Q4 2020 Ladder Capital Corp Earnings Call
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Greetings and welcome to ladder Capital Corp, 's fourth quarter 2020 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now.
Now I'll turn the conference or would you go matters Chief compliance Officer Senior Reagan.
I'm, sorry of regulatory counsel Ms. Michelle Wallach. Please go ahead because of all of it.
Thank you and good afternoon, everyone I'd like to welcome you to ladder Capital Corp earnings call for the fourth quarter and year ended December 31st 2020.
With me. This afternoon are Brian Harris, the company's Chief Executive Officer Pamela.
Pamela Mccormack the company's president.
Marc Fox, the company's Chief Financial Officer on.
On poor Maselli, the company's director of Finance and Chief Financial Officer commencing on March 1st 2021.
This afternoon, we released our financial results for the quarter and year ended December 31st 2020.
The earnings release is available in the investors section of the company's website and our annual report on form 10-K will be filed this week with the S E C.
Before the call begins I'd like to remind everyone that certain statements made in the of course of this call are not based on historical information and May constitute forward looking statements.
These statements are based on management's current expectations and beliefs and are subject for a number of trends and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.
I refer you to ladder capital Corp, 's 2020 form 10-K for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Accordingly, you are cautioned not to place undue reliance on these forward looking statements.
The company undertakes no duty to update any forward looking statements that may be made during the course of this call.
Additionally, certain non-GAAP financial measures will be discussed on this conference call.
The company's presentation of the best information is not intended to be considered in isolation or as the substitute for the financial information presented in accordance with GAAP.
A reconciliation of these non-GAAP.
The financial measures for the most comparable measures prepared in accordance with GAAP are 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.
'twenty was an unforgettable year all of us, including those in the financial market faced unprecedented challenges.
Ladder met those challenges with quick and decisive actions and the company is now well positioned for the opportunities we expect 2021 for Brian.
My remarks today will focus on the key actions, we have taken since the onset of Covid.
We quickly raise liquidity and reduce leverage.
Next we turned our attention to proactively managing our balance sheet in order to protect book value.
And finally, we went back to originating new business and are pleased to share that we currently have over $200 million of new loans, both conduit and the balance sheet under application and indeed, the due diligence.
Our deep in house origination team is fully engaged and actively pursuing compelling opportunities.
And our multi filling of the business model allows us the pivot quickly to take advantage of the best available risk adjusted return.
Before I begin I'm excited to confirm our appointment of Paul James Sally Chief Financial Officer effective March for 2021.
All of them succeed Marc Fox, who have the 12 and a half years, we'll be moving on but will remain with us through the beginning of may to help ensure an orderly transition.
As many of you know Paul joined ladder nearly two years ago and is currently ladder as director of finance.
Since then Paul has been working closely with Mark and the senior management team as part of ladder as long term succession plan.
On a personal note I want to thank mark for being a great partner and of great spreads for both ladder and me personally and let them know how much we all value of the contributions. He has made a lot of success.
Looking back of 'twenty and 'twenty I'll start with the look at liquidity leverage and liability management.
We increased our unrestricted cash balance to $1.25 billion as of December 31, 'twenty 'twenty.
Our ability to increase liquidity by monetizing assets was driven by strong asset performance healthy repayments and vigorous asset management efforts.
Since the onset of Covid, we achieved 99 per ton collection rate of interest in rents across our entire portfolio of loan and real estate assets, including 100% collections from our net lease portfolio.
Our focus on our highly diversified and granular mid market origination strategy enhanced the pace of our balance sheet loan repayments with a much larger base of capital available to refinance our smaller average loan sizes.
Since the onset of Covid, we reduced our balance sheet loan portfolio by $1.4 billion to just 37 per cent of our assets as of February 19th 2021.
More importantly, we are now on a strong position to reset our basis in this portfolio as we rebuild it with the origination of new loans, reflecting current market conditions.
In conjunction with these repayments or hotel exposure decreased approximately 30 per cent in 'twenty 'twenty.
As of February 19, 2021 hotel collateral represents only $14 five per cent of are significantly smaller balance sheet loan portfolio.
Our approach to security investments was also validated during the pandemic.
