Q3 2019 Earnings Call
Good afternoon, and welcome to the ladder Capital Corporation earnings call for the third quarter of 2019.
At this time all participants on in listen only mode.
Question, that's especially will follow the formal presentation.
And what you require operate assistance during the conference. Please press Star then what are your telephone keypad.
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At this time I would like to turn the conference over to matters, Chief Compliance Officer Senior regulatory Council Ms. Michelle wallet. Please go ahead.
Thank you and good afternoon, everyone I like to welcome you to ladder capital Corp. earnings calls for the third quarter 2019.
With me this afternoon or Brian Harris, our company's Chief Executive Officer.
Well, the Mccormick, President and Mark Fox or Chief Financial Officer.
Brian Hi, Mark will share their comments about the third quarter and then we will open up the call to question.
This afternoon, we released our financial results for the quarter ended September Thirtyth 2019.
The earnings release is available in the Investor Relations section of the company's website I don't know quarterly report on Form 10-Q , which we filed with the FCC. This week.
Before the call begins I'd like to remind everyone that this call may include forward looking statements.
Actual results may differ materially from those expressed or implied on this call.
And we do not undertake any duty to update these statements.
I refer you to our most recent 10-K for a description of some of the risks that may affect our result.
Well also refer to certain non-GAAP measures on this call.
Reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with gap or contained in our earnings release.
With that I'll turn the call over to our President Pamela Mccormack.
Thank you Michelle and good afternoon, everyone.
During the third quarter latter produce core earnings of $44.1 million, what 38 cents per share, reflecting an after tax or return of 10.9%.
Comfortably covering our quarterly cash dividend payment of 34 cents per share.
We made $1.1 billion of investments in the quarter.
Including $732 million of total loan originations.
70% of which were balance sheet loans. In addition to $346.1 million securities and $8.8 million of real estate.
At the end of September .
Undepreciated book value per share was 15015% and our debt to equity ratio with 2.89 times.
As I discussed our products in more detail I'll begin with our conduit business, which contributed $6.6 million in Q3 core earnings, reflecting the sale of $140.7 million of loans that settled in the quarter.
I will also note however that we priced a second securitization in the third quarter, but the results of that transaction a core gain of $4.8 million will be reported in the fourth quarter when the deal settled.
Conduit loan securitization margins for that business continued to be acceptable and we're pleased with the performance of that segment.
We originated $230.7 million the new loan held the securitization in the third quarter.
And the fourth quarter is off to a good start.
We closed $78.9 million the conduit loans in October .
And have several hundred million dollars the ones presently under application that we expect to close by year end subject to customary closing conditions.
Our balance sheet loan origination business is also doing well.
In October we originated $90.4 million the balance sheet wells.
And we have a robust forward pipeline for this business going into year end as well.
We originated $501.3 million and balance sheet loans during the quarter.
Including 400.
$54.9 million the floating rate loans.
With an average loan size of $20.6 million a.
The weighted average spread over LIBOR up 385 basis points.
And a weighted average LTV of 70%.
During the quarter, we were seeing pay off the $429.9 million, resulting in net balance sheet originations $71.4 million as origination slightly outpaced repayments.
We continue to see strong liquidity in the market that is enhancing bar with ability to refinance or sell assets.
Our recent focused on new loan originations has been on more lightly transitional assets, including our newly completed but not yet fully leased assets.
Property type mix of work balance sheet loan portfolio has shifted towards heavier weighting that housing related and industrial properties during 2019.
Those two categories comprised 56% waters balance sheet originations over the first nine months of 2019 up from 24% during 2018.
Conversely, offset hotel properties comprised only 16% of originations compared to 49% in 2018.
During the third quarter, our real estate equity portfolio continued to provide consistent net rental income from long dated cash was that contribute to our recurring earnings.
We acquired we acquired seven new net lease properties to our portfolio with a weighted average remaining lease term a 14.7 years.
Once tell a property contributed $300000 to Corning.
Quarter end, we had $1.2 billion of real estate investments on an underappreciated basis.
In the third quarter.
We have quite a $346.1 million highly rated securities with an additional $209.8 million acquired through the end of October .
Since the end of last year, we invested a total of $1.4 billion and senior CMBS securities ending the quarter with $1.9 billion up from 1 billion at the ended the third quarter of 2018.
As Brian will elaborate on shortly.
We continue to look to our security business to provide reliable returns of 8% to 10%.
While maintaining flexibility to sell the securities to reallocate this capital into higher yielding opportunities as market conditions warrant.
We also enjoy the liquidity of our short dated highly rated securities portfolio, but this isn't line is not a new business fourth nor is it just the cash management tool.
Our season trading desk is led by Brian together with a six member investment platform that include or had trader Ed Peterson, who has worked with Brian for almost three decades since the creation of the CMBS business in the United States.
The third quarter was characterized by solid earnings they didn't want originations and investment activity.
Did not reach to make more aggressive on or stretched our historical debt to equity targets as we remain committed to maintaining a strong balance sheet was conservative credit metrics.
Our multi cylinder approach continues to result in a sustainable double digit returns on equity that's supported durable well cover dividend.
We designed our platform from inception to give us the flexibility to selectively originate loans with experience sponsors and strong credit fundamentals instead of having to push volume.
