ability to make payments on and to refinance our indebtedness, including the Notes, and to fund working capital needs will depend on our ability to generate cash in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness, on or before the maturity thereof, sell assets or seek to raise additional capital, any of which could have a material adverse effect on our operations and the value of our

 

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common stock. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness, will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future indebtedness may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest or principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as the value of our common stock.

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our financial condition and results of operations.

If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. Our assets or cash flow could be insufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. As a result, any default by us on our indebtedness could have a material adverse effect on our business and could have a material adverse effect on the value of our common stock.

The indenture governing our Notes and the credit agreements governing our funding debt will restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The indenture governing our Notes and the credit agreements governing our funding debt will impose significant operating and financial restrictions and limit the ability of LCFH, Ladder Capital Finance Corporation and their restricted subsidiaries to, among other things:

 

   

incur additional indebtedness and guarantee indebtedness;

 

   

pay dividends or make other distributions in respect of, or repurchase or redeem, partnership interests or capital stock;

 

   

prepay, redeem or repurchase certain debt;

 

   

sell or otherwise dispose of assets;

 

   

sell stock of our subsidiaries;

 

   

incur liens;

 

   

enter into transactions with affiliates;

 

   

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

   

consolidate, merge or sell all or substantially all of our assets.

 

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As a result of these covenants and restrictions, we are and will be limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. In addition, we will be required to maintain specified financial ratios and satisfy other financial condition tests. The terms of any future indebtedness we may incur could include more restrictive covenants. We may be unable to maintain compliance with these covenants in the future and, if we fail to do so, we may be unable to obtain waivers from the lenders and/or amend the covenants.

Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition, as well as the value of our common stock, could be adversely affected.

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 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. 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, our broker-dealer subsidiary is subject to routine periodic examination by the staff of FINRA.

As a registered broker-dealer and member of a self-regulatory organization, our broker-dealer subsidiary is subject to the SEC’s uniform net capital rule. Rule 15c3-1 of the Securities Exchange Act of 1934, as amended (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 will result in additional regulation by the SEC, the U.S. Commodity Futures Trading Commission (“CFTC”) and other regulators of our broker-dealer subsidiary. 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

 

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establishing fiduciary duties for broker-dealers and directing the SEC to examine and improve sales practices and disclosure by broker-dealers and investment advisers. Our broker-dealer subsidiary will also be affected by rules to be adopted by federal agencies pursuant to the Dodd-Frank Act that require any person who organizes or initiates an asset-backed security transaction to retain a portion (generally, at least five percent) of any credit risk that the person conveys to a third party. Securitizations will also be affected by rules proposed by the SEC in September 2011 to implement the Dodd-Frank Act’s prohibition against 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 proposed rules would except bona fide market-making activities and risk-mitigating hedging activities in connection with securitization activities from the general prohibition.

If our subsidiaries that are regulated as registered investment advisers are unable to meet the requirements of the SEC or fail to comply with certain federal and state securities laws and regulations, they may face termination of their investment adviser registration, fines or other disciplinary action.

Two of our subsidiaries are regulated by the SEC as registered investment advisers. Registered investment advisers are subject to the requirements and regulations of the Investment Advisers Act of 1940, as amended (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. Non-compliance with the Advisers Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational damage.

If our subsidiaries that are regulated as registered investment advisers are unable to successfully negotiate the terms of their management fees, our results of operations could be negatively impacted.

Our asset management business, which currently consists of our institutional bridge loan partnership (a private investment fund) in addition to three separate CMBS managed accounts, 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.

In connection with creating new investment products or securing additional investments in existing accounts and vehicles, we negotiate terms with existing and 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.

 

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The historical returns attributable to the accounts and investment vehicles 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 the Notes.

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.

One of our subsidiaries that advises private investment funds may provide investors the right to redeem their investments in these funds or to cause these funds to be dissolved. In addition, the investment management agreements related to our separately managed accounts may permit the investor to terminate our management of such account on short notice. Any of these events would lead to a decrease in our revenues, which could be substantial.

Investors in any private investment funds advised by one of our subsidiaries may have the right redeem their investments on an annual, semi-annual or quarterly basis following the expiration of a specified period of time when capital may not be withdrawn, subject to the applicable fund’s specific redemption provisions. In a declining market, the pace of redemptions and consequent reduction in our subsidiary’s assets under management could accelerate. The decrease in revenues that would result from significant redemptions in our subsidiary’s funds could have a material adverse effect on our business, revenues, net income and cash flows.

One of our subsidiaries currently manages certain separately managed accounts whereby it earns management and incentive fees. The investment management agreements our subsidiary enters into in connection with managing separately managed accounts on behalf of certain clients may be terminated by such clients on relatively short notice. In the case of any such terminations, the management and incentive fees our subsidiary earns in connection with managing such account would cease, which could result in an adverse impact on our revenues.

The governing agreements of any private investment funds advised by one of our subsidiaries may provide that, subject to certain conditions, third-party investors in those funds will have the right to remove the general partner of the fund or to accelerate the liquidation date of the investment fund without cause by a simple majority vote, resulting in a reduction in the compensation we would earn from such investment funds. Finally, the applicable funds would cease to exist. In addition to having a negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our investment funds could result in significant reputational damage to us.

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.

All of our separately managed accounts and private funds do and would have an adviser that is regulated as a registered investment adviser under the Advisers Act, which requires these investment management agreements to be terminated upon an “assignment” without investor consent. Such “assignment” may be deemed to occur in the event such adviser was to experience a direct or indirect change of control (at the Company level). Termination of these agreements would cause us to lose the fees we earn from such accounts or funds.

 

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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. Any limitation on the activities of the captive and regulatory proceeding, regulatory limitation or sanction, loss of license or change of laws or regulation affecting the captive could affect the ability of the captive to borrow from the FHLB and thereby limit a source of financing for our operations.

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. As a member, the captive is required to purchase shares of the FHLB based on the amount of funds 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, both with respect to the shares of the FHLB and the assets provided by the captive as collateral. 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 may pass regulatory initiatives adverse to captive insurance companies which may lead to limited lending to captive insurance companies and possibly termination of our FHLB membership.

The FHFA is the regulator of the FHLB. The FHFA has issued two formal regulatory initiatives to address its concerns regarding captive insurance companies as members of the FHLB. These initiatives could (i) impact whether additional captive insurance companies may become members of an FHLB, (ii) limit lending by FHLB to captive insurance companies members, (iii) incentivize captive insurance companies to voluntarily withdraw from membership or (iv) dictate the involuntary termination of captive insurance companies and the associated repayment of their outstanding financing. Although we do not expect the FHFA to issue proposed rules in the near term, there can be no assurance that any such proposed rules will not adversely impact our captive insurance company and its access to lending by the FHLB.

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 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. 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.

 

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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, once we become a publicly traded company or otherwise have publicly traded securities such as the Notes, we will be subject to additional regulation, including the Sarbanes-Oxley Act of 2002 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.

In June 2010, the SEC approved Rule 206(4)-5 under the Advisers Act regarding “pay to play” practices by investment advisers involving campaign contributions and other payments to government clients and elected officials able to exert influence on such clients. The rule prohibits investment advisers from providing advisory services for compensation to a government client for two years, subject to very limited exceptions, after the investment adviser, its senior executives or its personnel involved in soliciting investments from government entities make contributions to certain candidates and officials in position to influence the hiring of an investment adviser by such government client. Advisers are required to implement compliance policies designed, among other matters, to track contributions by certain of the adviser’s employees and engagement of third-parties that solicit government entities and to keep certain records in order to enable the SEC to determine compliance with the rule. Any failure on our part to comply with the rule could expose us to significant penalties and reputational damage. In addition, there have been similar rules on a state-level regarding “pay to play” practices by investment advisers.

