Q3 2020 Ladder Capital Corp Earnings Call
[music].
Thank you for standing by [laughter] Coltrane's, operator, welcome to the ladder Capital Corp, third quarter 2020 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to Michelle Wallis Chief compliance Officer, and senior regulatory Counsel. Please go ahead.
Thank you and good afternoon, everyone. We.
We continue to wish that all of you listening and your families are well remain stage.
Turning to our earnings call for the third quarter 2020 with me. This afternoon are Brian Harris, our company's Chief Executive Officer Pat.
Pamela Mccormack our president.
Marc Fox, our Chief Financial Officer.
Brian Pamela Mark will share their comments about the third quarter. What they are currently seeing in the fourth quarter.
And we will then open up the call to questions.
This afternoon, we released our financial results for the three and nine months ended September Thirtyth 2020.
The earnings release is available in the investors relations section of the company's website at.
And our quarterly report on form 10-Q will be filed with the FCC later 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 form 10-K and form 10-Q for a description of some of the risks that may affect our results.
Well also refer to certain non-GAAP measures on this call are.
Additional information, including a reconciliation of these non-GAAP measures to the most comparable GAAP measures is available on our website <unk>.
Hi, or dot ladder capital Dotcom and in our earnings release with.
With that I'll turn the call over to our president.
Pamela Mccormack.
Thank you Michelle and good afternoon, everyone.
For the third quarter, why don't produce core earnings of $19.7 million or 16 cents per share.
Our Undepreciated book value per share increased by 18 cents from the prior quarter to $14.35 per share.
We continue to increase liquidity and reduce leverage.
And ended the quarter with unrestricted cash balance of $876 million and an adjusted debt to equity ratio net of cash of 2.34 times.
As of today, our unrestricted cash balance stands at over $940 million.
Liquidity position continues to be among the best in our sector.
We have focused on building liquidity and book value, while we wait for the results of next week's election right.
For clarity on other stimulus package and a more expansive reopening of the economy.
With clarity on these issues nearing closer.
Large cash position and modest leverage Lisa leaves us, both well position and well capitalized to begin to take advantage of the investment opportunities. We expect will rise as a consequence of this crisis.
In the meantime.
I'm pleased to report that we had an average collection rate of 98% for interest in rents across our wont and real estate portfolios in the quarter.
In addition, no specific loan loss provisions were quiet.
Our overall rate includes 100% collections from our substantial portfolio of net leased properties, which has performed particularly well during the crisis.
Actual collections have been similarly strong across all of our business lives there.
Credit quality and liquidity of our balance sheet loan portfolio was further evidenced as the portfolio pay down by more than 21% or $739 million from loan pay offs in sales over the second and third quarters.
During the third quarter loan repayments totaled $223 million, including two hotel loans and we sold a 7 million dollar note at par value.
Consequently as of quarter end, our $2.7 billion balance sheet loan portfolio represented just 42% of our total assets.
Since then we've received over $80 million in additional loan repayments as more loans paid off in October.
During the third quarter. We also sold three properties for total proceeds of $64 million, which generated $12 million of core earnings.
Strong collections repayments in equity sales above book value demonstrate the continued strength of our inherently conservative credit culture.
Our middle market focus.
Results in a highly diverse and granular asset base.
We maintain relatively small investment five wins across all of our business line.
And an average loan size of less than $20 million spread across various sponsored property types and geographic locations.
With small balances, we've seen our middle market borrowers access a larger and more diversified pool of capital providers to refinance their assets.
Leading regional banks and credit unions that bonds and governmental agencies.
As long as paid off our total future funding obligations were reduced to just $227 million as of September thirtyth.
The majority of which remain conditional upon the achievement of good news events, such as leasing and tenant improvements that would be accretive to the asset.
With regard to our security segment.
Our portfolio has been reduced by more than 25% or $483 million over the second and third quarter through a combination of amortization sales.
As a result $367 million, what 31% of securities people that has been paid down during the same time.
Limiting our outstanding Securities repo to $823 million.
As we continue to strengthen the right side of our balance sheet by reducing our total debt and mark to market financing. We are pleased to report that as of today, we only have $288 million of loan repo debt outstanding.
76% of why this capital base is now comprised of unsecured bonds, non recourse and non mark to market that and book equity.
And over $2.7 billion or 43% of our assets are unencumbered, including our unrestricted cash and $1.2 billion. The first mortgage loans.
In conclusion, with a strong balance sheet and vast incremental earnings power on hand.
We're looking forward to finally, taking advantage of the substantial investment opportunities we expect to emerge.
Our multi cylinder business model will allow us to pivot quickly as opportunities present for long leases and door rescue capital on compelling projects with strong sponsors and we have the necessary liquidity and in house experience to immediately capitalize on these opportunities.
