Ladder Capital Corp (LADR) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes of Ladder Capital Corp included within the Annual Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements” within this Annual Report and “Risk Factors” within this Annual Report for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements as a result of various factors, including but not limited to, those in “Risk Factors” set forth within this Annual Report.

References to “Ladder,” the “Company,” and “we,” “our” and “us” refer to Ladder Capital Corp, a Delaware corporation incorporated in 2013, and its consolidated subsidiaries.

Ladder Capital Corp is the sole general partner of Ladder Capital Finance Holdings LLLP (“LCFH”) and, as a result of the serialization of LCFH on December 31, 2014, became the sole general partner of Series REIT of LCFH. LC TRS I LLC, a wholly-owned subsidiary of Series REIT of LCFH, is the general partner of Series TRS of LCFH. Ladder Capital Corp has a controlling interest in Series REIT of LCFH, and through such controlling interest, also has a controlling interest in Series TRS of LCFH. Ladder Capital Corp’s only business is to act as the sole general partner of LCFH and Series REIT of LCFH, and, as a result of the foregoing, Ladder Capital Corp directly and indirectly operates and controls all of the business and affairs of LCFH, and each Series thereof, and consolidates the financial results of LCFH, and each Series thereof, into Ladder Capital Corp’s consolidated financial statements.

Overview

Ladder Capital is an internally-managed real estate investment trust (“REIT”) that is a leader in commercial real estate finance. We originate and invest in a diverse portfolio of commercial real estate and real estate-related assets, focusing on senior secured assets. Our investment activities include: (i) our primary business of originating senior first mortgage fixed and floating rate loans collateralized by commercial real estate with flexible loan structures; (ii) owning and operating commercial real estate, including net leased commercial properties; and (iii) investing in investment grade securities secured by first mortgage loans on commercial real estate. We believe that our in-house origination platform, ability to flexibly allocate capital among complementary product lines, credit-centric underwriting approach, access to diversified financing sources, and experienced management team position us well to deliver attractive returns on equity to our shareholders through economic and credit cycles.

COVID-19 Impact on the Organization

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. We continue to actively manage the liquidity and operations of the Company in light of the market disruption and overall financial impact caused by the COVID-19 pandemic across most industries in the United States. In view of the ongoing uncertainty related to the duration of the pandemic, its ultimate impact on our revenues, profitability and financial position is difficult to assess at this time. The Company has disclosed the impact of the COVID-19 global pandemic on our business throughout this Annual Report.

57

Table of Contents

Results of Operations

A discussion regarding our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below. A discussion regarding our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Year ended December 31, 2021 compared to the year ended December 31, 2020

The following table sets forth information regarding our consolidated results of operations ($ in thousands):

Investment Overview

Activity for the year ended December 31, 2021 included originating and funding $2.5 billion in principal value of commercial mortgage loans and $63.6 million of purchases of mortgage loans, which was offset by $305.6 million of sales and $1.1 billion of principal repayments. We acquired $247.0 million of new securities, which was offset by $438.6 million of sales and $164.5 million of amortization in the portfolio, which partially contributed to a net decrease in our securities portfolio of $355.0 million during the year ended December 31, 2021. We also invested $102.2 million in real estate, which included $81.8 million of real estate acquired via foreclosure, and received proceeds from the sale of real estate of $219.2 million.

58

Table of Contents

Activity for the year ended December 31, 2020 included originating and funding $566.5 million in principal value of commercial mortgage loans, which was offset by $582.8 million of sales and $961.2 million of principal repayments. We acquired $440.4 million of new securities, which was partially offset by $931.9 million of sales and $135.9 million of amortization in the portfolio, which partially contributed to a net decrease in our securities portfolio of $663.0 million during the year ended December 31, 2020. We also invested $36.7 million in real estate, which included $29.3 million of real estate acquired via foreclosure, and received proceeds from the sale of real estate of $98.7 million.

Operating Overview

Net income (loss) totaled $56.9 million for the year ended December 31, 2021, compared to $(9.5) million for the year ended December 31, 2020. The most significant drivers of the $66.4 million increase are as follows:

•an increase in total other income (loss) of $41.8 million, primarily as a result of a $23.7 million increase in realized gain on sale of real estate, net, a $17.0 million increase in net results from derivative transactions, a $14.0 million increase as a result of realized gain on securities, and an increase of $10.0 million in sales of loans, partially offset by a decrease of $22.3 million of gain on extinguishment of debt;

•an increase in net interest income after provision for loan losses of $7.8 million, as a result of a $27.0 million release of provision partially offset by a $19.2 million net decline of net interest income comprised of a $63.8 million decrease in interest income and a $44.5 million decrease in interest expense;

•a decrease in total costs and expenses of $27.5 million compared to the prior year, primarily attributable to a $19.8 million decrease in compensation and employee benefits, a $2.6 million decrease in operating expenses and a $2.4 million decrease in real estate operating expenses; and

•a decrease of $10.7 million in income tax expense (benefit) compared to the prior year is primarily as a result of taxable gain primarily as a result of loan sales in 2021 and net operating losses generating tax benefits in 2020.

Income (Loss) Before Taxes

Income (loss) before taxes totaled $57.8 million for the year ended December 31, 2021, compared to $(19.2) million for the year ended December 31, 2020. The significant components of the $77.1 million increase in income before taxes are described in the first four bullet points under operating overview above.

Distributable Earnings

Distributable earnings, a non-GAAP financial measure, totaled $61.3 million for the year ended December 31, 2021, compared to $51.3 million for the year ended December 31, 2020. The significant components of the $10.0 million increase in distributable earnings are primarily as a result of an increase of $14.0 million of realized gain (loss) on securities, an increase of $12.1 million in sale of loans, net, an increase of $6.7 million in net results from derivative transactions, an increase of $6.7 million in compensation and employee benefits and an increase in realized gain on sale of $2.8 million real estate, net. These increases were partially offset by a decrease of $22.3 million in gain (loss) on extinguishment of debt and a decrease of $10.1 million in net interest income after provision for loan losses comprised of a $63.8 million decrease in interest income, a $44.5 million decrease in interest expense, a decrease of $9.2 million in specific provision for loan losses and a decrease of $3.3 million in operating expenses.

Our results of operations in the second quarter of 2020 were significantly impacted by the actions we took to generate liquidity and pay down mark-to-market debt in direct response to the highly volatile market conditions that occurred due to the COVID-19 pandemic. The actions taken by management had multiple impacts on distributable earnings for the three months ended June 30, 2020. In late March of 2020, as the COVID-19 crisis continued to unfold, the ability of repurchase financing counterparties to determine the value of collateral in the form of CMBS was impaired as trading volumes in the commercial real estate securities market were at depressed levels characterized by very few buyers and very few, typically distressed, sellers. As a result, the Company received margin calls on its securities repurchase financing, all of which were successfully satisfied by the Company in cash in a timely manner. Management and the board of directors, as stockholders owning over 10% of the Company and as accountable stewards of all stockholders’ capital, elected to strategically position the Company for potential long-term volatility due to the COVID-19 pandemic. The Company therefore took decisive defensive actions, including halting new investment activity, selling performing loans and highly rated securities, paying down debt, including mark-to-market debt that was otherwise not due, as well as hiring professional service firms. These actions were significant strategic shifts to position the Company defensively against highly volatile market conditions caused by the COVID-19 pandemic.

59

Table of Contents

The financial impact of such actions aggregated to a $16.9 million net reduction to distributable earnings for the three months ended June 30, 2020. The reduction included $34.5 million of losses comprised of (i) $6.7 million of losses from sales of performing first mortgage loans included in sale of loans, net; (ii) $15.4 million of losses from sales of CMBS; (iii) $3.7 million of losses from conduit loan sales; (iv) $6.5 million of prepayment penalties related to pay downs of mark-to-market debt included in interest expense; (v) $2.1 million of professional fee expenses included in operating expenses primarily for advisory fees related to increasing liquidity and paying down debt with $20 thousand in fees related to employee health and safety, compliance with local, state and national guidelines, and head count reduction; and (vi) $0.2 million of severance costs included in compensation and employee benefits. The losses were partially offset by (vii) $19.0 million of gains from the repurchase of, and extinguishment of, unsecured corporate bond debt at a discount from par, net of (viii) $1.5 million of accelerated premium amortization included in interest expense.