It is impossible to determine the extent of the impact on us of the Dodd-Frank Act or any other new laws, regulations or initiatives that may be proposed or whether any of the proposals will become law. 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.

 

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Accounting 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 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 stockholders. 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 are required to register as an investment company under the Investment Company Act.

If we or any of our subsidiaries 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 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 in this prospectus. 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.

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investment company under Section 3(a)(1)(A) of the Investment Company Act because we will 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. Rather, we will be engaged primarily in the business of holding securities of our wholly-owned and majority-owned subsidiaries.

Under Section 3(a)(1)(C) of the Investment Company Act, because we are a holding company that will conduct its businesses primarily through wholly-owned subsidiaries, the

securities issued by these subsidiaries 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 U.S. 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. In addition, the assets we and our subsidiaries 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 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 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. Pursuant to this guidance, and depending on the characteristics of the specific investments, certain mortgage loans, participations in mortgage loans, mezzanine loans, joint venture investments, CMBS and the equity securities of other entities may not constitute “qualifying real estate assets” (as that term is interpreted under Section 3(c)(5)(C) of the Investment Company Act) or, in certain limited circumstances, real estate-related assets and therefore our investments in these types of assets may be limited. 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 are using. The SEC or its 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 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 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.

Certain of our other subsidiaries, particularly those holding significant amount of CMBS or mezzanine loans, may rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(1) or 3(c)(7) of the Investment Company Act. The securities issued by any such subsidiary exempted from the definition of

 

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“investment company” based on Section 3(c)(1) or 3(c)(7), together with any other investment securities owned by the relevant entity, may not have a value in excess of 40% of the value of the Company or any of our subsidiaries relying Section 3(a)(1)(C), as applicable, on an unconsolidated basis.

Any of the Company or our subsidiaries 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, 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 SEC or its staff could require us to adjust our strategies accordingly.

We will monitor our holdings and those of our subsidiaries to ensure continuing and ongoing compliance with these tests, and we will be responsible for making the determinations and calculations required to confirm our compliance with these tests. If the SEC does not agree with our determinations, we may be required to adjust our activities and those of our subsidiaries.

We determine whether an entity 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 strategies and our assets in order to continue to pass the 40% test. Any such adjustment in our strategies could have a material adverse effect on us.

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 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. 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.

To the extent that the SEC or its staff provides more specific guidance regarding any of the matters bearing upon our exclusion from the definition of an investment company under the Investment Company Act, 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 that we have chosen. Furthermore, although we intend to monitor the assets of our subsidiaries relying on Section 3(c)(5)(C), there can be no assurance that any such subsidiary will be able to maintain this exclusion from the definition of an investment company under the Investment Company Act. In that case, our investment in such subsidiary would be classified as an investment security, and therefore, we might be unable to maintain our overall exclusion from the definition of an investment company and thus be required to register as such under the Investment Company Act.

 

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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. We do not have a policy that expressly prohibits 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.

We may compete with our investors and our affiliated entities for certain investment opportunities.

TowerBrook and GI Partners, or one or more of their affiliates, may compete against us for investment opportunities in the future. The investment in the Company by the funds managed by TowerBrook and GI Partners did not result in any limitations on the types of investments and activities that may be made or pursued by any of the funds managed by TowerBrook and GI Partners and our amended and restated articles of incorporation provide that we shall not have any right or expectation in any corporate opportunities known to Towerbrook or GI Partners. In the future, TowerBrook or GI Partners (or one of any of their affiliates) or one or more of the funds managed by TowerBrook or GI Partners may invest in and/or control one or more other entities or businesses with investment and operating focuses that overlap with our investment and operating focus. Certain potential conflicts of interest may also arise with respect to the allocation of prospective investments between us and one or more of the funds managed by TowerBrook and GI Partners or other investment entities controlled or managed by TowerBrook and GI Partners and their affiliates. Where such allocations are appropriate, TowerBrook and GI Partners generally will act or choose not to act in a fashion that they deem reasonable and fair to each investment entity that is a party to the transaction. As a result, we may decide not to invest in otherwise desirable and beneficial investment opportunities.

Meridian Capital Group, LLC (“Meridian”), a strategic investor in us, expects, in its capacity as a commercial real estate mortgage loan broker, to present us with a geographically diverse volume of loan opportunities for our review. Meridian, however, will also provide our competitors with many, if not all, of the same loan opportunities and there can be no assurance that we will accept any of these opportunities for origination. Additionally, representatives of Meridian who may be appointed to our Board of Directors and our subsidiaries may also serve as directors of one or more other entities that compete with us.

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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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

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 securities 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 and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect our business because, among other things:

 

   

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 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

 

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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.

Certain hedging instruments are not traded on regulated exchanges and 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 significant losses.

We may enter into hedging transactions that subject us to mandatory 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 mandatory margin requirements. 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. 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.

Increased regulatory oversight of derivatives could adversely affect our hedging activities.

The Dodd-Frank Act regulates derivative transactions, which covers certain hedging instruments we may use in our risk management activities. The Dodd-Frank Act and related SEC and CFTC regulations that have been adopted to date include significant new provisions regarding the regulation of 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. Additional SEC and CFTC regulations governing derivative transactions and market participants are also expected. The legislation and new regulations could increase the operational and transactional cost of derivatives contracts and also affect the number and/or creditworthiness of available hedge counterparties.

Risks Related To the Offering and Our Class A Common Stock

An active market for our Class A common stock may not develop or be sustained.

We have applied to list our Class A common stock on the New York Stock Exchange under the symbol “LADR.” However, we cannot assure you that a regular trading market of our Class A common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active

 

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trading market for our Class A common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your Class A common stock when desired, or at all, or the prices that you may obtain for your 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 stockholders.

Even if an active trading market develops, 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 stockholders; 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.

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 the perception that such sales 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.

Upon completion of the offering we will have a total of             shares of our Class A common stock outstanding (or             shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock). All of the shares of Class A common stock that will be sold in the offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our “affiliates.” Under the Securities Act, an “affiliate” of an issuer is a person that directly or indirectly controls, is controlled by or is under common control with that issuer.

In addition, subject to certain limitations and exceptions, pursuant to certain provisions of our LLLP Agreement, unitholders of LCFH may exchange an equal number of LP Units and Class B common stock for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Upon consummation of the offering, the Continuing LCFH Limited Partners will beneficially own             LP Units, all of which will be exchangeable for shares of our Class A common stock beginning 180 days after the date of this prospectus.

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

 

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board of directors in its sole discretion. In accordance with the Delaware General Corporation Law (“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 LCFH to issue an unlimited number of additional limited liability limited partnership interests of LCFH with designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to the LP Units, and which may be exchangeable for shares of our Class A common stock.