With that I'll now turn the call over to Mark.
Thank you Pamela the liquidity and capital strengthening actions taken over the last few months a lot of latter to focus on managing its portfolio of investments and working so we do see its cost of funds.
In that regard water continue to de lever its balance sheet by September 30, our adjusted leverage ratio was reduced to 2.91 times.
None of unrestricted cash letters or adjusted leverage ratio was 2.34 times.
During the course of the third quarter total debt was reduced by $239 million, including a $91 million reduction of financing against our securities portfolio.
In paying down debt, we continued to intentionally target secured borrowings that were subject to mark to market provisions.
For the three months ended September 30, we paid down an additional $27 million of loan repo debt, resulting in a balance at quarter end of $354 million.
In our real estate equity portfolio, which totaled $1.2 billion of Undepreciated book value and comprises approximately 7.7 million square feet and 176 properties across the United States.
This approximately a 163 properties are net leased to single tenants with a weighted average remaining lease term of 12 years.
Our $1.4 billion securities portfolio is nearly 100% investment grade, 92% AAA rated.
With a weighted average duration of 2.1 years as of September Thirtyth.
Financing pricing and liquidity for these high quality short duration assets have improved over the course of the quarter.
We are reporting $19.7 million of quarterly core earnings and core EPS of 16 cents.
The major sources of Threeq, you income where interest in rental income in addition to the gains on real estate investments.
We did not record any specific loan loss provisions in the third quarter.
With regard to cease all the dollar amount of that general reserve decreased by two and a half million dollars to $27 million.
The decrease related to the balance sheet loan payoffs received during the quarter.
With regard to shareholders' equity our securities portfolio valuation marks continued to steadily increase during the quarter, resulting in an $18.7 million credit the shareholders' equity from a 121 basis point improvement in marks as liquidity continued to return to the investment grade rated CRM.
Hello, and CMBS markets. We also paid a dividend of 20 cents a share.
In Q3.
GAAP book value at September 30 increased to $12.61 per share from $12.44 at the end of the prior quarter, well Undepreciated book value per share rose to 14 35.
Finally.
Latter successfully streamlined its capital structure as the last of our original partners exchange their class B units for shares of ladders publicly traded class a common stock.
Latter now has a single class of equity ownership interest outstanding.
This simplification provides a lot of what the option of aligning the timing of ladders future dividend dates with those of our public company peers.
And we will also allow us to realize annual administrative cost savings.
Looking forward, we're confident in our strengthened capital base and solid liquidity position our.
Our loan and securities portfolio have decreased in size due to strong levels of natural amortization and healthy levels of payoffs.
We continue to de lever our already diverse liability structure, while maintaining significant liquidity to remain ready for opportunities as they may present themselves.
More details of our Q3 operating results can be found in our quarterly earnings supplement which is available on our web site now as well as our third quarter 2020, 10-Q, which we expect to file this evening.
I'll now turn the call over to our Chief Executive Officer, Brian Harris.
Thank you Mark.
In the third quarter, we continued to strengthen our balance sheet and raise our liquidity profile. We began this somewhat defensive stance back in March when the virus took hold in the U.S. and cause elevated volatility in the capital markets.
Our next call won't be until late February I wanted to expand on what Pamela and Mark detailed into what we're seeing so far in October.
With additional loans that paid off in October how restricted cash has risen to over $940 million as of today, we are exceptionally liquid and have one of the best liquidity profiles in the sector.
As the investment landscape becomes more clear, we're happy to be sitting with such a large cash position. After the progress we've made and de leveraging the company while our cash holdings are dampening earnings in the short term, we are extremely well positioned to take advantage of longer term opportunities in lending on and owning real estate as ours.
Finally recovered and a medical solution to the current health problem emerging hopefully in the next three to six months.
Despite the challenges facing commercial real estate, we continue to see our loan portfolio refinancing what appears to be a fairly normal rate.
Well apartments in industrial assets are the easiest property types to refinance or sell we are impressed to see some retail office and even hotel loans also taking advantage of today's low interest rate and refinancing.
We're also happy to have realized significant value through the sales of our real estate portfolio. This quarter that resulted in meaningful gains. We continue to see this segment of our business has a stable source of recurring earnings with occasional but substantial contributions from gain on sale.
We said on our last call that we felt it was prudent to wait and see how school openings when and how the how under control the virus was and lastly, how the election turns out.
It seems to be adjusting to the new norm, but the virus is clearly not under control. So the importance of finding a medical solution seems more critical than ever before.
The result of U.S. elections will give us better clarity and more confidence as to how we invest going forward and we expect our patient.