Refer to “—Reconciliation of Non-GAAP Financial Measures” for our definition of distributable earnings and a reconciliation to income (loss) before taxes.

Net Interest Income

The $63.8 million decrease in interest income was primarily attributable to a decrease in our loan and securities portfolios due to paydowns and sales and timing of loan originations. The decline was also a result of the timing of our capital deployment primarily in the last nine months of 2021 which was at lower prevailing LIBOR rates. For the year ended December 31, 2021, securities investments averaged $0.8 billion and loan investments averaged $2.5 billion. For the year ended December 31, 2020, securities investments averaged $1.6 billion and loan investments averaged $3.0 billion. There was a $0.8 billion decrease in average securities, and a $0.5 billion decrease in average loan investments.

The $44.5 million decrease in interest expense is primarily due to repayments made on our facilities including our secured financing facility, loan repurchase facilities, the FHLB, and our revolving credit facility and amortization of a CLO which reduced interest expense. There was also a net decline in our interest expense related to our Notes as we redeemed the 2021 and 2022 Notes during the year, replacing them with newly issued, lower cost, 2029 Notes in June 2021.

The increase in net interest income before provision for loan losses of $19.2 million is explained in the paragraphs above.

As of December 31, 2021, the weighted average yield on our mortgage loan receivables was 5.7%, compared to 6.6% as of December 31, 2020 as the weighted average yield on new loans originated was lower than the weighted average yield on loans that were securitized or paid off. As of December 31, 2021, the weighted average interest rate on borrowings against our mortgage loan receivables was 2.6%, compared to 5.4% as of December 31, 2020. The decrease in the rate on borrowings against our mortgage loan receivables from December 31, 2020 to December 31, 2021 was primarily due to the utilization of new sources of financing at lower borrowing rates obtained and held during the twelve months ended December 31, 2021. As of December 31, 2021, we had outstanding borrowings secured by our mortgage loan receivables equal to 39.0% of the carrying value of our mortgage loan receivables, compared to 33.4% as of December 31, 2020.

As of December 31, 2021, the weighted average yield on our real estate securities was 1.7%, compared to 1.7% as of December 31, 2020. As of December 31, 2021, the weighted average interest rate on borrowings against our real estate securities was 0.9%, compared to 1.1% as of December 31, 2020. The decrease in the rate on borrowings against our real estate securities from December 31, 2020 to December 31, 2021 was primarily due to lower prevailing market borrowing rates as of December 31, 2021 compared to December 31, 2020. As of December 31, 2021, we had outstanding borrowings secured by our real estate securities equal to 74.4% of the carrying value of our real estate securities, compared to 75.1% as of December 31, 2020.

Our real estate is comprised of non-interest bearing assets; however, interest incurred on mortgage financing collateralized by such real estate is included in interest expense. As of December 31, 2021, the weighted average interest rate on mortgage borrowings against our real estate was 4.9%, compared to 5.0% as of December 31, 2020. As of December 31, 2021, we had outstanding borrowings secured by our real estate equal to 77.9% of the carrying value of our real estate, compared to 77.8% as of December 31, 2020.

60

Table of Contents

Provision for (release of) Loan Loss Reserves

On January 1, 2020, the Company recorded a CECL reserve of $11.6 million, which equated to 0.36% of $3.2 billion carrying value of its held for investment loan portfolio. This reserve excluded three loans that previously had an aggregate of $14.7 million of asset-specific reserves and a carrying value of $39.8 million as of January 1, 2020. Upon adoption, the aggregated CECL reserve reduced total shareholder’s equity by $5.8 million.

The total change in reserve for provision for the year ended December 31, 2021 was a release of $8.7 million. The release represents a decline in the general reserve of loans held for investment of $8.6 million and the release on unfunded loan commitments of $0.1 million. The release during the year is primarily due to an improvement in macroeconomic assumptions along with newly issued loans with lower expected loss. For additional information, refer to “Allowance for Credit Losses and Non-Accrual Status” in Note 3, Mortgage Loan Receivables, to the consolidated financial statements. The total change in reserve for provision for the year ended December 31, 2020 was an addition of $18.3 million which included $9.1 million in the general reserve on both loans held for investment and the related unfunded commitments and $9.2 million in asset-specific provisions related to three loans. The increases during the year are primarily due the specific loss provisions on certain investments and macro economic assumptions that factored in the impact of the COVID-19 pandemic. For additional information, refer to “Allowance for Credit Losses and Non-Accrual Status” in Note 3, Mortgage Loan Receivables to the consolidated financial statements.

Real Estate Operating Income

The increase of $1.3 million in real estate operating income was primarily attributable to an increase in operations as a result of the easing of restrictions in place due to COVID-19 partially offset by real estate sales.

Sale of Loans, Net

Income (loss) from sale of loans, net, includes all loan sales, whether by securitization, whole loan sales or other means. Income (loss) from sale of loans, net also includes realized losses on loans related to lower of cost or market adjustments. During the year ended December 31, 2021, we sold/transferred 16 conduit loans with an aggregate outstanding principal balance of $251.6 million and one balance sheet loan with an aggregate outstanding principal balance of $46.6 million resulting in a net gain of $8.4 million. During the year ended December 31, 2021, we recorded no realized losses on loans related to lower of cost or market adjustments. During the year ended December 31, 2020, we sold/transferred 31 conduit loans with an aggregate outstanding principal balance of $313.7 million and eight balance sheet mortgage loan receivables held for investment, net, at amortized cost, with an aggregate outstanding principal balance of $280.1 million resulting in a net loss of $1.6 million. During the year ended December 31, 2020, we recorded no realized losses on loans related to lower of cost or market adjustments. Income from sales of loans, net is subject to market conditions impacting timing, size and pricing and as such may vary significantly quarter to quarter.

Realized Gain (Loss) on Securities

The realized gain (loss) on securities for the year ended December 31, 2021 was $1.6 million compared to a realized loss of $(12.4) million for December 31, 2020, which resulted in a net positive change of $14.0 million. For the year ended December 31, 2021, we sold $438.6 million of securities, comprised of $408.2 million of CMBS and $30.4 million of Agency securities. For the year ended December 31, 2020, we sold $931.9 million of securities, comprised of $913.3 million of CMBS, $4.0 million of corporate bonds and $14.6 million of equity securities. Other than temporary impairments on securities of $(0.1) million are included in realized gain (loss) on securities for the year ended December 31, 2021, compared to $(0.5) million for the year ended December 31, 2020.

Unrealized Gain (Loss) on Equity Securities

The Company had no equity security activity during the year ended December 31, 2021, compared to unrealized gain (loss) of $(0.1) million for the year ended December 31, 2020. The Company has elected the fair market value option for accounting for these equity securities and changes in fair value are recorded in current period earnings.

Realized Gain (Loss) on Sale of Real Estate, Net

There was an increase of $23.7 million in realized gain (loss) on the sale of real estate. The increase was primarily as a result of the sale of six retail properties for a realized gain of $53.8 million, one apartment property for a realized gain of $4.0 million and a realized loss on a land parcel of $2.0 million which resulted in an aggregate $55.8 million realized gain (loss) for the year

61

Table of Contents

ended December 31, 2021. The realized gain (loss) of $32.1 million for the year ended December 31, 2020 consisted primarily of gains on the sale of 11 diversified commercial real estate properties and one single-tenant net lease property of $27.7 million and $4.4 million, respectively.

Fee and Other Income

We generated fee income from origination fees, exit fees and other fees on the loans we originate and in which we invest, and dividend income on our FHLB stock. The $1.5 million decrease in fee and other income year-over-year was primarily due to a increase in exit fees, offset by a decrease in origination fees and dividend income. Also contributing was a realized loss on our investment in the Ladder Select Bond Fund, which was liquidated on June 22, 2020.