We and certain of the existing unitholders of LCFH have agreed with the underwriters not to sell, otherwise dispose of or hedge any of our Class A common stock, subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Deutsche Bank Securities Inc. and Citigroup Global Capital Markets Inc. We have also agreed, in respect of the existing owners who have not entered into such a lock-up agreement, not to permit such existing owners to exchange their LP Units or Class B common stock for shares of our Class A common stock during such 180-day period without the prior written consent of Deutsche Bank Securities Inc. and Citigroup Global Markets Inc. The agreements provide exceptions for (1) sales to underwriters pursuant to the purchase agreement, (2) our sales in connection with existing stock incentive plans and (3) certain other exceptions. Subject to these agreements, we may issue and sell in the future additional Class A common stock. In addition, after the expiration of the 180-day lock-up period, the shares of Class A common stock issuable upon exchange of the LP Units and Class B common stock will be eligible for resale from time to time, subject to certain contractual and Securities Act restrictions.

You may be diluted by the future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise.

After the offering, we will have an aggregate of             shares of Class A common stock authorized but unissued, including             shares of Class A common stock issuable upon exchange of LP Units and Class B common stock that will be held by our owners. Our amended and restated certificate of incorporation authorizes us to issue these 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. We have reserved             shares for issuance under our 2014 Omnibus Incentive Plan. 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.

Investors in the offering will suffer immediate and substantial dilution.

The initial public offering price per share of Class A common stock will be substantially higher than our pro forma net tangible book value per share immediately after the offering. As a result, you will pay a price per Class A share that substantially exceeds the book value of our assets after subtracting our liabilities. At an offering price of $         per share, the midpoint of the estimated price range set forth on the cover of this prospectus, you will incur immediate and substantial dilution in an amount of $         per share of Class A common stock. In addition, under an existing deferred compensation plan, certain employees of LCFH may be entitled to receive shares of Class A common stock on account of certain deferred compensation plan account balances that are notionally invested in Class A common stock to the extent their interests in the plan become earned and payable. See “Dilution” and “Executive Compensation—Phantom Equity Investment Plan (Deferred Compensation Plan).”

 

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We do not intend to pay any cash dividends in the foreseeable future, which may depress the price of our Class A common stock.

We intend to reinvest any earnings in the growth of our business. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it.

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 stockholder may consider favorable by permitting our board of directors to issue one or more series of preferred stock, requiring advance notice for stockholder proposals and nominations, and placing limitations on convening stockholder meetings. In addition, we are subject to provisions of the DGCL that restrict certain business combinations with interested stockholders. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. See “Description of Capital Stock.”

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 will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the New York Stock Exchange rules promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our legal and financial compliance costs, 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. Additionally, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Furthermore, because of our relative inexperience in operating as a public company, we might not be successful in implementing these requirements. The increased costs of compliance with public company reporting requirements and our potential failure to satisfy these requirements could have a material adverse effect on our financial condition.

 

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Risks Related to Our Organization and Structure

Our only material asset after completion of the offering will be our interest in LCFH, and we are accordingly dependent upon distributions from LCFH to pay dividends, if any, taxes, payments under the tax receivable agreement, and other expenses.

We will be a holding company and will have no material assets other than our ownership of LP Units. We have no independent means of generating revenue. We intend to cause 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, and dividends, if any, 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.

We are controlled by the existing unitholders of LCFH, whose interests may differ from those of our public stockholders.

Immediately following the offering and the application of net proceeds from the offering, the existing unitholders of LCFH will control approximately     % of the combined voting power of our Class A and Class B common stock. Accordingly, the existing unitholders of LCFH, if voting in the same manner, will have the ability to elect all of the members of our board of directors, and thereby to control our management and affairs. In addition, they will be able to determine the outcome of all matters requiring shareholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company.

In addition, immediately following the offering and the application of net proceeds from the offering, the Continuing LCFH Limited Partners of LCFH will own     % of the LP Units. Because they hold their ownership interest in our business through LCFH, rather than through the public company, these existing unitholders may have conflicting interests with holders of our Class A common stock. For example, the existing unitholders of LCFH may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. In addition, the structuring of future transactions may take into consideration these existing unitholders’ tax considerations even where no similar benefit would accrue to us. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

We will be required to pay certain existing unitholders of LCFH for certain tax benefits we may claim arising in connection with future exchanges of LP Units under the LLLP Agreement, which payments could be substantial.

The Continuing LCFH Limited Partners may from time to time cause LCFH to exchange an equal number of LP Units and Class B common stock for Class A common stock of Ladder Capital Corp on a one-for-one basis (as described in more detail in “Certain Relationships and Related Party Transactions—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 LP Units and the proportionate share of LCFH’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, although the U.S. Internal Revenue Service (“IRS”) may challenge all or part of that tax basis adjustment, and a court could sustain such a challenge.

 

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We will enter into a tax receivable agreement with certain of the Continuing LCFH Limited Partners that will provide for the payment by us to them 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’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 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 will provide 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. Ladder Capital Corp will have the right to terminate the tax receivable agreement by making payments to of 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 LP Units and Class B common stock that have not been exchanged are deemed exchanged for the market value of the Class A common stock at the time of termination and that LCFH will have sufficient taxable income in each future taxable year to fully realize all potential tax savings.

Further, certain existing indirect investors in LCFH have elected to receive shares of our Class A common stock in lieu of any or all LP Units and shares of Class B common stock that would otherwise be issued to such existing investors in the Reorganization Transactions and in exchange for the ownership interests of the direct owner of LCFH interests owned by that indirect investor. See “Organizational Structure—Reorganization Transactions at LCFH.” The Company will not realize any of the cash savings in U.S. federal, state and local tax described above in relation to any Class A common stock received by the Exchanging Existing Owners in the Reorganization Transactions, and such Exchanging Existing Owners would not be party to the tax receivable agreement. Based on preliminary indications from certain existing indirect investors in LCFH, we expect to issue          shares of our Class A common stock to the Exchanging Existing Owners in the Reorganization Transactions. To the extent that existing indirect investors in LCFH elect to receive more Class A common stock in the Reorganization Transactions than currently anticipated, future possible payments under the TRA would be reduced and the portion of the tax savings retained by LCFH would be reduced, which could have a material adverse effect on our financial condition and results of operations.

There may be a material 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 us by LCFH 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, the existing unitholders of LCFH 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

 

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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 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. A Continuing LCFH Limited Partner that exchanges its LP Units and shares of 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 by us 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 will provide 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 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.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, 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. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

changes in economic conditions generally, changes in our industry and changes in the commercial finance and the real estate markets specifically;

 

   

our business and investment strategy;

 

   

our ability to obtain and maintain financing arrangements;

 

   

the financing and advance rates for our assets;

 

   

our expected leverage;

 

   

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 assets;

 

   

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 downgrade in the credit ratings assigned to our investments;

 

   

the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

 

   

our ability and the ability of our subsidiaries to maintain our and their exemptions from registration under 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;

 

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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 degree and nature of our competition;

 

   

the market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; and

 

   

the prepayment of the mortgage and other loans underlying our mortgage-backed and other asset backed securities.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this prospectus to confirm these statements in relationship to actual results or revised expectations.

See “Risk Factors” for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

 

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ORGANIZATIONAL STRUCTURE

Ladder Capital Corp was formed as a Delaware corporation on May 21, 2013. Following the reorganization and the offering, we will be a holding company and our sole material asset will be a controlling equity interest in LCFH. We have not engaged in any other business or other activities except in connection with the Reorganization Transactions and the Offering Transactions described below. We will be the sole general partner of LCFH. Accordingly, we will operate and control all of the business and affairs of LCFH and will consolidate the financial results of LCFH and its consolidated subsidiaries. The ownership interest of the limited partners of LCFH (other than Ladder Capital Corp or any of its wholly owned subsidiaries) will be reflected as a non-controlling interest in our consolidated financial statements.