To be rewarded as we look ahead to the end of 2020 and into next year, we expect to selective we started making new loans at purchasing new assets and what we expect to be a post cobot environment characterized by low interest rates that will rise over time with inflation at higher levels than we've seen over the last five years.
Even though there seems to be a lot of capital available in the wireless space. We believe that lending standards that banks will be very restrictive and that should result in less competition and provide attractive opportunities for non bank lender.
Our consistent use of unsecured corporate that should put us in a strong competitive position as the recovery unfolds next year, we have just $250 million, a five and seven eight rate corporate bonds due in August 2021.
They are callable now at par.
We expect to refinance this issue in the first half of 2021 and are cautiously optimistic that our economy will be moving in the right direction every hopefully move toward the end of this pandemic.
Well now turn to Q and a.
Thank you.
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John Your question please.
Our them too.
Our first question is from Mike slight B. Riley Securities. Please go ahead.
Hey, everyone. Thanks for taking the questions.
So my first question is kind of given where the stock is trading on books I guess just high level. What do you kind of think that market is it sort of missing here and how do you think about bridging that gap just a few quarters of stable book value performance or are looking to put capital to work and grow the dividend any color you can provide would be helpful.
Sure and thank you for asking.
This is Brian I think that if there's a couple of things that happen first of all obviously out of the whole sector got checked pretty hard.
When the original Covance shock took place in the middle of March.
We got caught up in a discussion about securities and leverage at that point that frankly, we never should have been in I don't know why the market had that discussion about us.
In any event I think that we were taken down a little harder than a lot of our competitors in the sector.
So when you're trading at a deep discount to.
To book value like we are at this point, we decided that we would put it back seat to earnings and we would worry more about liquidity because that seemed to be one of the concerns was and frankly with a pandemic going on that's the playbook, we haven't really figured out and in our careers in the past. So it helped to a you know with interest rates falling precipitously.
It Didnt make any sense to go out and do a whole lot of lending at very low rates anyway. So I think you know it's a several step process. The first was to stabilize our bond portfolio and.
And I mean, the corporate bond portfolio at the bonds that we have outstanding which fell a and in some cases down to 60 cents on a dollar back in March or April.
Those we acquired $175 million worth of those I would point out that's not something somebody would do if they were having a liquidity problem because those bonds are not due for quite a while.
And they also represented tremendous value, especially versus anything else, we could have been investing in so we feel like we stabilize the or the price of those bonds. Although we still trail some of our competitors and were a little surprised by that but you know that's probably just requires more attention and marketing from us.
We will continue to buy those bonds if they do show any any form of a weakening in price because they're a first offerings that comes due comes due and I.
I think its a September of 2021, so we have to buy them anyway, It's got a pretty high rate. So we'll probably look to retire those as I said either in the first half or else will systematically just purchase them in the open market I think the as far as the second step goes eight you were at that point I don't yes.
At some point when your concern might be about credit as an investor and as you see 25% of a portfolio payoff at par on time.
And do you see levels of cash rising approaching a 125% of the market cap of the company you could always wonder are they over leveraged I think if you look at our leverage as a company were under leveraged actually a we've got an enormous amount of cash we can pay off most of our debts and we've had a very.
Three active usage of.
Unsecured corporate debt, which I think was very it was very fortuitous and showed a lot of foresight into a situation like this because those bonds or not do you know first and the last one we did was in January 2020, and those those bonds are not due until 2027.
So I think the first that was the bonds. The second step is liquidity and a and you did see us start to buy some of our stock back in the last quarter and I think the third step will be earnings and I think early this is something that is a relatively easy thing to turn on you have to be a little bit careful because of the credit isn't.
Vitamin were in which is uncertain that doesn't mean bad it just means uncertain and I think that will begin to start making loans, probably after this election or weve already send some loan quotes out and we would close on loans, but everybody.
Everybody thought Europe was a great idea and a textbook case of how to handle a pandemic about three months ago, and maybe that was too soon.
So I think our patience has been rewarded I'm not overly worried about.
Earnings right now obviously you have to worry about earnings eventually, but I think we've taken all the right steps and now approaching almost a billion dollars in cash clearly we can get involved in a lot of situations, including our own stopped buying our bonds back or retiring them or making loans into any form of distress or or regular way financings I think we also.
That would be very careful of how our banks feel about financing those loans, we have really lowered our repo debt as as Pamela detailed I think our loan repo debt is in the low 200 millions.
And I think if we ever needed to call upon additional cash reserves, we could actually sell the securities portfolio and I think that portfolio. If we took away the debt associated with the securities portfolio. I think we're levered. If you remove that in cash were like 1.3 times. So it is not a leverage conversation.
And so I think that the market has thought it was a leverage conversation that's why it's a deep discount to book value.
If the market continues to think of it as a oh, a leverage conversations and we will step in and take advantage of that opportunity as opposed to observing it.