Net Result from Derivative Transactions

Net result from derivative transactions of $1.7 million is composed of a realized gain of $1.7 million and an unrealized gain of $33.8 thousand for the year ended December 31, 2021, compared to a loss of $15.3 million for the year ended December 31, 2020, which was comprised of an unrealized loss of $0.3 million and a realized loss of $15.0 million resulting in a positive change of $17.0 million. The hedge positions were related to fixed rate conduit loans and securities investments. The derivative positions that generated these results were a combination of interest rate futures that we employed in an effort to hedge the interest rate risk on the financing of our fixed rate assets and the net interest income we earn against the impact of changes in interest rates. The gain in 2021 was primarily related to movement in interest rates during the year ended December 31, 2021. The total net result from derivative transactions is comprised of hedging interest expense, realized gains/losses related to hedge terminations and unrealized gains/losses related to changes in the fair value of asset hedges.

Earnings (Loss) from Investment in Unconsolidated Joint Ventures

Earnings from our investment in Grace Lake LLC totaled $1.4 million, and $1.0 million for the year ended December 31, 2021 and 2020, respectively. Earnings (loss) from our investment in 24 Second Avenue totaled $0.2 million and $0.8 million for the years ended December 31, 2021 and 2020, respectively. See Note 6, Investment in and Advances to Unconsolidated Joint Ventures, for further detail. Our maximum exposure to loss from these investments is limited to the carrying value of our investments. The gain in the year ended December 31, 2020 is attributable to equity and earnings on our investments.

Gain (Loss) on Extinguishment

We had no gain (loss) on extinguishment/defeasance of debt for the year ended December 31, 2021. During the year ended December 31, 2021, the Company redeemed $146.7 million of principal of the 2021 Notes at par and $465.9 million of principal of the 2022 Notes at par. Gain (loss) on extinguishment/defeasance of debt totaled $22.3 million for the year ended December 31, 2020. During the year ended December 31, 2020, the Company retired $98.2 million of principal of the 2027 Notes for a repurchase price of $83.9 million, recognizing a $12.9 million net gain on extinguishment of debt after recognizing $(1.3) million of unamortized debt issuance costs associated with the retired debt, the Company retired $52.0 million of principal of the 2025 Notes for a repurchase price of $45.1 million, recognizing a $6.4 million net gain on extinguishment of debt after recognizing $(0.5) million of unamortized debt issuance costs associated with the retired debt, the Company retired $34.2 million of principal of the 2022 Notes for a repurchase price of $33.2 million, recognizing a $0.7 million net gain on extinguishment of debt after recognizing $(0.2) million of unamortized debt issuance costs associated with the retired debt and, the Company retired $119.5 million of principal of the 2021 Notes for a repurchase price of $119.3 million, recognizing a $52.4 thousand net gain on extinguishment of debt after recognizing $(0.2) million of unamortized debt issuance costs associated with the retired debt.

Compensation and Employee Benefits

Compensation and employee benefits are comprised primarily of salaries, bonuses, equity based compensation and other employee benefits. The decrease of $19.8 million in compensation expense was primarily attributable to a reduction in compensation expense resulting from the timing of the payment of equity based compensation for the year ended December 31, 2021 compared to the year ended December 31, 2020 along with a reduction in head count for December 31, 2021 as compared to December 31, 2020.

62

Table of Contents

Operating Expenses

Operating expenses are primarily composed of professional fees, lease expense and technology expenses. The decrease of $2.6 million was primarily related to a decrease in professional fees.

Real Estate Operating Expenses

The decrease of $2.4 million in real estate operating expense is primarily the result of real estate sales throughout 2021.

Fee Expense

Fee expense is comprised primarily of custodian fees, financing costs and servicing fees related to loans. The decrease of $1.4 million in fee expense was primarily attributable to decreased servicer fees as a result of a lower average loan balance due to the the timing of our loan originations in 2021.

Depreciation and Amortization

The $1.3 million decrease in depreciation and amortization is primarily attributable to the timing of the real estate sales and acquisitions during each year.

Income Tax (Benefit) Expense

Most of our consolidated income tax provision related to the business units held in our TRSs. The decrease in benefit of $10.7 million is primarily a result of an increase in income as a result of taxable gains primarily from the sale of loans.

Liquidity and Capital Resources

The management of our liquidity and capital diversity and allocation strategies is critical to the success and growth of our business. We manage our sources of liquidity to complement our asset composition and to diversify our exposure across multiple capital markets and counterparties.

We require substantial amounts of capital to support our business. The management team, in consultation with our board of directors, establishes our overall liquidity and capital allocation strategies. A key objective of those strategies is to support the execution of our business strategy while maintaining sufficient ongoing liquidity throughout the business cycle to service our financial obligations as they become due. When making funding and capital allocation decisions, members of our senior management consider business performance; the availability of, and costs and benefits associated with, different funding sources; current and expected capital markets and general economic conditions; our asset composition and capital structure; and our targeted liquidity profile and risks relating to our funding needs.

To ensure that Ladder Capital can effectively address the funding needs of the Company on a timely basis, we maintain a diverse array of liquidity sources including (1) cash and cash equivalents; (2) cash generated from operations; (3) proceeds from the issuance of the unsecured bonds; (4) borrowings under repurchase agreements; (5) principal repayments on investments including mortgage loans and securities; (6) borrowings under our revolving credit facility; (7) proceeds from securitizations and sales of loans; (8) proceeds from the sale of securities; (9) proceeds from the sale of real estate; (10) proceeds from the issuance of CLO debt and other non-mark-to-market loan financing; and (11) proceeds from the issuance of equity capital. We use these funding sources to meet our obligations on a timely basis and have the ability to use our significant unencumbered asset base to further finance our business.

Our primary uses of liquidity are for (1) the funding of loan and real estate-related investments; (2) the repayment of short-term and long-term borrowings and related interest; (3) the funding of our operating expenses; and (4) distributions to our equity investors to comply with the REIT distribution requirements. We require short-term liquidity to fund loans that we originate and hold on our consolidated balance sheet pending sale, including through whole loan sale, participation, or securitization. We generally require longer-term funding to finance the loans and real estate-related investments that we hold for investment. We have historically used the aforementioned funding sources to meet the operating and investment needs as they have arisen and have been able to do so by applying a rigorous approach to long and short-term cash and debt forecasting.

63

Table of Contents

In addition, as a REIT, we are also required to make sufficient dividend payments to our shareholders in amounts at least sufficient to maintain our REIT status. Under IRS guidance, we may elect to pay a portion of our dividends in stock, subject to a cash/stock election by our shareholders, to optimize our level of capital retention. Accordingly, our cash requirement to pay dividends to maintain REIT status could be substantially reduced at the discretion of the board.

Our principal debt financing sources include: (1) long-term senior unsecured notes in the form of corporate bonds; (2) CLO issuances; (3) borrowings on both a short- and long-term committed basis, made by Tuebor from the FHLB; (4) long term non-recourse mortgage financing; (5) committed secured funding provided by banks and other lenders; and (6) uncommitted secured funding sources, including asset repurchase agreements with a number of banks.

In the future, we may also use other sources of financing to fund the acquisition of our assets, including credit facilities, warehouse facilities, repurchase facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized, may involve one or more lenders and may accrue interest at either fixed or floating rates. We may also seek to raise further equity capital or issue debt securities in order to fund our future investments.

Refer to “Financial Covenants” and “Our Financing Strategies” for further disclosure of our diverse financing sources and, for a summary of our financial obligations, refer to the Contractual Obligations table below. All of our existing financial obligations due within the following year can be extended for one or more additional years at our discretion, refinanced or repaid at maturity or are incurred in the normal course of business (i.e., interest payments/loan funding obligations).

Cash, Cash Equivalents and Restricted Cash

We held cash, cash equivalents and restricted cash of $621.5 million at December 31, 2021, of which $548.7 million was unrestricted cash and cash equivalents and $72.8 million was restricted cash. We held cash and cash equivalents of $1.3 billion and restricted cash of $29.9 million as of December 31, 2020. As the COVID-19 crisis evolved in 2020, management implemented a plan to mitigate the uncertainty in financial markets by increasing liquidity and obtaining additional non-recourse and non-mark-to-market financing. The additional liquidity was redeployed into new investments in 2021.

Cash Flows

The following table provides a breakdown of the net change in our cash, cash equivalents, and restricted cash ($ in thousands):

We experienced a net decrease in cash, cash equivalents and restricted cash of $(662.7) million for the year ended December 31, 2021 reflecting cash used in operating activities of $79.7 million, cash provided by investing activities of $(651.5) million and cash used in finance activities of $(91.0) million.