The diagram below depicts our simplified organizational structure immediately following the reorganization and the offering. As discussed in greater detail below, prior to the completion of the offering, the limited liability limited partnership agreement of LCFH will be amended and restated to, among other things, modify its capital structure by replacing the different classes of interests currently held by the existing owners of LCFH with a single new class of units that we refer to as “LP Units.” In addition, we will issue to the Continuing LCFH Limited Partners a number of shares of Ladder Capital Corp Class B common stock equal to the number of LP Units held by such owner. Our Class B common stock will entitle holders to one vote per share and will vote as a single class with our Class A common stock issued in the offering. However, the Class B common stock will not have any economic rights. The amended and restated limited liability limited partnership agreement of LCFH (the “LLLP Agreement”) will also provide that each of the Continuing LCFH Limited Partners) will have the right to exchange an equal number of their LP Units and Class B common stock for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Any Class B shares exchanged will be cancelled. As part of the Reorganization Transactions, Exchanging Existing Owners have elected to receive, at or prior to the closing of this Offering,              shares of our Class A common stock in lieu of any and all LP Units and shares of Class B common stock that would otherwise be issued to such existing investors in the Reorganization Transactions. Following the offering, Ladder Capital Corp and its wholly-owned subsidiaries will own a number of LP Units equal to the number of shares of our Class A common stock that are issued and outstanding (or deemed issued and outstanding) and the Continuing LCFH Limited Partners will own the remaining outstanding LP Units.

 

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In connection with the offering, we (along with our wholly-owned subsidiaries) will acquire a number of LP Units of LCFH that is equal to the number of shares of Class A common stock that are issued and outstanding (or deemed issued and outstanding). We (along with our wholly-owned subsidiaries) will benefit from the income of LCFH and its consolidated subsidiaries to the extent of any distributions made on our (along with our wholly-owned subsidiaries’) holdings of LP Units. Any such distributions will be distributed to all holders of LP Units, including the Continuing LCFH Limited Partners, pro rata based on their holdings of LP Units.

 

LOGO

 

(1) Includes $28.3 million of restricted stock expected to be granted under our 2014 Omnibus Incentive Plan to certain directors and employees at the closing of this offering, which represents              shares based on the midpoint of the price range set forth on the cover of this prospectus. See “Executive Compensation—2014 Grants.”
(2)

See Exhibit 21.1 for a list of these subsidiaries.

 

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(3) Includes subsidiaries in our Loans segment that originate and hold conduit loans that may be subsequently sold through securitizations and balance sheet loans. Certain entities also selectively invest in note purchase financings, mezzanine debt and other structured finance products related to commercial real estate. See Exhibit 21.1 for a list of these subsidiaries and related entities. See “Business—Our Business Segments—Loans” for a description of our Loans segment.
(4) Includes subsidiaries in our Securities segment engaged in CMBS and U.S. Agency Securities investment activities. See Exhibit 21.1 for a list of these subsidiaries. See “Business—Our Business Segments—Securities” for a description of our Securities segment.
(5) Includes subsidiaries in our Real Estate segment that hold our investments in selected net leased and other commercial real estate assets. See Exhibit 21.1 for a list of these subsidiaries and related entities. See “Business—Our Business Segments—Real Estate” for a description of our Real Estate segment.
(6) Participates in both Loans and Securities segments with activity and other measures allocated between those two segments accordingly.
(7) Consists of our registered investment advisers, the co-issuer of our corporate debt and a depositor entity for our single asset securitizations. See Exhibit 21.1 for a list of these subsidiaries. See “Business—Our Business Segments—Other” for a description of our Other segment.

Reorganization Transactions at LCFH

LCFH is a holding company for the companies that directly or indirectly own and operate our business. Immediately prior to the offering, LCFH will effect certain transactions, which we collectively refer to as the “Reorganization Transactions,” intended to simplify the capital structure of LCFH. Currently, LCFH’s capital structure consists of three different classes of membership interests (Series A and Series B Participating Preferred Units and Class A Common Units), each of which has different capital accounts and amounts of aggregate distributions above which its holders share in future distributions. The net effect of the Reorganization Transactions will be to convert the current multiple-class structure into a single new class of units in LCFH called “LP Units” and an equal number of shares of Class B common stock. The conversion of all of the different classes of units of LCFH will be in accordance with conversion ratios for each class of outstanding units based upon the liquidation value of LCFH, as if it was liquidated upon the offering, with such value determined by the initial public offering price of the Class A common stock sold in the offering. The distribution of LP Units per class of outstanding units will be determined pursuant to the distribution provisions set forth in the LLLP Agreement. In addition, the Exchanging Existing Owners have elected to receive, at or prior to the closing of this offering,              shares of our Class A common stock in lieu of any or all LP Units and shares of Class B common stock that would otherwise be issued to such existing investors in the Reorganization Transactions on a one-for-one basis, which will result in Ladder Capital Corp, or a wholly-owned subsidiary of Ladder Capital Corp, owning one LP Unit for each share of Class A Common Stock so issued to the Exchanging Existing Owners.

 

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The following table summarizes the number of membership interests by class outstanding prior to the Reorganization Transactions, the conversion ratio for each class, and the number of LP Units that will be outstanding after the Reorganization Transactions and the Offering, assuming that no direct or indirect existing investors in LCFH elect prior to the closing of this offering to receive shares of our Class A common stock in lieu of any or all LP Units and shares of Class B common stock that would otherwise be issued to them or for their benefit in the Reorganization Transactions:

 

Limited Partners of LCFH

   Number of
applicable
units before
the
Reorganization
Transactions
on or about
February 4,
2014
    Conversion
Ratio in the
Reorganization
Transactions
    Number of LP Units
outstanding after the
Reorganization Transactions
and the Offering
 

Holders of Series A Participating Preferred Units

     6,115,500                       (4) 

Holders of Series B Participating Preferred Units

     2,153,054 (2)                     (5) 

Holders of Class A Common Units

      

Subtotal

     22,550,855 (2)                   (3)                   (6) 

Ownership by Ladder Capital Corp(1)

      

Total

            N/A     

 

(1) Includes $28.3 million of restricted Class A common stock expected to be granted under our 2014 Omnibus Incentive Plan, which represents              shares based on the midpoint of the price range set forth on the cover of this prospectus, including              shares of restricted Class A common stock to certain of our employees, including our executive officers, and              shares of restricted Class A common stock to our directors.
(2) The numbers shown include both vested and unvested partnership interests. The Reorganization Transactions will not affect applicable vesting timelines.
(3) The conversion ratio shown above is a weighted average conversation ratio for all Class A Common Units. The 20,512,821 Class A Common Units owned by an affiliate of Brian Harris and certain of our other investors and employees prior to the Reorganization Transactions have a conversion ratio of              per Class A Common Unit. The 910,491 Class A Common Units owned by Thomas M. Harney prior to the Reorganization Transactions have a conversion ratio in the Reorganization Transactions of              per Class A Common Unit as a result of such Class A Common Units having been originally granted by LCFH to Thomas M. Harney with a threshold amount of $0.85 per Class A Common Unit. The 1,127,543 Class A Common Units owned by an affiliate of Michael Mazzei prior to the Reorganization Transactions have a conversion ratio in the Reorganization Transactions of              per Class A Common Unit as a result of such Class A Common Units having been originally granted by LCFH to Michael Mazzei with a threshold amount of $0.97 per Class A Common Unit.
(4) All of these LP Units will be fully vested as of the completion of the Offering.
(5) With respect to these              LP Units,              will be vested and              are unvested as of the completion of the Offering.
(6) With respect to these              LP Units,              will be vested and              are unvested as of the completion of the Offering.