So a and I think you know the earnings should come I don't think that's going to be difficult. We certainly know how to lend money, we know how to invest in real estate, we know how to buy and sell securities or or get into distress. So but right now I think anything we would feel comfortable lending on given the environment. We're in is that 4% to 4.5% rate into.
An environment, where inflation is likely to tick higher and the reason the overall rate is so low is because interest rates are low for precisely the wrong reason you wouldn't want to be lending a lot of money into that environment, given the uncertainty because the fed is trying to hit to quell fears right now with rates being so low so.
That's a long winded I example, but its a three step process as I said, it's a bonds first now its book value than its earnings so hopefully that answered it.
No. Thanks, a lot Brian that's a lot of really good color.
So moving over to credit you mentioned, 98% of collections I was just wondering how did that look on the hotel and retail loans and you know any other color you can or trends you can provide on the property tax would be it would be appreciated.
I'll punt that to Pamela if that's okay.
Yeah, I I may ask Rob for help on the breakdown of the hotel specifically, but are 98% collection rate was across the portfolio, including loans and also the real estate portfolio with 100% collection on our Triple net leases Rob do you have the specific breakdown on the hotel.
It's really I think Jeff I was one hotel.
Yeah.
It was in excess of 95% payment by the cash flow or equity contributions are going well.
One hotel was a delinquent.
Got you and can you provide a little bit any color on the delinquent hotel.
Well, yes hotel.
Hi, Rob go ahead.
I'm sorry.
Go ahead.
It was a Miami hotel that is.
Is that $45 million position and we're in the process of foreclosure.
It also listing it for sale.
Got you that is helpful commentary. Thank you so much for taking my questions.
Sure.
The next question is from Steve Delaney with JMP Securities. Please go ahead, sorry, My Maam. Please go ahead.
Hi, good evening everyone.
I applaud your your discipline and patience I don't think that I could could could match that given given what you've been through but a great job to be sitting where you are with the opportunities.
To that end and I understand Brian your comments about rates I think it's been a lot of extend that seem to tenure back up pretty well over the last month, but.
But.
It seems to me when you look at the opportunities out there to start deploying the capital.
It would seem that CMBS conduit lending.
At this point in time with the what would I expect will be a pretty good wave of interest in refinancing into fixed rate paper.
Might be in a great place for you to go I learned a long time ago from Mark not to trust cama, but it sounds like margins in the third quarter were very attractive and if you could just share your thoughts about where you would rank conduit lending on the list of things that over the next couple of months you guys might might look to.
Step up thank you.
Sure I, if I look across our product matrix, So even securities bridge loans conduit and cash now as an investment I guess.
And real estate sell you the truth I think I'd like real estate fast right now because I think I said don't particularly care to be lending at these low rates, but might be a fine idea it'd be borrowing at these low rates.
Especially with inflation around the corner as you know we have a real estate portfolio and as we begin to look at refinancing that portfolio. That's now a head heading to the part of its life, where the the mortgages are actually maturing yeah, we should be refinancing into lower rate transactions. There. So that'll be a position of earnings too, but as far as.
I know it goes conduit is a little bit tricky. It. It yes. It is a very high ROI business. It's one that we're very comfortable in my concerns right now regarding that are not really around the arbitrage associated with making alone and selling it. It is the aggregation process of getting a bunch of.
People together, who also have loans and the aggregation process can take quite a bit longer and in addition to that then you may wind up with a very quickly b piece buyer. We're in a unique position because if we ever wanted to we could buy those b pieces and we can do our own securitization and just hang onto our own bps, but I.
I would say right now given what you know the margins for a 4% or 4.5% loan are quite high however.
However, the aggregation period is also quite high and most of the banks are making loans in the 50% to 55% LTV area with a three handle on rates and I'm a little bit concerned when I think about inflation and the fence stated objective and I'm not guessing at this they said it yes, I am a little concerned that get you.
Couldn't get caught holding something where long and needs to widen out because of the inflation side of it the conduit business is not dangerous, though because you tend to only hold portion of one transaction and if it does right now so yeah, we like that and so I suspect we will be I think I said in our last call that we would probably begin with conduit lending I think.
Well I know, it's a relatively easy thing to finance it did not easy to find a lot of loans that you would write for 10 years.
The inventory of addressable assets, that's a little thin right now because you know the jury's out right now on a lot of retailers and the office sector, but again, if you pay too much attention to New York City, you can get a little bit nervous, but the office sector should be okay to think and obviously apartments the government with their backstop has.
Really you know caused oh, a flattening of yields there and so it's a little bit of a thin pickings as well as a you know aggregation process is a little challenging but I suspect you know we've always approached it from the standpoint, and we don't have to sell this in six months, we can hold it for a year. So I think we'll start just like we started in 2008.