Net cash provided by operating activities of $79.7 million was primarily driven by $(220.4) million of originations of mortgage loans held for sale and $(55.8) million of realized gain on sale of real estate, partially offset by $259.1 million of proceeds from sales of mortgage loans held for sale and depreciation and amortization of $37.8 million.

Net cash used in investing activities of $(651.5) million was driven by usage of $(2.3) billion of origination of mortgage loans held for investment, $(247.0) million in purchases of real estate securities, $(63.6) million of purchases of mortgage loans held for investment, and $(20.5) million in purchases of real estate. These uses were partially offset by $1.1 billion of repayment from mortgage loan receivables, $438.6 million of proceeds from sale of real estate securities, $190.9 million proceeds from the sale of real estate, $164.5 million in repayments on securities, and $46.6 million of proceeds from the sale of mortgage loan receivables held for investment.

Net cash used in financing activities of $(91.0) million was primarily as a result of $(100.6) million of dividends payments, $(9.0) million in purchase of treasury shares, $(4.5) million of shares acquired to satisfy minimum federal and state tax withholdings on restricted stock, and $(3.2) million in deferred financing costs partially offset by net borrowings of $25.5 million.

64

Table of Contents

We experienced a net increase in cash, cash equivalents and restricted cash of $928.5 million for the year ended December 31, 2020 reflecting cash provided by operating activities of $111.9 million, cash provided by investing activities of $1.5 billion and cash used in finance activities of $(725.7) million.

Net cash provided by operating activities of $111.9 million was primarily driven by our mortgage loan receivable held for investment. This included $312.3 million in proceeds from mortgage loan receivables held for sale, partially offset by $(212.8) million of originations of mortgage loans held for sale.

Net cash provided by investing activities of $1.5 billion was driven by $891.7 million of repayment from mortgage loan receivables, $932.2 million of proceeds from sale of real estate securities, $270.5 million of proceeds from the sale of mortgage loan receivables held for investment, partially offset by $(440.6) million in purchases of real estate securities and $(353.7) million of origination of mortgage loans held for investment.

Net cash used in financing activities of $(725.7) million was primarily as a result of net borrowings of $(593.4) million, $(118.9) million of dividends payments, $(17.1) million of shares acquired to satisfy minimum federal and state tax withholdings on restricted stock and $(18.0) million in deferred financing costs, partially offset by $32.0 million of proceeds from issuance of common stock.

Unencumbered Assets

As of December 31, 2021, we held unencumbered cash of $0.5 billion, unencumbered loans of $1.7 billion, unencumbered securities of $150.9 million, unencumbered real estate of $85.9 million and $358.5 million of other assets not secured by any portion of secured indebtedness.

Borrowings under various financing arrangements

Our financing strategies are critical to the success and growth of our business. We manage our leverage policies to complement our asset composition and to diversify our exposure across multiple counterparties. Our borrowings under various financing arrangements as of December 31, 2021 are set forth in the table below ($ in thousands):

(1)Presented net of unamortized debt issuance costs of $0.3 million as of December 31, 2021.

(2)Presented net of unamortized debt issuance costs of $1.9 million and an unamortized discount of $2.1 million related to the Purchase Right (described in detail under Secured Financing Facility below) at December 31, 2021.

(3)Presented net of unamortized debt issuance costs of $9.6 million as of December 31, 2021.

(4)Presented net of unamortized debt issuance costs of $18.7 million as of December 31, 2021.

The Company’s repurchase facilities include covenants covering minimum net worth requirements (ranging from $400.0 million to $871.4 million), maximum reductions in net worth over stated time periods, minimum liquidity levels (typically $30.0 million of cash or a higher standard that often allows for the inclusion of different percentages of liquid securities in the determination of compliance with the requirement), maximum leverage ratios (calculated in various ways based on specified definitions of indebtedness and net worth) and a fixed charge coverage ratio of 1.25x, and, in the instance of one lender, an interest coverage ratio of 1.50x, in each case, if certain liquidity thresholds are not satisfied. We were in compliance with all

65

Table of Contents

covenants as of December 31, 2021 and 2020. Further, certain of our financing arrangements and loans on our real property are secured by the assets of the Company, including pledges of the equity of certain subsidiaries or the assets of certain subsidiaries. From time to time, certain of these financing arrangements and loans may prohibit certain of our subsidiaries from paying dividends to the Company, from making distributions on such subsidiary’s capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary’s property or other assets to the Company or other subsidiaries of the Company.

Committed loan facilities

We are a party to multiple committed loan repurchase agreement facilities, totaling $1.2 billion of credit capacity. As of December 31, 2021, the Company had $184.5 million of borrowings outstanding, with an additional $1.0 billion of committed financing available. As of December 31, 2020, the Company had $255.4 million of borrowings outstanding, with an additional $1.3 billion of committed financing available. Assets pledged as collateral under these facilities are generally limited to whole mortgage loans collateralized by first liens on commercial real estate, mezzanine loans collateralized by equity interests in entities that own commercial real estate, and certain interests in such first mortgage and mezzanine loans. Our repurchase facilities include covenants covering net worth requirements, minimum liquidity levels, and maximum debt/equity ratios. We believe we were in compliance with all covenants as of December 31, 2021.

We have the option to extend some of our existing facilities subject to a number of customary conditions. The lenders have sole discretion with respect to the inclusion of collateral in these facilities, to determine the market value of the collateral on a daily basis, and, if the estimated market value of the included collateral declines, the lenders have the right to require additional collateral or a full and/or partial repayment of the facilities (margin call), sufficient to rebalance the facilities. Typically, the facilities are established with stated guidelines regarding the maximum percentage of the collateral asset’s market value that can be borrowed. We often borrow at a lower percentage of the collateral asset’s value than the maximum leaving us with excess borrowing capacity that can be drawn upon at a later date and/or applied against future margin calls so that they can be satisfied on a cashless basis.

Committed securities facility

We are a party to a term master repurchase agreement with a major U.S. banking institution for CMBS, totaling $400.0 million of credit capacity, or more depending on our utilization of a loan repurchase facility with the same lender. As we do in the case of borrowings under committed loan facilities, we often borrow at a lower percentage of the collateral asset’s value than the maximum, leaving us with excess borrowing capacity that can be drawn upon a later date and/or applied against future margin calls so that they can be satisfied on a cashless basis. As of December 31, 2021, the Company had $44.1 million borrowings outstanding, with an additional $818.7 million of committed financing available. As of December 31, 2020, the Company had $149.6 million borrowings outstanding, with an additional $638.4 million of committed financing available.

Uncommitted securities facilities

We are a party to multiple master repurchase agreements with several counterparties to finance our investments in CMBS and U.S. Agency securities. The securities that served as collateral for these borrowings are highly liquid and marketable assets that are typically of relatively short duration.

Revolving credit facility

The Company’s revolving credit facility (the “Revolving Credit Facility”) provides for an aggregate maximum borrowing amount of $266.4 million, including a $25.0 million sublimit for the issuance of letters of credit. The Revolving Credit Facility is available on a revolving basis to finance the Company’s working capital needs and for general corporate purposes. The Revolving Credit Facility has a current maturity date of February 11, 2022, which may be extended by three 12-month periods subject to the satisfaction of customary conditions, including the absence of default. The Interest on the Revolving Credit Facility is one-month LIBOR plus 3.00% per annum payable monthly in arrears. There were no outstanding draws on the facility as of December 31, 2021. As of December 31, 2020, the Company had $266.4 million borrowings outstanding.

The obligations under the Revolving Credit Facility are guaranteed by the Company and certain of its subsidiaries. The Revolving Credit Facility is secured by a pledge of the shares of (or other ownership or equity interests in) certain subsidiaries to the extent the pledge is not restricted under existing regulations, law or contractual obligations.

66

Table of Contents

LCFH is subject to customary affirmative covenants and negative covenants, including limitations on the incurrence of additional debt, liens, restricted payments, sales of assets and affiliate transactions under the Revolving Credit Facility. In addition, under the Revolving Credit Facility, LCFH is required to comply with financial covenants relating to minimum net worth, maximum leverage, minimum liquidity, and minimum fixed charge coverage, consistent with our other credit facilities. Our ability to borrow under the Revolving Credit Facility will be dependent on, among other things, LCFH’s compliance with the financial covenants. The Revolving Credit Facility contains customary events of default, including non-payment of principal or interest, fees or other amounts, failure to perform or observe covenants, cross-default to other indebtedness, the rendering of judgments against the Company or certain of our subsidiaries to pay certain amounts of money and certain events of bankruptcy or insolvency.