Immediately prior to the offering, LCFH’s limited liability limited partnership agreement will be amended and restated to, among other things, designate Ladder Capital Corp as the General Partner of LCFH and establish the LP Units. The LP Units do not carry any voting rights at Ladder Capital Corp and, following the offering, Ladder Capital Corp will have the right to determine the timing and amount of any distributions (other than tax distributions as described in “—Holding Company Structure”) to be made to holders of the LP Units from LCFH. Profits and losses of LCFH will be allocated, and all distributions generally will be made, pro rata to the holders of the LP Units.

 

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Incorporation of Ladder Capital Corp

Ladder Capital Corp was incorporated as a Delaware corporation on May 21, 2013. Ladder Capital Corp has not engaged in any business or other activities except in connection with its formation. The amended and restated certificate of incorporation of Ladder Capital Corp at the time of the offering will authorize two classes of common stock, Class A common stock and Class B common stock and one or more series of preferred stock, each having the terms described in “Description of Capital Stock.”

Prior to completion of the offering, a number of shares of Class B common stock equal to the number of outstanding LP Units owned by the Continuing LCFH Limited Partners will be issued to the Continuing LCFH Limited Partners in order to provide them with voting rights. Each Continuing LCFH Limited Partner will receive a number of shares of Class B common stock equal to the number of LP Units held by such Continuing LCFH Limited Partner. See “Description of Capital Stock—Class B Common Stock.” Holders of our Class A and Class B common stock each have one vote per share of Class A and Class B common stock, respectively, and vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

Offering Transactions

At the time of the offering, we intend to use all of the net proceeds from the offering to purchase              newly issued LP Units from LCFH. See “Use of Proceeds.” Following the offering, each of the Continuing LCFH Limited Partners may from time to time beginning 181 days after the date of this prospectus (subject to the terms of the LLLP Agreement) cause LCFH to exchange an equal number of their LP Units and 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. See “Certain Relationships and Related Transactions—Amended and Restated Limited Liability Limited Partnership Agreement of LCFH.” Any Class B shares exchanged will be cancelled. Any exchanges of LP Units for shares of Class A common stock are expected to result, with respect to Ladder Capital Corp, in increases in the tax basis of the assets of LCFH that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that Ladder Capital Corp would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.

We will enter into a tax receivable agreement with the Continuing LCFH Limited Partners that will provide for the payment from time to time by Ladder Capital Corp to such Continuing LCFH Limited Partners of 85% of the amount of the benefits, if any, that Ladder Capital Corp realizes or under certain circumstances (such as following a change of control) is deemed to realize as a result of (i) the increases in tax basis 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.

We refer to the foregoing transactions as the “Offering Transactions.”

As a result of the transactions described above:

 

   

the investors in the offering will collectively own             shares of our Class A common stock (or              shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and the Exchanging

 

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Existing Owners will collectively own              shares of Class A common stock. Ladder Capital Corp will hold              LP Units (or             LP Units if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A common stock), representing     % of the total economic interest of LCFH (or     % of the total economic interest of LCFH if the underwriters exercise in full their over-allotment option);

 

   

the Continuing LCFH Limited Partners (other than Ladder Capital Corp or any of its wholly owned subsidiaries) will collectively hold             LP Units, representing     % of the total economic interest of LCFH (or             LP Units, representing     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock), which can be exchanged together with an equal number of Class B common stock for newly-issued Class A common stock pursuant to the LLLP Agreement;

 

   

the investors in the offering will collectively have     % of the voting power in Ladder Capital Corp (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the existing owners of LCFH, including the Exchanging Existing Owners that will receive shares of Class A common stock in the Reorganization Transactions and the Continuing LCFH Limited Partners that will hold LP Units and Class B common stock that may be exchanged for newly-issued Class A common stock pursuant to the LLLP Agreement, will collectively have     % of the voting power in Ladder Capital Corp (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

Our post—offering organizational structure will allow the Continuing LCFH Limited Partners to retain their equity ownership in LCFH, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of LP Units. Investors in the offering will, by contrast, hold their equity ownership in Ladder Capital Corp, a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock.

The Continuing LCFH Limited Partners will also hold shares of Class B common stock of Ladder Capital Corp. The shares of Class B common stock have only voting and no economic rights. A share of Class B common stock cannot be transferred except in connection with a transfer of an LP Unit. Further, an LP Unit cannot be exchanged with LCFH for a share of our Class A common stock without the corresponding share of our Class B common stock being delivered together at the time of exchange for cancellation by us. Accordingly, as the Continuing LCFH Limited Partners subsequently cause LCFH to exchange LP Units for shares of Class A common stock of Ladder Capital Corp pursuant to the LLLP Agreement, the voting power afforded to the existing owners of LCFH by their shares of Class B common stock is automatically and correspondingly reduced.

Holding Company Structure

Ladder Capital Corp will be a holding company, and its sole material asset will be a controlling equity interest in LCFH. As the General Partner of LCFH, Ladder Capital Corp will indirectly control all of the business and affairs of LCFH and its subsidiaries through its ability to appoint the LCFH board.

Ladder Capital Corp will consolidate the financial results of LCFH and its subsidiaries, and the ownership interest of the Continuing LCFH Limited Partners will be reflected as a non-controlling interest in Ladder Capital Corp’s consolidated financial statements.

 

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Pursuant to the LLLP Agreement of LCFH, the board of LCFH has the right to determine when distributions (other than tax distributions) will be made to the limited partners of LCFH and the amount of any such distributions. If Ladder Capital Corp authorizes a distribution, such distribution will be made to the holders of LP Units of LCFH, including Ladder Capital Corp, pro rata in accordance with their respective percentage interests.

The holders of LP Units of LCFH, including Ladder Capital Corp, will generally have to include for purposes of calculating their U.S. federal, state and local income taxes their share of any taxable income of LCFH. Taxable income of LCFH generally will be allocated to the holders of LP Units of LCFH (including Ladder Capital Corp) pro rata in accordance with their respective share of the net profits and net losses of LCFH. LCFH is obligated, subject to available cash and applicable law and contractual restrictions (including pursuant to our debt instruments), to make cash distributions, which we refer to as “tax distributions,” based on certain assumptions, to its limited partners (including Ladder Capital Corp) pro rata in accordance with their respective percentage interests. Generally, these tax distributions will be an amount equal to our estimate of the taxable income of LCFH multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual resident in New York, New York (taking into account the non-deductibility of certain expenses). See “Certain Relationships and Related Transactions—Amended and Restated Limited Liability Limited Partnership Agreement of LCFH.”

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

We intend to use the net proceeds from the offering to purchase newly-issued LP Units from LCFH, as described under “Organizational Structure—Offering Transactions”. The proceeds received by LCFH in connection with the sale of newly issued LP Units will be used to grow our loan origination and related commercial real estate business lines, and for general corporate purposes. Although specific assets have not yet been identified, assuming that the proceeds of the offering are applied consistently with our asset allocation as of September 30, 2013, we would invest approximately $            million in our loan origination business line to make additional commercial real estate loans, $            million in securities secured by first mortgage loans and $            million in net leased and other commercial real estate assets. Actual allocation of the proceeds of the offering will ultimately be determined by management’s assessment of the long-term prospects of the business and real estate markets and individual evaluation of investment opportunities.