Well you know, we'll start doing some conduit loans and when we find the right partner and the right B piece buyers and will enter the market, but there is no urgency around that right now, but it is it is always the highest ROI we product we now.
Hi, just a thing I would add to that Brian panel one.
I was just going to add one thing I think it's a great illustration of latter when we do participate in the securitization market, we only make loans, we'd be willing to hold ourselves. We don't do it to distribute we just take advantage diminishes the distribution ability and as Brian said earlier, while we have the ability and the cast right along I think you're going to see we're going to see vintage matters.
And when when we feel the timing is right and therefore the risk adjusted for what we just looking at whats getting down right now and that the pricing doesn't seem to justify.
Not waiting to see what happens with some of the volatility that looks likely to be clarified over the next few weeks if not months.
Sure makes sense why I know there are a lot of people in the queue. So I'll leave it there. Thank you for your comments.
Okay. Thanks.
The next question is from Charlie I listed with JP Morgan. Please go ahead.
Hi, good evening, everybody. Thanks for taking the questions I apologies if I missed in the prepared remarks, but I was wondering if you could provide some color on those three real estate assets that were sold during the quarter and ultimately what drove the decision to sell them.
Oh sure if they're among the three assets or at one was a warehouse that had an enormous amount of improvement in the Atlanta area. It was a we had purchased in a couple of years ago from cure Rick.
A coffee Cup maker, and I guess, they decided to stop doing cold beverages, but they put a whole lot of stainless steel into a building and then decided they didn't need it we purchased it with a partner and we felt that that amount of equipment would probably be useful if we found the right buyer and two years later.
Admittedly six months of a pandemic slowed some things down, but we sold it to a user we bought it for $25 million, we sold it for $41 million and our take there was you know aside from the lending side and some some other parts, but though he was almost $10 million.
I'll take it so that was the lion's share of the game. The other two are interesting a we had a 10 31 party approached us and said they wanted to they needed to buy something in the triple net space. So we showed them a list of many assets that we own and you know they picked one that they knew pretty well. It was a new York asset it was that bjs wholesale club.
And so that's all then they assumed mortgage debt and that I think we had on that for about five years and they just assume that that and the last one was an interesting one and that it was a real I was a hotel that it was a limited service hotel that we had foreclosed on and put up for sale and versus.
Our our level of ownership, we it was actually positive moneymaker.
I've long said I don't understand why people don't put properties up for sale before they go into the fall, but are they still don't and so we wound up foreclosing on that we also foreclosed on another hotel from the same borrower and that hotel is also under contract now and it hasn't closed yet, but if it does close.
Then, we'll let you know about that one next quarter.
Does that answer any further details needed.
Very much so thanks, Brian and if I could just get one more question I apologize you guys mentioned I think it was last quarter that's.
There are some new fund private debt funds that have been set up to take advantage of some of the more distressed opportunities.
Probably in some of the more beaten down markets and property types has that pays kept it up this quarter and is that really changing the competitive environments loans are not really an area that you guys are focusing.
Oh I mean, it's an area we're focused in it it's a little hard to say because.
For one thing, we're all sitting in different buildings in cities, but.
I think that there has been a lot of money raised and I think there was anticipation that there was going to be a tremendous amount of asset transfer is taking place.
I just don't agree that there's going to be that many assets transferring with LIBOR at 14 basis points and banks with unbelievable amounts of capital in their balance sheets I think there's about 17 trillion dollars now inside of banks, but you know it might I think that if I had to.
Just throwing some Kentucky windage added I think I think they braced too much money given given what the opportunity is now the opportunity could grow quite a bit more we'll see but you know with the fed hike getting involved and the possibility of fiscal stimulus.
Thinking it could be a lot of money sitting around for quite a while so I do think that many things that will take place, though will take place because someone is under stress. It doesn't have to be a bank. It doesn't have to be a borrower it could be it could be a financing line going you know against the lender and could become prime.
Hello, Matt So I do think it's a it's a pickers market now you know I don't think you can say categorically this as a sector I'm going to dump money into I think the low hanging fruit for the securities business, where March shook out a lot of triple B and single a paper at astonishing low prices.
Those have already covered I do think there are some hotel paper that you could still buy you know I think most people think the four seasons in Maui will actually open one day.
And I think that you know the Boca resort will probably open the diplomat hotel. So there's some of these single asset deals that are floating around that you know this but they are they're not trading 70 cents on a dollar they're trading at 92 or 93 cents on a dollar. So that's really the extent of that retail you have to be very careful there is a an anti.
Higher swath of real estate that in retail that frankly is.