Mortgage Loan Financing

We generally finance our real estate using long-term non-recourse mortgage financing. During the year ended December 31, 2021, we executed one term debt agreement to finance real estate. These non-recourse debt agreements provide for fixed rate financing at rates ranging from 3.75% to 6.16%, with anticipated maturity dates between 2022-2031 as of December 31, 2021. These loans have carrying amounts of $693.8 million and $766.1 million, net of unamortized premiums of $3.2 million and $4.6 million as of December 31, 2021 and December 31, 2020, respectively, representing proceeds received upon financing greater than the contractual amounts due under these agreements. The premiums are being amortized over the remaining life of the respective debt instruments using the effective interest method. The Company recorded $1.4 million, $1.2 million and $1.6 million of premium amortization, which decreased interest expense for the years ended December 31, 2021, 2020, and 2019 respectively. The mortgage loans are collateralized by real estate and related lease intangibles, net, of $805.0 million and $909.4 million as of December 31, 2021 and December 31, 2020, respectively.

Secured Financing Facility

On April 30, 2020, the Company entered into a strategic financing arrangement with an American multinational corporation (the “Lender”), under which the Lender provided the Company with approximately $206.4 million in senior secured financing (the “Secured Financing Facility”) to fund transitional and land loans. The Secured Financing Facility is secured on a first lien basis on a portfolio of certain of the Company’s loans and will mature on May 6, 2023, and borrowings thereunder bear interest at LIBOR (or a minimum of 0.75% if greater) plus 10.0%, with a minimum interest premium clause, of which approximately $5.3 million remains as of December 31, 2021. The Secured Financing Facility is non-recourse, subject to limited exceptions, and does not contain mark-to-market provisions. Additionally, the Secured Financing Facility provides the Company optionality to modify or restructure loans or forbear in exercising remedies, which maximizes the Company’s financial flexibility.

As part of the strategic financing, the Lender also had the ability to make an equity investment in the Company of up to 4.0 million Class A common shares at $8.00 per share, subject to certain adjustments (the “Purchase Right”). The Purchase Right was exercised in full at $8.00 per share on December 29, 2020. In addition, the Lender has agreed not to sell, transfer, assign, pledge, hypothecate, mortgage, dispose of or in any way encumber the shares acquired as a result of exercising the Purchase Right for a period of time following the exercise date. In connection with the issuance of the Purchase Right, the Company and the Lender entered into a registration rights agreement, pursuant to which the Company has agreed to provide customary demand and piggyback registration rights to the Lender.

The Purchase Right was classified as equity and the $200.9 million of net proceeds from the original issuance were allocated $192.5 million to the originally issued debt obligation and $8.4 million to the Purchase Right using the relative fair value method. The commitment to issue shares will not be subsequently remeasured. The $8.4 million allocated to the Purchase Right is being treated as a discount to the debt and amortized over the life of the Purchase Right to interest expense.

As of December 31, 2021, the Company had $132.4 million of borrowings outstanding under the secured financing facility included in debt obligations on its consolidated balance sheets, net of unamortized debt issuance costs of $1.9 million and a $2.1 million unamortized discount related to the Purchase Right.

Collateralized Loan Obligations (“CLO”) Debt

On July 13, 2021, a consolidated subsidiary of the Company completed a privately-marketed CLO transaction, which generated $498.2 million of gross proceeds to Ladder, financing $607.5 million of loans (“Contributed July 2021 Loans”) at an 82% advance rate on a matched term, non-mark-to-market and non-recourse basis. A consolidated subsidiary of the Company retained an 18% subordinate and controlling interest in the CLO. The Company retained consent rights over major decisions with respect to the servicing of the Contributed July 2021 Loans, including the right to appoint and replace the special servicer

67

Table of Contents

under the CLO. The CLO is a VIE and the Company was the primary beneficiary and, therefore, consolidated the VIE - See Note 10, Consolidated Variable Interest Entities.

On December 2, 2021, a consolidated subsidiary of the Company completed a privately marketed CLO transaction, which generated $566.2 million of gross proceeds to Ladder, financing $729.4 million of loans (“Contributed December 2021 Loans”) at a maximum 77.6% advance rate on a matched term, non-mark-to-market and non-recourse basis. A consolidated subsidiary of the Company retained an 15.6% subordinate and controlling interest in the CLO. The Company also held two additional tranches as investments totaling 6.8% interest in the CLO. The Company retained consent rights over major decisions with respect to the servicing of the Contributed December 2021 Loans, including the right to appoint and replace the special servicer under the CLO. The CLO is a VIE and the Company was the primary beneficiary and, therefore, consolidated the VIE - See Note 10, Consolidated Variable Interest Entities.

As of December 31, 2021, the Company had $1.1 billion of matched term, non-mark-to-market and non-recourse CLO debt included in debt obligations on its consolidated balance sheets. Unamortized debt issuance costs of $9.6 million were included in CLO debt as of December 31, 2021.

Borrowings from the Federal Home Loan Bank (“FHLB”)

On July 11, 2012, Tuebor, a consolidated subsidiary of the Company, became a member of the FHLB and subsequently drew its first secured funding advances from the FHLB. As of February 19, 2021, pursuant to a final rule adopted by the Federal Housing Finance Agency (the “FHFA”) regarding the eligibility of captive insurance companies, Tuebor’s membership in the FHLB has been terminated, although outstanding advances may remain outstanding until their scheduled maturity dates. Funding for future advance paydowns is expected to be obtained from the natural amortization and/or sales of securities collateral, or from other financing sources. There is no assurance that the FHFA or the FHLB will not take actions that could adversely impact Tuebor’s existing advances.

As of December 31, 2021, Tuebor had $263.0 million of borrowings outstanding, with terms of 0.7 years to 2.75 years (with a weighted average of 1.95 years), interest rates of 0.36% to 2.74% (with a weighted average of 0.96%), and advance rates of 71.7% to 95.7% on eligible collateral. As of December 31, 2021, collateral for the borrowings was comprised of $259.3 million of CMBS and U.S. Agency securities and $42.5 million of cash.

Tuebor is subject to state regulations which require that dividends (including dividends to the Company as its parent) may only be made with regulatory approval. However, there can be no assurance that we would obtain such approval if sought. Largely as a result of this restriction, approximately $2.2 billion of the member’s capital was restricted from transfer via dividend to Tuebor’s parent without prior approval of state insurance regulators at December 31, 2021. To facilitate intercompany cash funding of operations and investments, Tuebor and its parent maintain regulator-approved intercompany borrowing/lending agreements.

Senior unsecured notes

As of December 31, 2021, the Company had $1.6 billion of unsecured corporate bonds outstanding. These unsecured financings were comprised of $348.0 million in aggregate principal amount of 5.25% senior notes due 2025 (the “2025 Notes”), $651.8 million in aggregate principal amount of 4.25% senior notes due 2027 (the “2027 Notes”) and $650.0 million in aggregate principal of 4.75% senior notes due 2029 (the “2029 Notes,” and collectively with the 2025 Notes and the 2027 Notes, the “Notes”).

68

Table of Contents

On January 27, 2021, the Company redeemed in full its 5.875% Senior Notes due 2021 (the “2021 Notes”) for $150.9 million. The 2021 Notes were redeemed at par, plus accrued and unpaid interest to the redemption date, pursuant to the optional redemption provisions of the indenture governing the 2021 Notes. The redemption of a portion of the 2021 Notes was subject to the condition that the Company’s subsidiary issuers of the 2021 Notes complete a notes offering of not less than $400 million. The issuers waived the condition prior to redeeming the 2021 Notes in full.

On September 15, 2021, the Company redeemed in full its 5.25% Senior Notes due 2022 (the “2022 Notes”) for $478.1 million. The 2021 Notes were redeemed at par, plus accrued and unpaid interest to the redemption date, pursuant to the optional redemption provisions of the indenture governing the 2022 Notes.