As always our primary emphasis is on originating loans with a sound long basis relative to the value of the underlying real estate that collateralizes alone.
Our focus on middle Ware, Pete Middle market borrowed needles after steadily maintain a granular diversified book a balance sheet loan that totaled $3.2 billion at the close a third quarter.
We had an average loan size of less than 20 million in a weighted average duration of just 17 months to initial maturity.
With a balanced approach <unk> and an unwavering focus on capital preservation and optimizing our way.
We prefer to make sure to term loans that allow us to routinely reevaluate the credit risk and return profile of each investment.
And if warranted we require a sponsored commit additional capital if that business plans are not being met.
In addition.
We highly value the ongoing options quickly reinvest and where we allocate capital from maturing loans into investments that we view with having the back then current risk adjusted return potential when loans come due.
As in previous quarters, where we provided updates on certain portfolio assets.
I'm pleased to reiterate that we do not have any assets that we expect will result in a write down or a lot to our current investment basis.
As an active lender, we're not exempt from periodically having difficult conversations with borrowings.
Our long standing emphasis on capital preservation of maintaining a sound basis, well talk relative to the underlying value of our collateral has been helpful and keeping our portfolio returns robots.
And we are prepared to enforce the collateral rights and remedies against Counterparties, who is actually performed require us to do so.
Two strong hallmarks of bladder.
Our unwavering focus on principle preservation and our ability to respond quickly we understand there the clear distinction between a default in a law and we focus on avoiding the ladder.
With that I'll now turn the call over Tomorrow clock, our Chief Financial Officer.
Thank you Pamela and next few months I'll provide some additional detail regarding our financial statements.
Updates on certain timely topics, including encouraging developments on the FHLB membership from cost reductions from COO and mortgage debt refinancing activity and ladders overall funding strategy.
The third quarter regarding income and the forms of net interest income and that rental income totaled $49.9 million.
I think on income was complemented by $6.6 million of core gains on the sale of loans.
$1.2 million or gains on the sales of securities and zero point, Threemillion dogs, Oh gains from real estate itself.
From this income we paid $40.9 million of dividends and distribution equivalent to 34 cents per share 119.7 million shares.
Well third quarter letters cash dividend payout ratio was 89%.
That would be 82% on a rolling four quarter basis.
Looking more closely with the balance sheet. In addition to the key asset related because there is covered by download. It is noteworthy that as of September thirtyth, 97% or debt investments were senior secured.
Senior secured assets Wolfcamp comprised 79% of our total asset base, reflecting letters continued focus on investments at the top of the capital stack.
On the rights on the balance sheet, we continued to strengthen our plumbing base, while minimizing funding costs.
During the third quarter lever commenced the long planned losses of refinancing the series a 10 year nonrecourse mortgage loans that we used to finance our own real estate portfolio.
Ladder has reached the point and its corporate history, where it is tied to start refinancings that property by property overtime.
As was the case when we established industrial property financings water plants originate new 10 year mortgage loans and securitize them at a profit.
In doing so lottery goals, including achieving woman cost reductions lengthening, our corporate debt maturity profile and freeing up equity capital for other investment opportunities.
In October water took additional steps to reduce its one that caused by paying off the remaining $99.3 million of outstanding CLL debt financing held by third parties.
That was originally issued in 2017 in two separate transactions the generated almost $700 million the proceeds at that time.
Yes, its involves yellow collateral pools performed well and the attractively priced financing a lot of letter to Unlevered returns in the high teens over the past two years.
This quarter. We're also encouraged by the Treasury Department's public support the mortgage lender access to the federal home loan Bank.
It's housing reform plan released in September while we cannot be certain I was decision by the FHLB or timing, we continue to monitor the situation closely and look forward to a resolution of this matter that benefits, both commercial mortgage lenders and the communities and once they invest.
The latter plans continue to operate as if our of they'll be membership will translate in 2021, but we're cautiously optimistic I loved the treasury department's position on this subject.
We closed the third quarter when adjusted debt to equity ratio of 2.89 times within our historically targeted two to three times range.
Excluding our portfolio highly liquid and highly rated securities our adjusted debt to total equity ratio would be reduced the 1.73 times.
At quarter end, why don't I had $1.2 billion of unsecured debt outstanding across three issuances that mature in 2021 wanting to avoid bought.
Unencumbered assets at quarter end splitter over $1.86 billion, reflecting a 1.60 to one unencumbered assets the unsecured debt ratio substantially over the one point do drive requirement included in our corporate bond indentures.
That's almost $1.3 billion of young encumbered asset base was comprised of Brooks mortgage loans securities backed by first mortgage loans and real estate.
That's all encumbered assets represent a potential source of future funding.
At the end of third quarter total available liquidity for new investments was over $390 million.
Considering the current environment I want to briefly touch on how lotteries business model has insulated our shareholders I guess falling interest rates as of September 31% degrees in one month LIBOR would reduce quarterly core earnings by less than one centsper share.
The impact of lower rates is limited by the wars on our floating rate dollar tree loan portfolio.
Taxability of strength of our mobile apps on the platform that enables us to invest in other asset classes as market conditions change.
100% of our floating rate balance you won't have like what was the weighted average of those why what was continues to rise and stood at 1.70% at quarter end, which translates to a window average coupon war of 6.7%.