It's on investable, because its not need it anymore. So I don't think you just dive in there I think you have to be very careful around what things are what the demographics and traffic counts look like I don't think retails dead, but there is if we had too much retail when Kmart went bankrupt and we certainly have too much retail now.
Thanks very much.
Sure.
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Our next question is from Jade Rahmani with KBW. Please go ahead.
Hi, there thanks for taking the questions.
Nice to hear from from all of you.
The dial in late so just wanted to ask.
Given where the stock is trading how attractive is buying back stock at this point, considering I think the company's got the largest liquidity position in the commercial mortgage REIT space, coupled with its covered asset base, coupled with its very high mix of non mark to market financing and the unsecured debt that was issued earlier this year.
Sure so at 51% 50.
Hi, you're looking at potential share repurchases.
I'll I'll inject a little humor here I.
I would tell you that some of our competitors have called I suspect.
Because another one in informed me that he thought we had more cash than Boeing on hand, and but the reality is.
We.
There's no reason not to right now.
We're we're not forcing things to pay off I mean on the loans are just paying off because there are two years old and this is the amount of pay offs. We tend to get every quarter were a little surprised that we saw three hotels refinance in the last quarter. So that was a bit of a surprise, but as far as our stock goes I you saw us purchase and I am.
Answered a question earlier about what are the three stages of recovery.
When your stock is cut in half like that it's a humbling moment, but it's also an opportunity to try to take care of things that you can control in your four walls and without involve inviting a borrower or a bank into the picture. So I think the stock is ridiculously cheap.
And we.
Our own quite a bit of it internally. So we know all about the shareholder experience. We thought it was important that because there was a market perception that we felt was unfounded, but it was still there that there was a liquidity conversation going on without naming the middle of it. So we address that first and we picked up a $175 million.
Sales of our corporate bonds.
We will pick up a lot more of them if they're available at at prices that we feel are too low, especially relative to other things. We can do we began to buy our stock back we did not want to start buying our stock back.
At a time when our bonds were trading at very low rates, because we felt like that would be a little tone deaf to the bond holders of the world and so weve largely repaired that situation, even though I still think they're trading up.
The bonds are trading behind some competitors I don't think we should be behind but and now the stock does look extraordinarily cheap I would say so I would I don't know where the stock will be tomorrow or today and it moved up a little bit I think of the whole sector did but it is a very attractive purchase right now and I think we have about 30.
$38 million left in our authorization at this point. So we will make use of that if the stock continues to sit in the 55% of book value area.
Okay, and just to put a finer point on it you look at you know Starwood property Trust and believe that they are going to report a cash number somewhere in that.
$7 million to $800 million range. If you look at the S&P just reported you know there and they are if I recall correctly somewhere in the four four to 500 million range and.
Yeah, both those companies have a much higher market cap than ladder. So there's nothing negative either in the portfolio or in the outlook that you are seeing.
Perhaps it's your experience through multiple cycles or something else that investors need to be cognizant of as to why the company should hold that much cash.
Well the company does not intend to continue holding that much cash as I said, we we have always set up the company, where the liberal use of unsecured corporate debt. So that was something we planned on six years ago, and we kept doing it and we were very well rewarded for that in January when we bought 750.
$1 unsecured.
That fact escaped investors in March when people were concerned about a a margin call of about $100 million, which was nothing.
It wasn't I don't want to sound like the president, saying, it's a peanut compared to our position, but it was a big margin call, but it was something we certainly had and and to your AAA bonds, just don't move around that much. So I I think the probably the frustration on my end the probably the stubbornness on my end is I am fairly convinced the latter clearly looks.
Different than a lot of other competitors right. One is we have an extraordinary amount of cash to we use way more corporate debts than anybody else three we have less repo debt than anybody else, we have way more securities than anyone else. We have much more triple net on real estate than any of the mortgage rates at your not the triple net lease.
With us so we have clearly pulled away and differentiating on purpose.
Well, we always assume having seen up and down many difficult markets.
You need to be able to turn cash off leaving the building. So weve always avoided construction loans, we have very little in the way of future advances I think somebody said it was 8% of our outstanding loan balance I think its 200 odd million dollars. Then we clearly have enough to handle that right. Now. So we don't have any threats coming from the debt.
That side, but we have made in our business to look different than others and when people say well maybe on too many securities if and I think that's a long winded way of telling you I think the market thinks we have too many securities.
I'll go along with that.
In a fairly short order, we could liquidate that securities portfolio and deliver another $350 million in cash. So the bottom line at that point that would just be making a point I think and keep in mind with now I know that when we record when we looked at those numbers that we've recycled it.
Even since then our cash position is higher from from yesterday. So yes, we're running into too much cash right. Now so we're going to have to do something with it we don't see great opportunities to deploy that in debt rates are too low and their low for the wrong reasons, and there's too much risk to be putting a billion dollars into the street at 4%.