LCFH issued the Notes with Ladder Capital Finance Corporation (“LCFC”), as co-issuers on a joint and several basis. LCFC is a 100% owned finance subsidiary of LCFH with no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the Notes. The Company and certain subsidiaries of LCFH currently guarantee the obligations under the Notes and the indenture. The Company believes it was in compliance with all covenants of the Notes as of December 31, 2021 and 2020. Unamortized debt issuance costs of $18.7 million and $12.9 million are included in senior unsecured notes as of December 31, 2021 and December 31, 2020, respectively, in accordance with GAAP.

2025 Notes

On September 25, 2017, LCFH issued $400.0 million in aggregate principal amount of 5.250% senior notes due October 1, 2025 (the “2025 Notes”). The 2025 Notes require interest payments semi-annually in cash in arrears on April 1 and October 1 of each year, beginning on April 1, 2018. The 2025 Notes are unsecured and are subject to an unencumbered assets to unsecured debt covenant. The Company may redeem the 2025 Notes, in whole or in part, at any time, or from time to time, prior to their stated maturity upon not less than 15 nor more than 60 days’ notice, at a redemption price as specified in the indenture governing the 2025 Notes, plus accrued and unpaid interest, if any, to the redemption date. On May 2, 2018, the board of the directors authorized the Company to repurchase any or all of the 2025 Notes from time to time without further approval. During the year ended December 31, 2020, the Company retired $52.0 million of principal of the 2025 Notes for a repurchase price of $45.1 million, recognizing a $6.4 million net gain on extinguishment of debt after recognizing $(0.5) million of unamortized debt issuance costs associated with the retired debt. As of December 31, 2021, the remaining $348.0 million in aggregate principal amount of the 2025 Notes is due October 1, 2025.

2027 Notes

On January 30, 2020, LCFH issued $750.0 million in aggregate principal amount of 4.25% senior notes due February 1, 2027. The 2027 Notes require interest payments semi-annually in cash in arrears on August 1 and February 1 of each year, beginning on August 1, 2020. The 2027 Notes are unsecured and are subject to an unencumbered assets to unsecured debt covenant. The Company may redeem the 2027 Notes, in whole, at any time, or from time to time, prior to their stated maturity. At any time on or after February 1, 2023, the Company may redeem the 2027 Notes in whole or in part, upon not less than 15 nor more than 60 days’ notice, at a redemption price defined in the indenture governing the 2027 Notes, plus accrued and unpaid interest, if any, to the redemption date. Net proceeds of the offering were used to repay secured indebtedness. On February 26, 2020, the board of the directors authorized the Company to repurchase any or all of the 2027 Notes from time to time without further approval. During the year ended December 31, 2020, the Company retired $98.2 million of principal of the 2027 Notes for a repurchase price of $83.9 million, recognizing a $12.9 million net gain on extinguishment of debt after recognizing $(1.3) million of unamortized debt issuance costs associated with the retired debt. As of December 31, 2021, the remaining $651.8 million in aggregate principal amount of the 2027 Notes is due February 1, 2027.

2029 Notes

On June 23, 2021, LCFH issued $650.0 million in aggregate principal amount of 4.75% senior notes due June 15, 2029. The 2029 Notes require interest payments semi-annually in cash in arrears on June 15 and December 15 of each year, beginning December 15, 2021. The 2029 Notes are unsecured and are subject to an unencumbered asset to unsecured debt covenant. The Company may redeem the 2029 Notes, in whole, at any time, or from time to time, prior to their stated maturity. At any time on or after June 15, 2024, the Company may redeem the 2029 Notes in whole or in part, upon not less than 10 nor more than 60 days’ notice, at a redemption price defined in the indenture governing the 2029 Notes, plus accrued and unpaid interest, if any, to the redemption date. Net proceeds of the offering were used for general corporate purposes, including funding the Company’s pipeline of new loans, investments in its core business lines and repayment of indebtedness. On June 24, 2021, the board of the directors authorized the Company to repurchase any or all of the 2029 Notes from time to time without further approval. As of December 31, 2021, the remaining $650.0 million in aggregate principal amount of the 2029 Notes is due June 15, 2029.

69

Table of Contents

Stock Repurchases

On August, 4, 2021, the board of directors authorized the repurchase of $50.0 million of the Company’s Class A common stock from time to time without further approval. This authorization increased the remaining authorization per the October 30, 2014 authorization at the time of $35.0 million to $50.0 million. Stock repurchases by the Company are generally made for cash in open market transactions at prevailing market prices but may also be made in privately negotiated transactions or otherwise. The timing and amount of purchases are determined based upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. As of December 31, 2021, the Company has a remaining amount available for repurchase of $44.1 million, which represents 2.9% in the aggregate of its outstanding Class A common stock, based on the closing price of $11.99 per share on such date. Refer to Item 1—“Financial Statements—Note 11, Equity Structure and Accounts” for disclosure of the Company’s repurchase activity.

The following table is a summary of the Company’s repurchase activity of its Class A common stock during the year ended December 31, 2021 ($ in thousands):

(1) Amount excludes commissions paid associated with share repurchases.

Dividends

In order for the Company to maintain its qualification as a REIT under the Code, it must annually distribute at least 90% of its taxable income. The Company has paid and in the future intends to declare regular quarterly distributions to its shareholders in aggregating to an amount approximating at least 90% of the REIT’s annual net taxable income. Refer to Item 1 —“Financial Statements and Supplemental Data—Note 11, Equity Structure and Accounts” for disclosure of dividends declared.

Principal repayments on investments

We receive principal amortization on our loans and securities as part of the normal course of our business. Repayment of mortgage loan receivables provided net cash of $1.1 billion for the year ended December 31, 2021 and $892.1 million for the year ended December 31, 2020. Repayment of real estate securities provided net cash of $164.5 million for the year ended December 31, 2021 and $146.2 million for the year ended December 31, 2020.

Proceeds from securitizations and sales of loans

We sell our conduit mortgage loans to securitization trusts and to other third parties as part of our normal course of business and from time to time will sell balance sheet mortgage loans. There were $305.6 million of proceeds from sales of mortgage loans for the year ended December 31, 2021 and $582.8 million of sales of mortgage loans for the year ended December 31, 2020.

Proceeds from the sale of securities

We sell our investments in CMBS, U.S. Agency securities, corporate bonds and equity securities as a part of our normal course of business. Proceeds from sales of securities provided net cash of $438.6 million for the year ended December 31, 2021 and $932.2 million for the year ended December 31, 2020.

Proceeds from the sale of real estate

Proceeds from sales of real estate provided net cash of $190.9 million for the year ended December 31, 2021 and $44.7 million for the year ended December 31, 2020.

70

Table of Contents

Proceeds from the issuance of equity

For the year ended December 31, 2021, there were no proceeds realized in connection with the issuance of equity. For the year ended December 31, 2020, we raised $32.0 million of proceeds in connection with the issuance of 4.0 million shares of our Class A common stock. We may issue additional equity in the future.

Other potential sources of financing

In the future, we may also use other sources of financing to fund the acquisition of our assets, including credit facilities, warehouse facilities, repurchase facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized, may involve one or more lenders and may accrue interest at either fixed or floating rates. We may also seek to raise further equity capital or issue debt securities in order to fund our future investments.

Contractual obligations

Contractual obligations as of December 31, 2021 were as follows ($ in thousands):

(1)          As more fully disclosed in Note 7, Debt Obligations, Net, the allocation of repayments under our committed loan repurchase facilities and Secured Financing Facility is based on the earlier of (i) the maturity date of each agreement, or (ii) the maximum maturity date of the collateral loans, assuming all extension options are exercised by the borrower.

(2)    Total does not include $1.1 billion of consolidated CLO debt obligations and the related debt issuance costs of $9.6 million, as the satisfaction of these liabilities will not require cash outlays from us.

(3)          Comprised of interest on secured financings and on senior unsecured notes. For borrowings with variable interest rates, we used the rates in effect as of December 31, 2021 to determine the future interest payment obligations.

(4)          Comprised primarily of our off-balance sheet unfunded commitment to provide additional first mortgage loan financing as of December 31, 2021.

The table above does not include amounts due under our derivative agreements as those contracts do not have fixed and determinable payments. Our contractual obligations will be refinanced and/or repaid from earnings as well as amortization and sales of our liquid collateral. We have made investments in various unconsolidated joint ventures of which our maximum exposure to loss from these investments is limited to the carrying value of our investments. Refer to Note 6 - Investments in and advances made on unconsolidated joint ventures for further detail.