Yes on the accounting and reporting Brian .
Matter is continuing to assess the impact of Cecil on our consolidated financial statements important factors influencing the seasonal reserve will include the size composition and risk profile of our loan portfolio as well as current and projected future macro market conditions.
In our 10-K, which we expect to pile in February we plan to provide more detail surrounding our cecil methodology or adjustment the reserve to be recorded in Q1 against equity and our ongoing process.
Finally, as we look out over the next several months, we remain focused on improving our funding profile in achieving positive ratings action.
We reported to you in July the bench, everybody letters rating outlook to positive from stable and shortly thereafter, Moody's affirmed its positive outlook on our credit ratings.
We expect to continue our progress on reducing secured debt and in that regard have been closely monitoring the unsecured debt markets what supportive market conditions. We look forward so continuing to make meaningful progress on that front and then the process. We expect not only strengthen our balance sheet, but also position lateral to continue to deliver.
Strong and sustainable core earnings for our shareholders and prudent might take advantage of growth opportunities overtime.
Now turn you over to our Chief Executive Officer, Brian Harris.
Thanks Mark.
I'm pleased where a third quarter results that I'll add a few thoughts about the quarter and explain why we've made some slight adjustments to how we are investing these days given a very different kind of economic backdrop and how these how we see these choices benefiting our shareholders now in the years to comp.
First spend a few minutes on how we are investing giving the macro concerns we have while navigating the realities of today's market conditions.
Well the drop in one month LIBOR over the last year.
Add some negative effect on net interest income our funding costs also felt.
The bigger cause for the decline in net interest income we saw over the last year has been from spread compression on new loan originations.
Well that spread compression has been well documented by others. What is left well known is that the credit spreads on the securities that these loans support have been widening since last November .
In this environment, we prefer to acquire securities at wider spreads and invest in more stable higher quality assets, meaning newer or recently renovated properties and more densely populated cities.
With a focus on multifamily and industrial property types.
In the third quarter, our balance sheet lending efforts produced a total of $494.6 million, a new loans, 68% of which were secured by apartments mobile home parks and warehouses.
The weighted average spread to LIBOR on these loans was 380 basis points, which we believe produces an appropriate risk adjusted returns, particularly given the stability of the assets securing these low.
As Pamela briefly mentioned about a year to date basis, 56% of our newly originated balance sheet loans were backed by these same property types, so our migration to stability and quality when lending rates come down it's visible.
In addition, we have acquired about $1 billion, and mostly CLL AAA and doubling securities over the last year and our securities produce a levered return of about 8% to 10%.
<unk> for clarity around some of the more uncertain macro world events.
This is what we call purposeful investing.
We are responding cautiously to market conditions in accepting slightly lower returns with a higher degree of safety until we feel more certain about the future.
Fortunately our investment model allows us to easily cover our dividend by good margin of safety under current market conditions.
We've employed the same strategy throughout their careers and it has produced extraordinary results if mortgage spreads improve will pivot quickly into growing our portfolio a balance sheet loans again, yes, and until then we'll continue to see safer investments with acceptable returns until the market volatility path.
Yes.
Turning to macro conditions, let me start by saying we agree with most of the media reports that say the economy is fairing pretty well largely anchored by a strong U.S. consumer.
We note. However, the corporate America is not spending like the consumer well credit card that it's very high end defaults in automobile loans and student that are rising rapidly. So some caution may be warranted.
Well, we won't pretend to know when or how the trade war with China will be resolved. We do know that are less than 12 months, our U.S. election will likely put us on one or two paths that couldn't be more different.
As of today, we think that will either be faced with massive entitlement programs getting larger and more normally swell taxes in general will be sorry, or a continuation of the fiscal experiment whereby the U.S. deficit continues to spiral over the trillion dollar mark well taxes continues to be lower both.
Larry scenarios caused us to be cautionary.
Well, we think both political path will evolve into something more reasonable we feel it might be a fine time to take a slightly more defensive investment profile until we have more clarity on what to expect a year from now.
Hopefully I've offered some insight into our current thinking and investment model a model that is designed to allow us to respond and involved in real time, a model that has produced industry leading returns since inception.
We play the long game that ladder and will occasionally take up a defensive position at rest assured we already in position to go on offense when the time is right.
We feel confident that we will see excellent opportunities to achieve outsize returns on investments over the next 18 months.
Uncertainty creates volatility and volatility creates opportunities for those with capital and flexibility.
Before I wrap up the lastly, I'd like to mention is that 2019 will be a year, where we stuck to our core strategies in lending in securities you might recall that in 2018 outperformance had a fairly large component of core earnings but came from strategic sales of real estate assets that we owned.
As I look ahead into 2020 I expect next year to include more supplemental gains as we prepare to sell more assets that we own as they mature it now and stabilize and I think we can go now to take some questions.
Thank you at this time, we will conduct a question answer session. If you like to ask a question. Please press star one on your telephone keypad.
He confirmation tone indicate your line is in a question Q.
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Our first question comes from Tim Hayes with B. Riley. Please proceed with your question.
Hey, good evening, everyone. Thanks for taking my questions.
My first one you know Brian as you move into more defensive assets, how do you see yields trending irrespective of lie bore movements and what type of our we do you think the platform is capable of sustaining as you continue to shift your loan mix.