 

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DIVIDEND POLICY

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon, among other things, our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors the board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2013:

 

   

on a historical basis for LCFH, our predecessor;

 

   

on a pro forma basis for LCFH, our predecessor, giving effect to the real estate acquisitions described under “Unaudited Pro forma Consolidated Financial Information,” as if such transactions occurred on September 30, 2013; and

 

   

on a pro forma basis for Ladder Capital Corp giving effect to the transactions described under “Unaudited Pro Forma Consolidated Financial Information,” including the application of the proceeds from the offering as described in “Use of Proceeds” as if such transactions occurred on September 30, 2013.

You should read this table together with the information contained in this prospectus, including “Organizational Structure,” “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2013
     Ladder Capital
Finance Holdings
LLLP Actual
     Ladder Capital
Finance Holdings
LLLP Pro Forma
     Ladder Capital
Corp Pro Forma
As Adjusted
     (unaudited)
     ($ in thousands)

Cash and cash equivalents

   $ 62,527       $ 62,080      
  

 

 

    

 

 

    

 

Debt:

        

Repurchase agreements

   $ 6,151       $ 58,577      

Borrowings under credit agreement

     —           —        

New revolving credit facility

     —           —        

Long term financing

     291,238         291,238      

Borrowings from the FHLB

     608,000         608,000      

Senior unsecured notes

     325,000         325,000      
  

 

 

    

 

 

    

 

Total debt

   $ 1,230,389       $ 1,282,815      

Capital (equity):

        

Class A common stock, par value $0.001 per share, 600 million shares authorized on a pro forma basis;             shares issued and outstanding on a pro forma basis

     —           —        

Class B common stock, no par value, 100 million shares authorized on a pro forma basis;             shares issued and outstanding on a pro forma basis

     —           —        

Series A Preferred Units

     820,957         820,427      

Series B Preferred Units

     289,134         288,947      

Common Units

     57,866         57,688      

Additional paid in capital

     —           —        
  

 

 

    

 

 

    

 

Total partners’ capital / Ladder Capital Corp stockholders’ equity

     1,167,957         1,167,062      

Noncontrolling interest

     9,364         10,773      
  

 

 

    

 

 

    

 

Total capital (equity)

     1,177,321         1,177,835      
  

 

 

    

 

 

    

 

Total capitalization

   $ 2,407,710       $ 2,460,650      
  

 

 

    

 

 

    

 

 

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DILUTION

If you invest in the initial public offering of our Class A common stock, your interest will be diluted to the extent of the excess of the initial public offering price per share of our Class A common stock over the pro forma net tangible book value per share of our Class A common stock after the offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the net tangible book value per share attributable to the existing equity holders.

Our pro forma net tangible book value at September 30, 2013 was approximately $         million, which does not reflect a deduction of $56.6 million for real estate intangible assets, or $         per share of our Class A common stock, based on              total shares of common stock to be outstanding after the Reorganization Transactions and before the Offering Transactions, including              shares of Class A common stock to be held by the Exchanging Existing Owners, and              shares of Class B common stock to be held by the Continuing Existing Owners. See “Reorganization Transactions at LCFH.” Pro forma net tangible book value represents the amount of total tangible assets less total liabilities of LCFH, after giving effect to the Reorganization Transactions, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, after giving effect to the Reorganization Transactions and assuming that all of the limited partners of LCFH (other than Ladder Capital Corp) exchanged their vested LP Units and Class B common stock for newly-issued shares of our Class A common stock on a one-for-one basis.

After giving effect to the sale by us of              shares of our Class A common stock at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus in the offering, after deducting the underwriting discounts, estimated offering expenses and other related transaction costs payable by us, and the use of the estimated net proceeds as described under “Use of Proceeds,” our pro forma net tangible book value at September 30, 2013, excluding pre-Reorganization noncontrolling interest that is not convertible into Class A shares, was $         million or $         per share of Class A common stock, assuming that all of the existing unitholders of LCFH (other than Ladder Capital Corp) exchanged their vested LP Units and Class B common stock for newly issued shares of our Class A common stock on a one-for-one basis.

The following table illustrates the immediate dilution of $         per share to new stockholders purchasing Class A common stock in the offering, assuming the underwriters do not exercise their option to purchase additional shares to cover any over-allotment.

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value per share prior to the offering at September 30, 2013

   $                

Increase in net tangible book value per share attributable to Class A stockholders purchasing shares in the offering

   $                

Pro forma net tangible book value per share after the offering

   $                

Dilution to new Class A stockholders per share

   $                

The pro forma net tangible book value per share reflects the dilution from $28.3 million of restricted stock expected to be granted under our 2014 Omnibus Incentive Plan at the closing of the offering, which represents approximately              shares based on the midpoint of the price range set forth on the cover of this prospectus.

 

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The following table summarizes, on the same pro forma basis at September 30, 2013, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share paid by the existing equityholders and by new investors purchasing shares in the offering, assuming that all of the existing unitholders of LCFH (other than Ladder Capital Corp) exchanged their vested LP Units and Class B common stock for shares of our Class A common stock on a one-for-one basis.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number    Percentage     Amount    Percentage    

Existing unitholders

             $                

Restricted shares of common stock expected to be granted

            

Public investors

             $                
  

 

  

 

 

   

 

  

 

 

   

Total

        100.0        100.0  
  

 

  

 

 

   

 

  

 

 

   

If the underwriters’ option to purchase additional shares to cover any over-allotment is exercised in full, the pro forma net tangible book value per share at September 30, 2013 would have been approximately $         per share and the dilution in pro forma net tangible book value per share to new investors would be $         per share, in each case assuming that all of the existing unitholders of LCFH (other than Ladder Capital Corp) exchanged their vested LP Units and Class B common stock for shares of our Class A common stock on a one-for-one basis. Furthermore, the percentage of our shares held by existing equity owners would decrease to approximately     % and the percentage of our shares held by new investors would increase to approximately     %, in each case assuming that all of the existing unitholders of LCFH (other than Ladder Capital Corp) exchanged their vested LP Units and Class B common stock for shares of our Class A common stock on a one-for-one basis.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following tables summarize our consolidated financial data for the periods indicated. The historical financial information and other data is that of LCFH. LCFH will be considered our predecessor for accounting purposes, and its consolidated financial statements will be our historical consolidated financial statements following the offering. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated balance sheet data for years ended December 31, 2012 and 2011 and the selected consolidated statement of operating and cash flows data for years ended December 31, 2012, 2011 and 2010 are derived from the audited consolidated financial statements of LCFH included elsewhere in this prospectus. The balance sheet data as of December 31, 2010, 2009 and 2008 and the operating and cash flows data for the year ended 2009 and for the period from inception through December 31, 2008 are derived from LCFH’s audited consolidated financial statements and related notes that are not included in this prospectus. The following consolidated financial information for the years ended December 31, 2012, 2011 and 2010 has been revised as described in Note 2 of the audited consolidated financial statements included elsewhere in the prospectus. Additionally the effect of the revision in 2009 is the reclassification of unrealized gains and losses on Agency interest-only securities from other comprehensive income to a component of net income in the amount of $1.2 million.