Future Liquidity Needs

In addition to the future contractual obligations above, the Company, in the coming year and beyond, as a part of its normal course of business will require cash to fund unfunded loan commitments and new investments in a combination of balance sheet mortgage loans, conduit loans, real estate investments and securities as it deems appropriate as well as necessary expenses as a part of general corporate purposes. These new investments and general corporate expenses may be funded with existing cash, proceeds from loan and securities payoffs, through financing using our revolving credit facility or loan and security financing facilities, or these could be funded through additional debt or equity facility raises. The Company has no known material cash requirements other than its contractual obligations in the above table, unfunded commitments and future general corporate expenses.

71

Table of Contents

Unfunded Loan Commitments

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our borrowers. These commitments are not reflected on the consolidated balance sheets. As of December 31, 2021, our off-balance sheet arrangements consisted of $390.1 million of unfunded commitments of mortgage loan receivables held for investment, 52% of which additional funds relate to the occurrence of certain “good news” events, such as the owner concluding a lease agreement with a major tenant in the building or reaching some pre-determined net operating income. As of December 31, 2020, our off-balance sheet arrangements consisted of $148.8 million of unfunded commitments of mortgage loan receivables held for investment to provide additional first mortgage loan financing. Such commitments are subject to our borrowers’ satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. Commitments are subject to our loan borrowers’ satisfaction of certain financial and nonfinancial covenants and may or may not be funded depending on a variety of circumstances including timing, credit metric hurdles, and other nonfinancial events occurring. The COVID-19 pandemic has impacted the progress of work generally and, depending on specific property locations, the progress of capital expenditures, construction, and leasing, which have been delayed and/or slower paced than originally anticipated. The progress of those particular projects located in states or local municipalities with continuing restrictions on such activities is anticipated to remain slower to complete than otherwise underwritten at loan origination, and the timing and amounts of our future funding commitments are likely to be slower and possibly diminished by our clients’ changing business plans to adapt to market conditions.

LIBOR Transition

We continue to develop and implement plans for the discontinuation of LIBOR. Specifically, we: (i) have implemented or are in the process of implementing fallback language for our LIBOR-based mortgage loans, bi-lateral committed repurchase facilities and revolving credit facility, including adjustments as applicable to maintain the anticipated economic terms of the existing contracts, (ii) continue to monitor the transition guidance provided by the ARRC, the International Swaps and Derivatives Association, Inc., the Financial Accounting Standards Board and other relevant regulators, agencies and industry working groups, and (iii) continue to engage with clients, lenders, market participants and other industry leaders as the transition from LIBOR progresses.

Interest Rate Environment

The nature of the Company’s business exposes it to market risk arising from changes in interest rates. Changes, both increases and decreases, in the rates the Company is able to charge its borrowers, the yields the Company is able to achieve in its securities investments, and the Company’s cost of borrowing directly impacts its net income. The Company’s net interest income includes interest from both fixed and floating-rate debt. The percentage of the Company’s assets and liabilities bearing interest at fixed and floating rates may change over time, and asset composition may differ materially from debt composition. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further disclosures surrounding the impact of rising or falling interest rate on our earnings.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. The Company’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain. Different estimates could have a material effect on the Company’s financial results. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and therefore, routinely require adjustment.

During 2021, management reviewed and evaluated these critical accounting estimates and believes they are appropriate. Our significant accounting policies are described in Item 8—“Financial Statements and Supplemental Data—Note 2.” The following is a list of accounting policies that require more significant estimates and judgments:

•Current expected credit losses

•Acquisition of real estate

72

Table of Contents

•Impairment or disposal of long lived assets

•Identified intangible assets and liabilities

•Variable interest entities

•Valuation of financial instruments

The following is a summary of accounting policies that require more significant management estimates and judgments:

Current expected credit losses

The Company uses a current expected credit loss model (“CECL”) for estimating the provision for loan losses on its loan portfolio. The CECL model requires the consideration of possible credit losses over the life of an instrument and includes a portfolio-based component and an asset-specific component. In compliance with the CECL reporting requirements, the Company has supplemented the existing credit monitoring and management processes with additional processes to support the calculation of the CECL reserves. As part of that effort, the Company has engaged a third-party service provider to provide market data and a credit loss model. The credit loss model is a forward-looking, econometric, commercial real estate (“CRE”) loss forecasting tool. It is comprised of a probability of default (“PD”) model and a loss given default (“LGD”) model that, layered together with user’s loan-level data, selected forward-looking macroeconomic variables, and pool-level mean loss rates, produces life of loan expected losses (“EL”) at the loan and portfolio level.

The asset-specific reserve component relates to reserves for losses on individually impaired loans. The Company evaluates each loan for impairment at least quarterly. Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. If the loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan to the present value of the expected future cash flows discounted at the loan’s effective rate or the fair value of the collateral, less the estimated costs to sell, if recovery of the Company’s investment is expected solely from the collateral. The Company generally will use the direct capitalization rate valuation methodology or the sales comparison approach to estimate the fair value of the collateral for such loans and in certain cases will obtain external appraisals. Determining fair value of the collateral may take into account a number of assumptions including, but not limited to, cash flow projections, market capitalization rates, discount rates and data regarding recent comparable sales of similar properties. Such assumptions are generally based on current market conditions and are subject to economic and market uncertainties.

The Company’s loans are typically collateralized by real estate directly or indirectly. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic submarket in which the collateral property is located. Such impairment analyses are completed and reviewed by asset management and underwriting personnel, who utilize various data sources, including (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrowers’ business plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and other market data and ultimately presented to management for approval.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). A TDR occurs when a concession is granted and the debtor is experiencing financial difficulties. Impairments on TDR loans are generally measured based on the present value of expected future cash flows discounted at the effective interest rate of the original loans. Generally, when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and, in some cases, lookback features or equity interests to offset concessions granted should conditions impacting the loan improve. The Company’s determination of credit losses is impacted by TDRs whereby loans that have gone through TDRs are considered impaired, assessed for specific reserves, and are not included in the Company’s assessment of the CECL reserve. Loans previously restructured under TDRs that subsequently default are reassessed to incorporate the Company’s current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary.

The Company designates non-accrual loans generally when (i) the principal or coupon interest components of loan payments become 90-days past due or (ii) in the opinion of the Company, it is doubtful the Company will be able to collect all amounts due according to the contractual terms of the loan. Interest income on non-accrual loans in which the Company reasonably expects a full recovery of the loan’s outstanding principal balance is recognized when received in cash. Otherwise, income recognition will be suspended and any cash received will be applied as a reduction to the amortized cost. A non-accrual loan is

73

Table of Contents

returned to accrual status at such time as the loan becomes contractually current and future principal and coupon interest are reasonably assured to be received in accordance with the contractual loan terms. A loan will be written off when management has determined it is no longer realizable and deemed non-recoverable.

The CECL accounting estimate is subject to uncertainty as a result of changing macro-economic market conditions, as well as the vintage and location of the underlying assets as disclosed in Note 3. Mortgage Loans Receivable. As a result, the estimate changed from $42.1 million at December 31, 2020 to $32.2 million at December 31, 2021. The estimate is sensitive to the assumptions used to represent future expected economic conditions.

The provision for loan losses for the years ended December 31, 2021 and 2020 were $8.7 million and $18.3 million, respectively. The allowance for loan losses as of December 31, 2021 and December 31, 2020 were $32.2 million and $42.1 million, respectively.

Acquisition of real estate

We generally acquire real estate assets or land and development assets through purchases and may also acquire such assets through foreclosure or deed-in-lieu of foreclosure in full or partial satisfaction of defaulted loans. Purchased properties are classified as real estate, net or land and development, net on our consolidated balance sheets. When we intend to hold, operate or develop the property for a period of at least 12 months, the asset is classified as real estate, net, and when we intend to market a property for sale in the near term, the asset is classified as real estate held for sale. Upon purchase, the properties are recorded at cost. Foreclosed assets classified as real estate and land and development are initially recorded at their estimated fair value and assets classified as assets held for sale are recorded at their estimated fair value less costs to sell. The excess of the carrying value of the loan over these amounts is charged-off against the reserve for loan losses. In both cases, upon acquisition, tangible and intangible assets and liabilities acquired are recorded at their estimated fair values.