Oh, Hi, Tim.
I would say that.
The yields you should know that when we when I say, we take up a defensive position, we're doing more multifamily mobile home parks and industrial because they're a little bit more stable and there were some opportunities to step into those markets for various reasons during last quarter and it seems to me that the credit spreads that are so.
Associated with various property types are very similar right now and I don't really think a hotel shouldn't be pricing the same way as apartment buildings and so if you're going to be given a price by the market I think we need to be if we're going to pay a fairly tight prices. We all know there's been some compression in credit spreads.
But if we're going to pay a tighter price on all property types I think if the prices the saying, we'd rather get the more stable assets being the apartments and the and the warehouses. We are still writing hotel owns an office properties, but our rates are much higher than that and a in to the extent that the rates on hotels and.
Office buildings are the same as to what we see in apartments and industrial properties, we will avoid the hotels and the office products. That's not to indicate to you that were afraid of hotel or office or the economy right now it's simply that we express our preferences for.
For our investment based on what we think the long term stability is on all these assets. The other thing that we're doing defensively right now and again the door defensively I don't like it necessarily but what's been happening its credit spreads had been falling on the alone says they're under as their originated however, the credit spreads on the bonds that are.
Sold in the C allows that finance these things they've been going wider so from a risk return and liquidity and safety standpoint to me, it's a hands down a analysis that the securities is a better investment.
And so we're able to attain about a nine 9.5% return.
We've been acquiring AAA and double a seller securities at around a 120 over LIBOR type number when you apply more can leverage to that do you get to around a nine or 10.
Oh, yes, as far as where do I think yields will go I actually think their widening right now.
As that tends to happen across the board in the fourth quarter almost every year because there's a lot of tax activity that takes place that have happened before year end and and in general for some reason a lot of financial companies like to go through year end, where they smaller balance sheet. So they're not apt to try to expand their balance sheet going into year end, we're very comfortable expanding our balance sheet into your.
Our end and so right now we've got it and I in my opinion, an extraordinarily large.
Pipeline of loans under application with deposits up and ER and very pleased with that activity and I think that margins are very acceptable in yields have been rising on the floating rate product and with interest rates rising over the last 10 days or so on the on the conduit side, you'll now.
Actually see spreads tighten their because as interest rates rise supply just falls off.
If that if that answered you.
That does a yet that it does thanks, Brian for that Yeah, I guess it sounds like your words and I know you've always been committed to the bridge business by you know it seems like you're still favoring the C.M.B. never turn the risk adjusted returns returned in CMBS versus the traditional.
Space right now, but it sounds like the pipeline still pretty strong there. So how do you think about.
Capital allocation, there and just deal in different parts of your business is growing I guess in a in the near term or over the course it does have 2020.
Oh, I think a the fourth quarter, maybe a little bit of.
Teams, because as I said, the fourth quarter things get a little unusual because of your end 10 tax driven deadlines, but I would say presently for instance, I'll give you some quick numbers here in the fourth quarter. So far we've actually purchase as of today I got this number one I walked in here, we purchased about $240 million worth of CLL paper.
And yeah, we're running about a nine and a half levered return on that however, the the pipeline of loans under application in the bridge portfolio has higher rates associated with it right now so we're actually allocating a lot of capital into that space also so it's one of those rare times than I would I would largely attributed to the fourth quarter.
Where every product type is working very nicely right now and its profit margins appear to be getting bigger enough smaller as we head into 2020 I think in the middle of 2019, when there was a flat yield curve.
That's very difficult lending environment for most of you know spread lenders.
Various reasons and that has started to correct itself. So even the that fundamental change is adding to the net interest margin.
So I'm very encouraged by that I don't think interest rates are going to rise dramatically, but at least maybe they'll they'll be less than flat or or worse inverted.
So I think the lenders I think you've seen a lot of stock prices the banks and finance companies move up in here recently, that's an response really to the finance I have the the curve steepening. So we will benefit from that also so I would tell you right now it if it appears that we were avoiding a bridge loans in the third quarter that that was not the.
Case, we actually had one of our more active quarters.
We were simply preferring to be buying securities, but we bought both I would tell you as we go into the fourth quarter. Those numbers are evening out even more so actually I think we may very well be doing more bridge lending right. Now then then we're doing in a into securities acquisitions.
Got it that that's really helpful. Thanks for the color there and then just a on rate I guess and you know the amount of floating rate loans has its kind of declined a little bit over the past few quarters is that and then a conscious effort to go more fixed rate in light of your view of rates and are you putting floors on.
All new floating rate originations.
Yeah that in 2019 in the in the middle of the year I think we stated that our preference would be to invest primarily in the conduit business as well is a securities and we did follow that and that was as a result of our view that rates would be falling a we had a if you take a look at the profit margins in the conduit business in the third.
After a they were excellent and I believe as of today, we've actually made more money in the fourth quarter already then we made in the third quarter. So in the conduit business. So those margins are very strong right now, but I don't want to mislead you in that many of those margins are there that the high margin that you're seeing is because rates were falling while there.