Our focus has always been on highly rated short duration liquid investments the.
The market for the Super Senior Securities recovered quickly.
And they are now regularly trading at or above par value as we expected.
Since March we reduced the securities portfolio by approximately $1.1 billion to a total of approximately $800 million outstanding as of February 19, 2021.
In total we've reduced the securities repo by over $800 million for 68% since March.
As a result securities repo now only represents about 10% of our total debt outstanding as of February 19, 2021.
We entered the new year with exception of liquidity and a strong portfolio of loans securities and investments.
We had over $2 $8 billion of unencumbered assets, which is nearly half of our asset base.
These assets are also of very high quality with over 80% comprised of cash and first mortgages.
Our substantial unencumbered asset pool contributed greatly to our financial flexibility during this pandemic.
These assets played a key role on our ability to raise liquidity quickly and disruptive market conditions.
And enabled us to reduce mark to market debt by raising of half a billion dollars of nonrecourse non mark to market debt.
As of today and after paying off an additional $390 million of debt since the end of the fourth quarter we.
We still have over $1 $3 billion of in unrestricted cash on hand.
And over 80% of our capital base is now comprised of unsecured bonds nonrecourse and non mark to market debt and book equity.
As of February 19, 2021, our adjusted leverage ratio net of cash is one point for time.
The further excluding a predominantly AAA rated short duration Securities Holdings.
Our leverage ratio was only 0.8 times and our total mark to market debt is now less than a quarter of our total debt.
We recently redeemed all of the remaining five and seven eighths unsecured corporate bonds in advance of the due date. This August.
We see the unsecured market as a safe and prudent way to finance our business and we expect to continue to be an act of issue in that market.
While we are pleased that our stock price has recovered significantly from the lower levels before early of last year, we remain committed to reclaiming the pricing on both our outstanding bonds and stock the better reflect the intrinsic value of ladder platform.
In the meantime, we are very happy to be back to the business of writing new loans at attractive risk adjusted returns.
With that I'll turn the call over to Mark.
Thank you Pamela.
For turning this presentation over to Paul I want to thank Brian Pamela the board of directors the.
The investment community on most of all my colleagues of ladder for this.
Support over the past 12 in the half years.
But the old very fortunate to be off of the opportunity to serve as ladder CFO in 2008.
Accepting the role was a major step in my career.
Taken in the most of them certain of times with no guarantees from any of them.
Together, we encountered a lot of challenges.
And the results indicate a record of success along the way.
I'd like to believe that those who decided I deserve the strength more than a decade ago now look back on that decision would satisfaction and proud of.
That was always my goal.
Based on my personal observations going forward I'm confident the investments really will see at least the same level of commitment skill and professional what professionalism.
From Paul Maselli.
They have seen from the rest of the latter team from day one.
I too will Miss working with the most talented team of professionals in this industry and we are confident that despite all of our achievements to date ladder.
As the best days lie ahead.
With that I will turn the discussion over to ladder as new Chief Financial Officer, Paul Maselli.
Thanks, Mark as noted in today's earnings release ladder has replaced its two primary non-GAAP measures of earnings.
Based on informal guidance from the SEC staff core earnings has been replaced by distributable earnings and core EPS has been replaced by distributable EPS.
The definitions of the distributable earnings and distributable EPS at ladder of very similar to those of core earnings and core EPS. The one exception is related to the timing of asset impairment recognition.
Going forward and can be computing distributable earnings of lateral work and I recognize assets specific loan and real estate impairment charges upon realization.
Which will occur at the time of an impairment of determined to be non recoverable.
With the change the distributable earnings of our non-GAAP performance measure will more closely align with the computation of non-GAAP performance measures used by our public company commercial mortgage REIT peers.
For the fourth quarter ladder produced distributable earnings of $4 9 million or <unk> <unk> per share.
For the full year 2020 ladder produced distributable earnings of $68 3 million or <unk> 60 per share.
Continuing with the measured approach to risk management in the fourth quarter of ladder did not newly originated or securitize any loans and the only acquired one small net lease property.
Loan repayments continued at a strong pace during the quarter with $286 million of loan payoffs of par.
In addition, ladder reduced its balance sheet balance of non accrual loans by 35 per cent.