 

    For the year ended December 31,     For the period
from inception
through
December 31,
2008
 
    2012     2011     2010     2009    
    ($ in thousands)  

Operating Data:

         

Interest income

  $ 136,198      $ 133,298      $ 129,301      $ 54,894      $ 923   

Interest expense

    (36,440     (35,836     (48,874     (16,727     (1,040
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

    99,758        97,462        80,427        38,167        (117

Provision for loan losses

    (449           (885     (566      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) after provision for loan losses

    99,309        97,462        79,542        37,601        (117

Total other income

    148,994        12,350        39,251        23,695        (44

Total costs and expenses

    (76,264     (36,570     (27,149     (18,899     (6,278
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    172,039        73,241        91,644        42,397        (6,439

Tax expense

    (2,584     (1,510     (600            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    169,455        71,731        91,044        42,397        (6,439
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interest

    49        (16                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to preferred and common unit holders

  $ 169,504      $ 71,715      $ 91,044      $ 42,397      $ (6,439
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the year ended December 31,     For the period
from inception
through
December 31,
2008
 
    2012     2011     2010     2009    
    ($ in thousands)  

Net Cash Provided By (Used in):

         

Operating activities

  $ (111,367   $ 340,302      $ (231,274   $ (45,524   $ (3,063

Investing activities

    283,692        (330,377     (423,717     (1,481,283     (104,809

Financing activities

    (211,498     (12,564     568,717        1,578,807        229,137   

Balance Sheet Data:

         

Securities

  $ 1,125,562      $ 1,945,070      $ 1,925,510      $ 1,550,901      $ 106,370   

Loans

    949,651        514,038        509,804        123,136         

Real estate

    380,022        28,835        25,669               

Other

    64,626        27,815        21,667        16,420        4,691   

Total assets

    2,629,030        2,654,389        2,587,788        1,879,776        232,461   

Total financing arrangements

    1,487,592        1,615,641        1,839,720        1,219,425         

Total liabilities

    1,530,760        1,665,326        1,869,282        1,231,286        (3,679

Total noncontrolling interest

    582        125                     

Total partners’/members’ capital

    1,098,270        989,062        718,506        648,490        228,782   

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma consolidated statements of income for the year ended December 31, 2012 and for the nine months ended September 30, 2013 present our consolidated results of operations giving pro forma effect to the Reorganization Transactions and Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from the offering as described under “Use of Proceeds,” and the purchase of real estate acquisitions described below by LCFH, as if such transactions occurred on January 1, 2012. The unaudited pro forma consolidated balance sheet as of September 30, 2013 presents our consolidated financial position giving pro forma effect to the Reorganization Transactions and Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from the offering as described under “Use of Proceeds,” and the purchase of real estate acquisitions described below by LCFH, as if such transactions occurred on September 30, 2013.

The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of LCFH. The unaudited pro forma consolidated financial information should be read together with “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the historical financial statements and related notes and the financial statements of revenue and certain expenses of the Richmond Properties and the Minneapolis Property (the “Properties”) and the related notes, included elsewhere in this prospectus.

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Ladder Capital Corp that would have occurred had we been in existence or operated as a public company or otherwise during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Reorganization Transactions and Offering Transactions described under “Organizational Structure”, the use of the estimated net proceeds from the offering as described under “Use of Proceeds” and the real estate acquisitions described below by LCFH occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The pro forma adjustments principally give effect to:

 

   

the purchase by Ladder Capital Corp of             LP Units of LCFH with the proceeds of the offering;

 

   

the purchase by LCFH of the Richmond Properties and the Minneapolis Property; and

 

   

in the case of the unaudited pro forma consolidated statements of income:

 

   

a provision for corporate income taxes on the income attributable to Ladder Capital Corp at an effective rate of      %, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction; and

 

   

compensation expense related to the $28.3 million grant of restricted stock awards to directors, members of management, and certain employees, in connection with this offering.

The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional             shares of Class A

 

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common stock from us, that the shares of Class A common stock to be sold in the offering are sold at $            per share of Class A common stock, which is the midpoint of the price range indicated on the front cover of this prospectus and that existing direct or indirect investors in LCFH elect prior to the closing of this offering to receive             shares of our Class A common stock in lieu of any or all LP Units and shares of Class B common stock that would otherwise be issued to such existing investors, or for their benefit, in the Reorganization Transactions (see “Organizational Structure—Reorganization Transactions at LCFH”) .

The unaudited pro forma consolidated financial information reflects the manner in which we will account for the Reorganization Transactions. Specifically, we will account for the reorganization transactions by which Ladder Capital Corp will become the general partner of LCFH as a transaction between entities under common control pursuant to ASC 805. Accordingly, after the reorganization, Ladder Capital Corp will reflect the assets and liabilities of LCFH at their carryover basis.

The pro forma adjustments to the unaudited consolidated financial information do not give rise to a liability under the tax receivable agreement as the Continuing LCFH Limited Partners will not be eligible to exchange their LP Units of LCFH and shares of Class B common stock of Ladder Capital Corp for shares of Class A common stock of Ladder Capital Corp, in a taxable exchange, until 180 days after the date of the offering.

The effects of the tax receivable agreement on our consolidated balance sheet upon exchange of LP Units are as follows:

 

   

we will record an increase in deferred tax assets for the estimated income tax effects of the increase in the tax basis of the assets owned by Ladder Capital Corp based on enacted federal, state and local income tax rates at the date of the transaction. To the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis of expected future earnings, we will reduce the deferred tax asset with a valuation allowance;

 

   

we will record an increase in liabilities for 85% of the estimated realizable tax benefit resulting from (i) the increase in the tax basis of the purchased interests as noted above and (ii) certain other tax benefits related to entering into the tax receivable agreement; and

 

   

we will record an increase to additional paid-in capital in an amount equal to the difference between the increase in deferred tax assets and the increase in liability due to the Continuing LCFH Limited Partners under the tax receivable agreement. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the tax receivable agreement have been estimated. All of the effects of changes in any of our estimates after the date of the purchase will be included in our net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

In certain instances, 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 will provide 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) obligations with respect to exchanged or acquired LP Units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions. These assumptions will include the assumptions that (a) we will have sufficient taxable income to fully utilize the deductions arising from the increased tax

 

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deductions and tax basis and other benefits related to entering into the tax receivable agreement and (b) that the subsidiaries of LCFH will sell certain nonamortizable assets (and realize certain related tax benefits) no later than a specified date. Accordingly, 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 case of an early termination, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and there is no assurance that we will be able to finance these obligations. Moreover, payments under the tax receivable agreement will be based on the tax reporting positions that we determine in accordance with the tax receivable agreement. Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, we will not be reimbursed for any payments previously made under the tax receivable agreement if the IRS subsequently disallows part or all of the tax benefits that gave rise to such prior payments, although future payments under the tax receivable agreement will be reduced on account of such disallowances. As a result, in certain circumstances, payments could be made under the tax receivable agreement that are significantly in excess of the benefits that we actually realize in respect of (a) the increases in tax basis resulting from our purchases or exchanges of LP Units (b) any incremental tax basis adjustments attributable to payments made pursuant to the tax receivable agreement and (c) any deemed interest deductions arising from our payments under the tax receivable agreement. Decisions made by the Continuing LCFH Limited Partners in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that we are required to make under the tax receivable agreement. For example, the earlier disposition of assets following an exchange or acquisition transaction generally will accelerate payments under the tax receivable agreement and increase the present value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase LCFH’s existing owners’ tax liability without giving rise to any obligations to make payments under the tax receivable agreement. Payments generally are due under the tax receivable agreement within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 200 basis points from the due date (without extensions) of such tax return.