The floor is in place. So we had some somewhat outsized returns I think that will normalize a little bit as rates rise, but as rates rise I think we'll we'll get higher credit spreads and arc and are there a bridge lending business. So that's the way the model works you whenever something I know that there's been a lot of talk about rates falling and what does that duty.
Net interest margin that that's why we can all figure out net interest margin and if you don't have floors and plays the answered one of your question is do we have floors in place and everything in the <unk>, Yes, we dealt.
All right and our floors are actually rising something had not many people realize because loans written three years ago actually had lower floors. Then loans written today. However, as we head into 2020 I would tell you that I think our net interest margin will pick up our volume will pick up in rates will be higher however, I don't think well.
I will enjoy the same margins in the conduit business because those floors that that added outsized profits or yeah, they're not there anymore.
Okay, Yeah that makes sense. Thanks again for the color there and then just a quick housekeeping question I got the 78.9 million of conduit loans October but just missed that number of how much you expect to close before year end can can I get that number.
And we'll do it but we just had several hundred it.
We're not giving that number.
There were several but nevertheless, we're getting out of that several hundred million dollars.
Perfect Alright, thanks, guys appreciate.
Our next question comes from Rick Shane with JP Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my question.
You know, Brian when we hear your approach in the near to intermediate term I think there or perhaps two things that are going on here.
One is the <unk> in terms of driving the strategy. One is a relative value play that you don't see risk or riskier assets being.
Priced appropriately versus less risky assets and then there is a more absolute value play based on some of your economic and political concerns a I'm curious if that's the right way to think about it and <unk>.
More importantly, how.
How bad are the signals that you feel that you're seeing.
Okay couple of parts that question. One is I'll go back and hear this recording again, because I'd like to say the way you said it as far as relative value and risky assets versus less risky assets.
There is a price for what I'll call.
Riskier assets, meaning shorter term assets, meaning more elastic more more levered to the economy. So hotel REIT is probably the ultimate in short term leasing so.
When we may very well, except a lower ROI, we on an apartment building then we would except on a hotel.
And the ones that differential is is minuscule will lean towards the apartments, because they're just more stable, they're not going to get a Amazon hasn't lived in an apartment yet for them and so it's it's just safer. So when do you see us, possibly accepting slightly lower our own ease youre correct. It is.
On a relative value investment basis, it's not because we're uncomfortable with hotels, we just think that the price of hotels relative to the pricing of apartments. A is out of whack. So we don't typically right a lot of apartment loans. If you remember I think we were 40% hotels at one point a few years ago were much lower than that now and there was a pay.
Sure. It in time, where are the agencies. The G.S. He is really kind of close down or took a little bit of a holiday in 2019 and because of the rent regulation laws that went into effect a lot of savings and loans froze all so and that really opened up a 120 day period, where apartment loans were able to be acquired at at much wider pricing. So we.
Just stepped in there again opportunistically I don't want you to think that we're migrating towards apartments, because we're afraid of hotels youre correct on a relative value basis in the third quarter that was what we expressed in our investment preferences.
Got it in the second part of the question and I would actually like to rephrase, what I said, a because it sounded probably perhaps a bit more dire than you suggested but when you look at this the economic single signals that are of cancer or where would you raised the magnitude of that concern.
[noise] [laughter] my concern primarily lives with.
[noise] medium to longer term likelihoods as opposed to what's happening right now I mean, there. There's a bad is playing the champagne is out unemployment is low wages are rising and there are seemingly no problem at all and and that's kind of true I I think that the economy is bouncing along pretty nicely here I don't.
It gets booming, but I think it's doing okay.
Where my concern comes in is after 10 years of extraordinarily low interest rates well, you've got a 2% GDP, which is okay nothing wrong with it but you might have thought higher there was a bit of a worldwide problem going on a slow down a corporate America is signaling a hesitancy to spend which may be motivated by the account.
Let me in what they're seeing or it may be motivated by their concern about which way. The next election is going to go.
Frankly, I'm, a little concerned about either way the election goes.
As far as a you know in the long term with a Republican victory.
Oh, we're going to continue to spiral the deficit and and having the deficit used to be something people worried about its not anymore. Apparently there's been a new theory that as long as is a small part of GDP. It doesn't really matter not sure I believe that one on but that is that the narrative that is playing out in the country today and the but the democratic altered.
And it does it looks like a massive expansion.
Of many many government programs and a entitlements and it would be only way to pay for it raising corporate taxes in individual taxes, and I have no doubt that'll turn into property taxes and other.
So you know we've kinda had.
A quick view of what can happen when taxes start becoming irrelevant as far as well how high they go and you're seeing it in the high end Manhattan condominium market, where they obviously limited state level taxes.
They got rid of a lot of foreign buyers and then there was a mansion attacks and now they're talking about putting on a second home tax four out of counters and that that market has been hammered.
And in New York City. So obviously, we're a national lender, but so is it dire no. It's not could it be I think it's I think it's very bad in high end residential condominiums.
I think that's dire, but but it's it to me, it's just a lowering of price because you've really just made it very hard to own over the long term and but on when I look at the properties and how they're performing I think hotels are doing fine I don't think there'll be doing better next year I think they Pete I think they're doing as well as they could be I don't see.
He them in trouble so they could go along here for a while just like this industrial properties are doing very well, obviously as retail gets hurt industrial does better.