Huh.
If it's a securitized instrument, that's fine, but our our securities portfolio can easily be liquidated. It is not a threatening instrument. It has been paying off is massively senior to everything else around it and had we not only those securities. We probably would have on another $1 billion worth of bridge loans and.
I, just can't swallow and Investor telling me I wish you had another billion dollars of bridge loans in a pandemic then AAA bonds.
It is the safer better more liquid and most likely to pay off at par instrument and ER and it will be a source of liquidity whenever we needed at this point, we don't we proved when the market was concerned in March and April we sold 400 million of various CUSIP.
In one of our earnings calls I identified our largest position.
And the facts don't really match.
The discussion sometimes it takes place so I think that what the market is telling US is they don't like our securities position and well I think that statement is wrong I'm going to go along with it anyway, because we don't make enough in the securities business not to if it's bothering people and they want us to look more like.
Our competitors and that's that's two year AAA portfolio scares them right will lighten up on that well, we don't need to own that many of those and we probably if you want to go down the road to you know a year year and a half from now I wouldn't be at all surprised that we don't own any securities. The only thing that I would point out is given what was discussed in March and April we will wind up exiting.
Thats securities portfolio without losses, when you panic, you lose and there was no reason to panic the market was telling us to panic and we held firm and Thats 37 years of experience in these markets talking so.
We're pretty comfortable where we are the market does not always understand us because we look a little different from other people. So maybe we're just a little bit too complicated, but we're going to simplify things a little bit and instead of dealing with our stock price and bond price as a problem, we're now going to be dealing with that as an opportunity.
I guess I just want a joke I wouldn't tell you when things go ahead.
I've been with Brian Scott I'm, turning 50, I think since I was 30, and so I'm a little bit of a disciple in that regard, but what I'll say is I remember when we opened the doors in 2008 with private equity guys and they went begging us to make loans make loans make loans and we are sitting on a lot of cash we had raised over $611 million back without place.
And even in 2008, and Brian with very patient had a set up to become the TALF borrow we buying securities and they said they don't pay people to invest in security and exercise enormous patients because at that time really I think we did our first securitization with JP Morgan in 2010, just to show you the timeline and we were very patient about making loans until.
Like the market is right, we're not in capable when I'm afraid we are intentionally it purposely waiting for what we think is a better risk. Adjusted return we are waiting to pounce, we've been ready and I think that well, Brian is and it hurts me to hear him perpetually on the on the securities because we do we not ignorant to what the market thinks of it.
But I will go along on this public call and say I think investors will be looking for us to do that again at the end of this when you get to the other side of that and couple of years from now and you see the limited losses due to the AAA nature of that portfolio I think it was a really smart decision.
Yeah, I've always thought that the.
You know pairing the securities business with the CMBS conduit business with the bridge lending business made a lot of sense provided the management team.
As the skill set to.
You know to trade those three sectors and then find opportunistic opportunities in the equity so I I've always been a fan of ladders business model.
The issue now is.
I started my job in 2007, and the first mortgage rate I look that was NRF and they were one of the only ones to start buying back their stock and buying back the debt at cents on the dollar and it created an upward trajectory of book value that allowed the company to avoid.
Actually reinstate the dividend grow dividends get investors' confidence back and they rallied.
Tremendously so looking at the stock at 740, we would take a very.
For the company to get back to above book value to be able to accretive the issue equity and grow and when stocks are at that position you worry that.
You know its a self fulfilling prophecy where events if investors assume that there is eventually going to be a dilutive equity issuance or some kind of.
So that's why I think this point deserves a lot of consideration for management.
So I guess that's it.
I would also I would add that in the products that you mentioned there they need that one does inform the other so if you were making conduit loans and you think you don't own securities. Okay. You can tell yourself that story, but yes, you do in fact, you own AAA is all the way down to the bps until you securitize those assets.
And if you are having trouble selling those AAA is when you do your conduit transaction, you probably shouldn't be buying a lot more on the security side, usually we get a fair heads up when the markets are softening because we have a securities portfolio that informs us on how aggressive we should or should not be around the conduit.
Business at any given time, so so as we said one they're really just different versions of the same things all of these products, including owning real estate is really just comes down to cash flows associated real or future with real estate and you ought to be able to figure out each of them. If you know what you're doing I will say that one of the problems we.
Ran into was that I kick myself for not fully appreciating is that pandemic started in the last two weeks at the end of the quarter and well I really do think that our corporate bond exposure actually hedges our business because for the very same reason that our stock fell because there was a precept.
None that we might have a leverage problem and a two year AAA portfolio. Our corporate bonds also fell and that is the first time in my life I have not been able to take advantage of that situation and the reason why is because we were in a closed window period for our security is what happens with the public company. So yeah.