The unaudited pro forma consolidated financial information reflects the acquisition adjustments made to present LCFH’s balance sheet as of September 30, 2013 as though the acquisition of the Minneapolis Property had occurred on September 30, 2013 and statements of income for the nine months ended September 30, 2013 and the year ended December 31, 2012 as though the acquisitions of the Properties had occurred on January 1, 2012. The Richmond Properties were acquired on June 7, 2013 and as such are already included in the actual results for the nine months ended September 30, 2013, for the period subsequent to June 7, 2013, and as of September 30, 2013.

The unaudited pro forma consolidated financial information do not contemplate certain amounts related to the purchase of real estate acquisitions by LCFH that are not readily determinable, such as additional general and administrative expenses that are probable, or interest income that would be earned on cash balances.

 

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Ladder Capital Corp

Unaudited Pro Forma Consolidated Balance Sheets

As of September 30, 2013

 

    Ladder Capital
Finance
Holdings LLLP
Actual
    Acquisition
Adjustments(5)
    Ladder Capital
Finance
Holdings LLLP
Pro Forma
    Pro Forma
Adjustments(1)
  Ladder Capital
Corp
Pro Forma

Assets:

         

Cash and cash equivalents(2)

  $ 62,527,331      $ (447,340   $ 62,079,991       

Cash collateral held by broker

    36,188,694          36,188,694       

Mortgage loan receivables held for investment, at amortized cost

    369,609,166          369,609,166       

Mortgage loan receivables held for sale

    93,031,322          93,031,322       

Real estate securities, available-for-sale:

         

Investment grade commercial mortgage backed securities

    877,467,235          877,467,235       

GN construction securities

    10,398,166          10,398,166       

GN permanent securities

    106,078,762          106,078,762       

Interest-only securities

    323,032,277          323,032,277       

Real estate, net

    510,146,878        51,520,000        561,666,878       

Investment in unconsolidated joint ventures

    12,074,319          12,074,319       

FHLB stock

    36,400,000          36,400,000       

Derivative instruments

    1,642,073          1,642,073       

Due from brokers

    23,404,631          23,404,631       

Accrued interest receivable

    11,433,271          11,433,271       

Other assets

    32,733,573        2,045,917        34,779,490       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,506,167,698      $ 53,118,577      $ 2,559,286,275       
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Capital:

         

Liabilities:

         

Repurchase agreements

  $ 6,151,000      $ 52,425,528      $ 58,576,528       

Long-term financing

    291,238,247          291,238,247       

Borrowings from the FHLB

    608,000,000          608,000,000       

Senior unsecured notes

    325,000,000          325,000,000       

Due to brokers

    18,153,020          18,153,020       

Derivative instruments

    19,473,262          19,473,262       

Accrued expenses

    46,390,267          46,390,267       

Other liabilities

    14,440,977        179,232        14,620,209       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,328,846,773        52,604,760        1,381,451,533       
 

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies:

         

Capital (equity):

         

Class A common stock, par value $0.001 per share,             shares authorized on a pro forma basis;             shares issued and outstanding on a pro forma basis

    —            —         

Class B common stock, no par value,             shares authorized on a pro forma basis;             shares issued and outstanding on a pro forma basis

    —            —         

Series A preferred units

    820,956,465        (529,260     820,427,205       

Series B preferred units

    289,133,997        (186,400     288,947,597       

Common units

    57,866,450        (178,915     57,687,535       

Additional paid-in capital

    —            —         
 

 

 

   

 

 

   

 

 

   

 

 

 

Total partners’ capital/Ladder Capital Corp stockholders’ equity(3)

    1,167,956,912        (894,575     1,167,062,337       

Noncontrolling interest(4)

    9,364,013        1,408,392        10,772,405       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capital (equity)

    1,177,320,925        513,817        1,177,834,742       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and capital

  $ 2,506,167,698      $ 53,118,577      $ 2,559,286,275       
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) As described in “Organizational Structure,” Ladder Capital Corp will become the General Partner of LCFH. Ladder Capital Corp will initially have     % economic interest in LCFH, but will have 100% of the voting power and control the management of LCFH. As a result, Ladder Capital Corp will consolidate the financial results of LCFH and will record non-controlling interest on the Ladder Capital Corp consolidated balance sheet. Immediately following the Restructuring Transactions and Offering Transactions, the non-controlling interest, based on the assumptions to the pro forma financial information, will be $         million. Pro forma non-controlling interest, including non-controlling interest at LCFH, represents     % of the pro forma equity of LCFH of $         million.

 

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(2) Reflects the net effect on cash and cash equivalents of the receipt of offering proceeds of $         million described in “Use of Proceeds” net of estimated expenses.
(3) Represents an adjustment to stockholders’ equity reflecting the following:
  (a) par value for Class A common stock and Class B common stock to be outstanding following the offering;
  (b) an increase of $         million of additional paid-in capital as a result of estimated net proceeds from the offering;
  (c) the elimination of LCFH partners’ equity of $         million upon consolidation.
(4) The increase in non-controlling interest reflects an increase from the reclassification of partners’ equity of $         million to non-controlling interest upon consolidation.
(5) Reflects the real estate acquired, escrow deposits on real estate (included in other assets), the repurchase agreement financing, net of cash received from operations of the properties, and additional allocation of net income to the components of total capital. The details are provided below.

 

    As of September 30, 2013  
    Cash and
Cash
Equivalents
    Real Estate,
net
    Other
Assets
    Repurchase
Agreements
    Other
Liabilities
    Total
Partners’
    Noncontrolling
interest
 

Office Building in Minneapolis, MN

  $ (447,340   $ 51,520,000      $ 2,045,917      $ 52,425,528      $ 179,232      $ (894,575   $ 1,408,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ (447,340   $ 51,520,000      $ 2,045,917      $ 52,425,528      $ 179,232      $ (894,575   $ 1,408,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Ladder Capital Corp

Unaudited Pro Forma Consolidated Statements of Income

For the Nine Months Ended September 30, 2013

 

    Ladder Capital
Finance
Holdings LLLP
Actual
    Acquisition
Adjustments(6)
    Ladder Capital
Finance
Holdings LLLP
Pro Forma
    Pro Forma
Adjustments(1)
  Ladder Capital
Corp Pro Forma

Net interest income:

         

Interest income

  $ 91,062,175        $ 91,062,175       

Interest expense

    35,703,283          35,703,283       
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    55,358,892          55,358,892       

Provision for loan losses

    450,000          450,000       
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    54,908,892          54,908,892       

Other income:

         

Operating lease income

    26,599,973        13,154,984        39,754,957       

Sale of loans, net

    141,046,263          141,046,263       

Gain (loss) on securities

    4,481,847          4,481,847       

Sale of real estate, net

    10,887,448          10,887,448       

Fee income

    5,324,872          5,324,872       

Net result from derivative transactions

    16,635,489          16,635,489       

Earnings from investment in unconsolidated joint ventures

    2,351,878          2,351,878       

Unrealized gain (loss) on agency interest only securities, net

    (1,849,924       (1,849,924    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    205,477,846        13,154,984        218,632,830       
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Salaries and employee benefits (5)

    47,937,276          47,937,276       

Operating expenses

    11,336,738          11,336,738