And the apartment market because oh, a lot of housing is out of price range and a lot to be love jobs apartments are doing pretty well. So it's not dire at all but I there could be some clouds building that could be.
Quick catalyst could step into them in the next 15 months.
And I don't think it'll be positive.
Oh I appreciate all the thoughts Brian Thank you sure.
Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.
Good evening everyone.
To start for starters, we were pleasantly surprised by the 500 million new balance sheet loans in the quarter and thank you for explaining be don't focus there with housing and industrial is there can you comment on the number of loans and <unk> and Mitch whether there's anything chunky and they're trying to.
Just figure out if if that.
Looks like as you go into next year that might be a sustainable near a sustainable quarterly level for that type of a financing. Thank you that's wonderful.
Yeah, So Steve Steve we originated 24 or balance sheet first mortgage loans during God.
The average.
And the Alberta size of those those balances dollar tree loans.
That we originated during the quarter originated.
500, $500 million worth so 20, my little bit more than 20 million yet [laughter] nothing John I didn't see you did a $90 million alone and one of them, but something I don't I don't think we have things over 100 million that I can recall.
We would love to write slightly larger loans, because frankly at this point I talked to panel or the other day about you know how busy we are going into year end and she said we might need to hire some more people. We've just had too many things closing in my first answer to your was will raise prices because you know that that means we've got to its volume coming in here. So.
So we do stick to that middle market model and I I think our average downsized been between 18 and $25 million for a long time.
Great. Thank you for that and we see two closed conduit deals so far in the fourth quarter.
Obviously, a lot of rate volatility and I don't know, how that's going to affect the second half before Q, but can you comment on the probability that you did you will be able to participate in a third transaction before the ended the year.
Sure. We have participated in two and a leap we've made seven and a half million dollar so far this quarter and in the fourth quarter and the.
There's a very good probability high probability will participate in the third one which I think we'll probably be bigger than than the other two however, we are somewhat dependent on other people and partners on <unk>, but what wall Street partners are simple good typically very motivated to get things done before the end of December So I would say the probability is higher going into.
This quarter end than than most.
And as I said I think it'll be bigger I also think will track over yearend with a much bigger balance of conduit loans to be securitize going into 2020.
We are trying to acquire a lot of assets right now.
Great. Thank you very much to the comments.
Okay.
Our next question comes from Jade Rahmani with KBW. Please proceed with your question [noise].
That's very much you made some cautious comments around office wanted to ask you about co working and we work.
My understanding is we work absorbed a significant amount of vacancy in New York for example, which could have artificially propped up the office market for a couple reasons, one by resetting rents to higher levels.
Taking that vacant space offline, but also in the transitional space sponsors could underwrite that last mile of vacancy assuming that we work.
I would take it I saw stat today that even in the third quarter. We work was 69% of the market, although they've pulled back. So just curious about your thoughts around that trend in the office space.
Sure.
Yes, I actually asked a few of the larger landlords around the country and we do have some loans out to them first of all our exposure true. We work is de Minimis, we've got a exposure to them in a building in the Midwest, which is not very high in that building in that and that's it.
I think you've asked US a few times questions around co working space and I think I may have indicated that unless it was the parent on the lease I would not even considered.
Using we work as a as a a tenant that we would bank and in fact lease that we do have them in our building. The parent is on that lease. So you know with the recent rescue I guess.
Thank you know that is the company that that is backing that lease.
And also it seems to me that obviously, they're very large acquire up space in a in a very short period of time and just market dynamics tell me that when you acquire a lot of things in a very short period of time, you probably paid a little too much for it because you were outcome eating a lot of other people. So I think against the backdrop of we work, which I'll call I don't.
10% maybe of the space.
It's going to come I think a lot of it will come back on the market I don't know it may not.
But I think the market is already softening a little bit and just generally so I think it's it if it had a I think it had a.
Muting effect on the way up because I think that they were paying high prices in a market that was softening and now I think there's gonna be mark space coming back on the market in a market. That's falling so that that may have a bit of an outsized.
Feel to it.
And but but so if I had to guess what do I think you're going to happen in New York City rents for the next 24 months as a result of co working space being less dependable and maybe 10% dropped I I don't think its fatal by any means and especially in a lot of markets that therein.
10% drop in rents yeah, I think so.
Wow.
Okay. So just to follow up you would also see cap rates widened in that scenario and then you have a lower and why so you're saying that you expect office values to decline more than that over the next 12 months.
About that yeah, I would go along with that probably [noise].
Oh, that's interesting so how does that play into ladders office exposure specifically.
Any.
This is of concern right now.
No I think you know the concerns that are doing better out there as far as what were saying I mean economy is still at doing fine Corporate America earnings are okay.
And as I said, many times I think if and when a recession does come I don't think it'll be a nearly as difficult as some people fear.
Mainly because of the expansion and the end the recovery has not been nearly as you know euphoric as many people have thought. So you did hear me say that were preferring <unk> at a similar price, where we are poor, preferring apartments mobile home parks and industrial properties as opposed to office and hotel.
I don't put office in the same category as hotel, but I put it closer to hotels and I put it to apartments, so how's that affecting us I mean, where where pricing higher and we're not we're not acquiring as many office loans as a result of that and that's by design. If we want to add office product I think we can.