Impairment or disposal of long-lived assets

Real estate assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less costs to sell and are included in real estate held for sale on our consolidated balance sheets. The difference between the estimated fair value less costs to sell and the carrying value will be recorded as an impairment charge. Impairment for real estate assets are included in impairment of assets in our consolidated statements of operations. Once the asset is classified as held for sale, depreciation expense is no longer recorded.

We periodically review real estate to be held and used and land and development assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The asset’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the anticipated holding period of the asset) is less than the carrying value. Such estimate of cash flows considers factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of real estate and land and development assets are recorded in impairment of assets in our consolidated statements of operations.

We had one property classified held for sale at December 31, 2021 and no properties classified as held for sale at December 31, 2020. We did not record any impairments of real estate for any of the years ended December 31, 2021 or 2020.

Identified intangible assets and liabilities

We record intangible assets and liabilities acquired at their estimated fair values, and determine whether such intangible assets and liabilities have finite or indefinite lives. As of December 31, 2021 and 2020, all such acquired intangible assets and liabilities have finite lives. We amortize finite lived intangible assets and liabilities over the period which the assets and liabilities are expected to contribute directly or indirectly to the future cash flows of the business acquired. We review finite lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If we determine the carrying value of an intangible asset is not recoverable we will record an impairment charge to the extent its carrying value exceeds its estimated fair value. Impairments of intangibles are recorded in impairment of assets in our consolidated statements of income.

Variable interest entities

74

Table of Contents

We evaluate our investments and other contractual arrangements to determine if our interests constitute variable interests in a variable interest entity (“VIE”) and if we are the primary beneficiary. There is a significant amount of judgment required to determine if an entity is considered a VIE and if we are the primary beneficiary. We first perform a qualitative analysis, which requires certain subjective decisions regarding our assessment, including, but not limited to, which interests create or absorb variability, the contractual terms, the key decision making powers, impact on the VIE’s economic performance and related party relationships. An iterative quantitative analysis is required if our qualitative analysis proves inconclusive as to whether the entity is a VIE or we are the primary beneficiary and consolidation is required.

Fair value of assets and liabilities

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial and nonfinancial assets and liabilities that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Pending Adoption

Our recently adopted accounting pronouncements and recent accounting pronouncements pending adoption are described in Item 8—“Financial Statements and Supplemental Data—Note 2. Significant Accounting Policies.”

Reconciliation of Non-GAAP Financial Measures

Distributable earnings

For the fourth quarter of 2020, the Company began utilizing distributable earnings, a non-GAAP financial measure, as a supplemental measure of our operating performance. We believe distributable earnings assists investors in comparing our operating performance and our ability to pay dividends across reporting periods on a more relevant and consistent basis by excluding from GAAP measures certain non-cash expenses and unrealized results as well as eliminating timing differences related to securitization gains and changes in the values of assets and derivatives. In addition, we use distributable earnings: (i) to evaluate our earnings from operations because management believes that it may be a useful performance measure for us and (ii) because our board of directors considers distributable earnings in determining the amount of quarterly dividends. Distributable earnings replaced our prior presentation of core earnings, and core earnings presentations from prior reporting periods have been recast as distributable earnings.

We define distributable earnings as income before taxes adjusted for: (i) real estate depreciation and amortization; (ii) the impact of derivative gains and losses related to the hedging of assets on our balance sheet as of the end of the specified accounting period; (iii) unrealized gains/(losses) related to our investments in fair value securities and passive interest in unconsolidated joint ventures; (iv) economic gains on loan sales not recognized under GAAP accounting for which risk has substantially transferred during the period and the exclusion of resultant GAAP recognition of the related economics during the subsequent periods; (v) unrealized provision for loan losses and unrealized real estate impairment; (vi) realized provisions for loan losses and realized real estate impairment; (vii) non-cash stock-based compensation; and (viii) certain transactional items. For the purpose of computing distributable earnings, management recognizes loan and real estate losses as being realized generally in the period in which the asset is sold or the Company determines a decline in value to be non-recoverable and the loss to be nearly certain.

For distributable earnings, we include adjustments for economic gains on loan sales not recognized under GAAP accounting for which risk has substantially transferred during the period and exclude the resultant GAAP recognition of the related economics during the subsequent periods. This adjustment is reflected in distributable earnings when there is a true risk transfer on the mortgage loan transfer and settlement. Historically, this adjustment has represented the impact of economic gains/(discounts) on intercompany loans secured by our own real estate which we had not previously recognized because such gains were eliminated in consolidation. Conversely, if the economic risk was not substantially transferred, no adjustments to net income would be made relating to those transactions for distributable earnings purposes. Management believes recognizing these amounts for distributable earnings purposes in the period of transfer of economic risk is a reasonable supplemental measure of our performance.

75

Table of Contents

As discussed in Note 2 to the consolidated financial statements included elsewhere in this Annual Report, we do not designate derivatives as hedges to qualify for hedge accounting and therefore any net payments under, or fluctuations in the fair value of, our derivatives are recognized currently in our GAAP income statement. However, fluctuations in the fair value of the related assets are not included in our income statement. We consider the gain or loss on our hedging positions related to assets that we still own as of the reporting date to be “open hedging positions.” While recognized for GAAP purposes, we exclude the results on the hedges from distributable earnings until the related asset is sold and the hedge position is considered “closed,” whereupon they would then be included in distributable earnings in that period. These are reflected as “Adjustments for unrecognized derivative results” for purposes of computing distributable earnings for the period. We believe that excluding these specifically identified gains and losses associated with the open hedging positions adjusts for timing differences between when we recognize changes in the fair values of our assets and changes in the fair value of the derivatives used to hedge such assets.

As more fully discussed in Note 2 to the consolidated financial statements included elsewhere in this Annual Report, our investments in Agency interest-only securities and equity 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 fair value securities adjusts for timing differences between when we recognize changes in the fair values of our assets. With regard to securities valuation, distributable earnings includes a decline in fair value deemed to be an other-than-temporary impairment for GAAP purposes only if the decline is determined to be nearly certain to be eventually realized. In those cases, an impairment is included in distributable earnings for the period in which such determination was made.

Set forth below is an unaudited reconciliation of income (loss) before taxes to distributable earnings ($ in thousands):

(1)    Prior to the final exchanges of the LCFH Limited Partners into Class A shares in the third quarter of 2020, we considered the Class A common shareholders of the Company and Continuing LCFH Limited Partners to have had fundamentally equivalent interests in our pre-tax earnings. Accordingly, for purposes of computing distributable earnings we start with pre-tax earnings and adjust for other noncontrolling interests in consolidated joint ventures, but we did not adjust for amounts attributable to noncontrolling interest held by Continuing LCFH Limited Partners. As of December 31, 2021, there are no remaining Continuing LCFH Limited Partners. For the years ended December 31, 2021 and December 31, 2020, $17 thousand and $16 thousand was included within net (income) loss attributable to noncontrolling interests in consolidated joint ventures on the consolidated statements of income, respectively.

(2) The following is a reconciliation of GAAP depreciation and amortization to our share of real estate depreciation, amortization and gain adjustments presented in the computation of distributable earnings in the preceding table ($ in thousands):

76

Table of Contents

Distributable earnings has limitations as an analytical tool. Some of these limitations are:

77

Table of Contents

•Distributable 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 distributable earnings differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, distributable earnings should not be considered in isolation or as a substitute for net income (loss) attributable to shareholders or any other performance measures calculated in accordance with GAAP, or as an alternative to cash flows from operations as a measure of our liquidity.

In addition, distributable earnings should not be considered to be the equivalent to REIT taxable income calculated to determine the minimum amount of dividends the Company is required to distribute to shareholders to maintain REIT status. In order for the Company to maintain its qualification as a REIT under the Code, we must annually distribute at least 90% of our REIT taxable income. The Company has declared, and intends to continue declaring, regular quarterly distributions to its shareholders in an amount approximating the REIT’s net taxable income.

In the future we may incur gains and losses that are the same as or similar to some of the adjustments in this presentation. Our presentation of distributable earnings should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

78

Table of Contents