Yeah, those are and as soon as that window opened we stepped right in there and began to buy those bonds and I think if we had been able to what that if that situation had taken place in the middle of February instead of the middle of March I think the outcome would have been much different.
Because we would've been able to step in and I think thats a confidence builder for people I think when people look at our stock now.
People, sometimes I think we tried to a dividend if you kind of look at us versus the peers are all kind of in the same neighborhood.
But I don't think.
The the smartest guys don't buy our stock because of our dividend I think most people buy because they think the socket double and I know I'm a believer in that I don't think it would be very hard at all to do that I don't think adding earnings here is difficult at all but one of the things you have to remember in a low interest rate environment and a mortgage riet. If you want to add earnings you have to add leverage and if you have leverage in this market given.
What's going on in the banking sector with a flat yield curve you better be very careful because they may decide they don't want to be in that business for much longer and I don't believe you know, having a $1 billion worth of repo financing on AAA securities that can be sold in five minutes is better than having another $1 billion of repo financing on bridge loans were 10.
Tenants or close by order of the government. So that the whole loan business is not very liquid and if you have to sell loans you have to be a little bit careful right. Now I think the apartment markets have largely been backstopped by the government. The rest of the markets have not been these eviction moratoriums that are out there our accident waiting to happen.
You know the government at large takes people who are voting and say you don't have to pay rent this month, but they're not going to be there when they own six months' worth of brand and they haven't told the landlord that he doesn't have to make his payment to his lender like me.
Or into a securitization and I think the thing that's missed sometimes is the people that own. These apartment buildings, they're not the blackstone's on the equity Residentials of the World. These guys that are guys that on an eight unit apartment building in Queens and when utility there is tendency doesn't have to make the payment and he has to pay his property taxes and his electric bills and as mortgage bills.
Yeah, you've really kind of missed the point, there and I could go on a ramp here about the government and how it's letting down and the very people that are talking about equity and equality are causing it and they are they really do need to get to fixing that because you're going to have people with their couches on the street here pretty soon.
And sorry, just a quick credit question I don't know if you Pamela or Rob wants to answer this but what's the total percentage of loans on non accrual either as a percentage I guess as a percentage of the loan portfolio.
So we had our pre call Vaid, we really only had one loan default mark can give you the stats, but we had one loan default pose problems that we you may have not been on the call time, but Rob went through earlier at a hotel in Miami.
A $45 million hotel, that's really the only posts Colgate loan default.
The other ones I mean, we were talking about the structural issue. We had the two assets in Austin, Texas that defaulted free co, but that's really partnership related issues first is half that level. This year.
And the total what is the total total number three ahead sorry three.
3.3% of assets.
Okay, that's better than most of the peers and also better than wells Fargo and some of the major.
Banks that have reported so kudos to you guys and still getting loan repayments, which is also positive.
Thank you one point on that Jay just when you think about US generally in terms of both loan payment and and those kind of issues on default we have our weighted average duration on our balance sheet loan is 1.1 year. It's it's really hard to hide anything you know if you can't really kick the can down the road with a final maturity.
I'd like that so I think what you see true the latter is.
We take the same approach is everybody, but our loans are coming due fast and furious at the 1.1 weighted average duration.
Jade I just to follow up on that and you know you're looking at US we're the largest films.
We've built up a large cash balance.
But in part because what worked and what Joe said, we have loans that are maturing all the time.
We are doing relatively our loans roughly two years on average that will make them.
Well, they're already is.
A fraction of what it is with our appears in our space were more like in the four to five year range. We have a lot more loans that are maturing.
Limited period of time. The second thing is is the future funding obligations, Brian mentioned that what we do you worry about we were able to shut off flow of cash out of our company.
The our competitor you you look at our competitive peers Magna.
Magnitude funding obligations. They have you can do it on fees you want maybe percentage you want.
What you will.
Is that is the.
Future funding obligations compared to about that means we have a lot that's going out the door.
So all this combined with the fact that we have securities that amortize lead you to a point.
[noise] region to a point, where you say you're going to see a lot of cash flow neutral out of capital that you could point in time.
Great well I appreciate all that and Ah. Thanks, so much for taking the questions.
Thanks Jay.
This concludes the question and answer session I will now turn the conference back over to Brian Harris for closing remarks.
I just wanted to say thanks, everybody you know, we're looking forward to a more productive year next year.
Yes, hopefully we'll have managed our way out of this coping situation I think we will I feel very good about where we are relative to where we were six months ago. So I look forward to it we won't speak to you again until late February but there isn't on chance that we'll do an early release of earnings. So if the timing looks right. Okay. So thanks very much.
Thank you Sir.
This concludes today's conference call. Thank you for participating and have a pleasant day.
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