And do that if we simply lower our spreads to where we're doing apartment loans will will have plenty of office buildings here. So we cure rate or portfolio. When we try to make sure that we're responding to what we perceive it again I see a lot of the stock at the stock traders, let's say well if it looks like a Democrat is going to win the election, you should should sell your stocks when you're maybe.
Hello that you're gonna get pay back in three to four years, you're not going to have that opportunity. So the time to start boarding up a you know and protecting things is well in advance of that so I don't know, what's going to happen and I I don't know, which one I fear more but but I do fear that there is a a lack of discipline in the financial system right now.
And a bit of complacency on the investment side I understand why stocks are trading at all times highs and I understand why employment as it is at an all time low.
Im a little bit concerned as to what the cost of those she's statements has been.
That's translating into the deficit and yeah, I sound like an old man when I talk about it but I I am a little concerned about a deficit that went from 400 billion said one trillion dollar is very shortly very quickly.
Pamela one through some of the way latter approaches asset management and a proactive matter.
I really appreciate that I think it's much better than lending pretending in extending but on that note can you just think about or talk about the magnitude of potential upcoming maturities, noting that maturity default is one big driver of at least credit default and are there any.
Hey, any credit issues, you know that you're watching closely a that you'd expect to arise in the next quarter or too.
[noise] Jade I'll, let Pamela talk here in a second but I think what you'll hear from Pamela is.
A big distinction between a default and loss and yeah. Youre correct. You can certainly extend alone when LIBOR is that 175, and then probably get somebody to put up a few dollars for interesting kick the can down the road a latter believed if there's a problem you should get added when the capital markets are very liquid.
In aggressive lenders exist and when the refinance possibilities are plentiful and before that same sponsor might have two or three problems on his hands. So we are probably an early warning system that would that were very aggressive in how we approach maturity deadlines.
As I said in the past one of the annoying borrower habits is when a borrower has a maturity coming up and the building is not for sale and he has not looked for an extension in his belief is that he's going to get an extension with us and he hasnt sought a re fi rather.
He that's that's a poor discipline that we don't really like to encourage and if a borrower does need an extension and he's willing to write a substantial checked to recommit himself to the equity then we're happy to extended oftentimes charging fees and raising rates because we prefer to things to happen on time, unless there's a reason or do we have some things.
Summing up near term I, we have a 60 million dollar loan that is in recently defaulted as far as a maturity default went I'll just point out it's actually been discussed a little bit in the Austin newspapers, it's the old three M. headquarters in a in Austin, Texas.
And the borrower purchased it just 18 months ago North of $80 million has $22 million an equity in the building.
We swept to cash flow for 18 months and I'm. The building is now empty. It's a mill almost a million square feet and there's 160 acres of land with another million square feet of as of right buildable space in probably one of the melt the healthiest markets in the United States, a if we were to Fourq.
Close on this property and take ownership of it we would own it at about $70 a square foot on the existing building, giving no value at all to the land or the other million square feet.
The borrower extended this loan with a seven figure pay down a <unk> right before we gave US 30 more days and he had a it we believe he was looking to refinance it with several hundred million dollars in alone that would have been a full redevelopment.
However, the FBI went into his offices seized computers, and and records and there's been no charges filed but the refinance fell down.
So when the borrower suggested potentially extending the loan we reiterated that it would require a pay down of principal not just a reloading of interest and loan went into default and.
It may pay off the alone at a default rate is presently.
Accruing at 13.8%.
And yeah, we're pretty comfortable with it. So if you. So there's a default not anything that's concerning us and not anything that we're expecting to take any write downs on and if it pays off great. If it doesn't that's okay and we are in Texas, Texas seems to be quick and so <unk> again, I think I've mentioned too.
Where we're seeing these problems bundle up is where there's no cash flow and the borrowing needs an extension and there's another example of it right right. There I mean hate it when you want to extend a 16 $60 million alone you have to put up a year of interest at a high rate. That's a lot of money and the mistake was made in that the first 18 months.
On finding new tenants and waiting perhaps too long to refinance it so as I said no. One has been charged with anything and so we're hopeful we hope the bar and keep the property.
But he'll he'll have a very high interest rate that goes with it at this point I you should also know too that the this isn't unusual phenomenon in this part of a.
This recovery in 39 years I never really saw law enforcement in real estate owners offices.
But we had another one last quarter that the F.B. I wish it was a.
In the offices of upstate New York property owner, and we had a 39 million dollar loan out to him and.
But it did pay off I mean, he had a maturity coming up and he did pay us off but I rarely seen law enforcement looking in real estate owners buildings as much as this and when it happens immediately all refinance activity stops. So if they're large substantial holders of real estate. They ultimately want of defaulting.
At a bit, but again that doesn't cause us concern as a lender because of the basis that we lend that going in so in this example in Austin, Texas is $22 million, an equity 18 months ago.
Okay and any other upcoming maturities that are on a near term maturities on a watch list.
So we maintain a robot <unk> watch list includes any maturity, but what I would tell you Jade as there are a small handful of loans where were in you know some of the same thing Brian covered it well we're in conversations with borrower about putting in more capital and we are taking a hard line across the board.
In order to gain access in you have to recommit [noise].
Capital submitted this plan that we think is superior to one that we can execute well because as Brian mentioned, we really are a basis, whether I look at the underlying value the real estate and feel very confident I think one thing that really distinguishes ladder.
The fact that we don't own and operate you know seven or 8 million square feet of real estate, we're very comfortable taking back property and we know what's the deal with it and and the OMA. How was really good example that that just opened and with reopened the health and its operating and you can make reservations on the web site that was a good example of.
Why and how we would step in so I.
Yes, the best way to stated we are in a few conversations but we're not looking at any assets that we have any concerns about or that we expect to take a write down ROA.
Okay, Great I definitely appreciate the proactive approach I think that's the right way to go about it thanks very much.
Once again to ask a question that star one our next question comes Joel Dryer with LTC Partners. Please proceed with your question.
Afternoon, gentleman I have two questions and Pamela sorry.
Number one is over the last seven quarters. The LTV on your balance sheet launches crept up 400 basis points to 70% LTV I just want to know what might be driving that and the second question. As you mentioned retail Brian how is the Gigi portfolio GE activity and just kind of some.
Some viewpoints on whats happening over there as well thank you.
Sure.
The 66 or use isn't a 66 LTV to a 70 over second quarter.
That's that's correct.
My guess is that's probably I mean, that's almost the same number but obviously its entire my guess is that's very reflective of our movement over to apartments as well as a industrial properties, because we use much lower leverage on hotels.
And I think the second is that helpful.
Yep that that answers that question I appreciate that missed the ship shift in us sectors and then the other question I was a color on the Gd did you portfolio in.
Sure dollar dollar General is one of my favorite companies as you know and yeah. They they have an incredible business model and it's one of the few retails United States and not only is thriving but its expanding at a rapid pace.
There are many technical reasons why DG is a wonderful credit for us to to put on our balance sheet.
And for the long term here for we sign brand new properties with 15 year leases [noise]. Many of the properties that we acquire are well move if it is moving a dollar general that's been in place and they've inline shopping center for 25 years and now it's moving across the street to a standalone. So.
So they understand their market and.
Intimately about point, when they're moving across the street with a new store and yeah. There there such small investments that they tend to trade at wide cap rates, which generate enormous returns and the reason why is because the expenses that are associated with acquiring such a small asset on a dollar generals costs 1.4.
Million dollars generally and what if you're gonna by one of then you're going to get a very big legal bill and a whole lot of other builds from various I reporting companies. However, if you're going to buy 100 of them.
You're going to be getting some economies of scale, we actually acquire our dollar generals, where if we do close on the transaction. Our expenses are paid for by by the seller. So it's an extremely efficient.
You know business for us as long as you are comfortable with the credit.
And we are dollar general Yum continues to expand in their their same store sales do great their customer is not necessarily Amazon prime.
And it's not necessarily.
Getting getting things delivered to the house on a regular basis. So in many ways dollar general comes in behind Walmart, when Walmart closest sometimes and while I wouldn't call that great real estate.
I'd tell you know turits <unk> they become the these general store of of the small town that they're in we probably by three out of every 10 that we look at and I want you to think that were just waving in the corporate credit we would do we require certain amount of people nearby many of their stores are in rural areas. We also try to acquire dollar.
Our general elsewhere, we don't expect there to be much slippage in the inventory.
And yeah. It's just been it's good it's been a good.
Program for Us, where we own presently 91 of them and Uh Huh.
The other thing that I think Mark mentioned in his we're beginning to refinance some of our triple net properties I know that we refinanced a few Walgreens recently, where we had been making 13, 14% cash on cash returns, we're taking small position cash out rates going down in the cash on cash return is now exceeding 20% going forward for the next.
10 years so.
So and we like the business were very particular about it we don't we don't go in and buy them in a wide spread with you know with reckless abandon on any corporate credit we actually look at the real estate. The typical dollar general real estate Bucks is about $140 a foot.
And when you compare that to what a Walgreens Cvs costs and some of these smaller towns. It really is a much safer play and that's assuming there is a default you know I don't think it's going to be it would be painful I wouldn't say it wouldn't lose money, but I don't think it would news lose nearly as much money is oh Walgreens that my close.
That concludes our QNX session, our we turn the call to Brian Harris, the company's Chief Executive Officer.
Okay, Thanks, everybody, who listen to the call Tonight, I'm very pleased with the third quarter.
It's always a interesting time to talk to you at the end of the third quarter because after the fourth quarter I don't get a chance to talk to you again for until around April or May. So I would just say that you'll probably the flat yield curve. If it disappears that'll be very helpful. Rising rates is gonna be a good thing if that does occur.
However, ladder is built to perform an up rates or down rate scenarios for everything that goes wrong when rates go down something else goes right. We build it that way on purpose and I think that we've had a very good year and I think that competition has abated a little bit if it was very aggressive in the second quarter and we're looking forward.
Good good while we do expect some volatility and I'm not counting on all that but as we move into the first quarter I think that we're going to go into 2020 with a very full deck and I look forward to also selling some real estate next year, because some of our assets have matured at this point, we didn't have any real.
Punch a you know that was the thing that punches are always up into the low teens.
But I do believe next year, we well so with that I will say good body for the year and thanks for your support.
This concludes today's teleconference. You may disconnect your lines this time and evergreen.
[noise].