Mainly by selling for defaulted loans at near par value.
We sold two defaulted loans and bankruptcy in Austin, Texas with an outstanding principal balance of $101 million.
We also contemporaneously foreclosed on and sold of residence Inn in South Bend, Indiana, and our hotel in Miami, Florida with the outstanding principal with outstanding principal balances of $4 1 million and $45 million respectively.
The sales resulted in in the disposition of $150 million of defaulted loans.
And generated a net impairment charge and the aggregate of for point of 1 million recorded in the fourth quarter.
Our seasonal reserve decreased overall by $5 6 million for $42 million in the fourth quarter as a result of loan payoffs in the sales executed during the quarter.
And to a lesser extent of moderately improved macroeconomic outlook.
The net decrease included a $1 2 million specific loan provision related to the 45 million dollar of hotel loan we foreclosed on and sold in the in Q1 as previously referenced.
Also during the fourth quarter ladder redeemed $100 million of at five and seven eighths corporate bonds scheduled to mature in August 2021.
The remaining $147 million of debt issuance was redeemed the January of 2021.
Market pricing of ladders outstanding corporate bonds of improved substantially.
Reflecting more favorable market conditions in recognition of the progress made in strengthening of ladders liquidity and capital base.
Also on December 2020, Coke real estate investments exercised its option to acquire of 4 million shares of ladders class a common stock.
Thereby increasing equity by $32 million and demonstrating their long term commitment of ladder.
Additionally, in an effort to reduce cash cost and further align interest of ladders employees with shareholders ladder elected to distribute 97 per cent of annual incentive compensation awards for the 2020 calendar year in the form of stock instead of cash to all employees, including senior management.
A portion of those shares were awarded in December the remainder of January.
With regards to shareholders' equity in addition to the 32 million contributed by Coke the value of our securities portfolio increased by $18 million.
We declared of <unk> 20 per share dividend in Q4, which was paid in January.
And repurchased 50000 shares of stock on an average price of $9.05.
We expect our dividend to remain unchanged in the first quarter of 2021.
On the depreciated book value per share was $13.94 of year end for GAAP book value per share was $12 in 'twenty, one based on $126 4 million shares outstanding as of December 31, 2020.
At 2021 begins we do so with over $1 $3 billion of unrestricted cash representing over 24% of our total balance sheet with corporate leverage by any measure of historically low levels.
Our three segments reflect the same strong credit metrics to which ladder shareholders of grown accustomed to over the years.
Our $2 $3 billion balance sheet loan portfolio was primarily first mortgage loans diverse in terms of collateral type with the 67% LTV and the average loan size of $19 million and a short 1.2 year weighted average duration.
With only $149 million of future funding commitments.
Our $1 $2 billion real estate portfolio is diverse and granular and includes 160 for net lease properties with strong tenants that include major drug drugstore chains warehouse clubs dollar stores and supermarket chains.
The portfolio was the result of ladders long standing strategy of focusing on net leased real estate investments on necessity based retail properties occupied by solid credit tenants.
Finally ladder is 1.1 billion securities portfolio remains 89% AAA rated almost entirely of investment grade with a weighted average duration of two years as of December 31st.
As noted values of these senior first mortgage backed securities with the significant credit subordination of recovered and are again trading at or above par with financing costs improving to pre pandemic levels.
Overall, our loan and securities portfolios of decreasing the size due to strong levels of natural amortization healthy levels of payoffs.
Our strength in capital based on solid liquidity position provide a strong foundation for ladder as we ramp up of our investing activity in the new year.
And for more details on our fourth quarter and year end 2020 operating results.
Please refer to our quarterly earnings supplement, which is available on our website as well as our 10-K, which we expect to file this week.
I'll now turn over the call Torchy of Executive Officer, Brian Harris.
Thanks, Paul.
2020 Delta of very different type of market disruption at the end of the first quarter, while we've never seen such a rapid and severe downturn in the economy, our decades of experience managing through harsh recessions and strong recoveries provided us with the template we've learned to follow in times of extreme volatility.
Number one in the spring of 2020 was to ensure we had enough liquidity to weather what looked to be some very rough times ahead as 33 million jobs were lost in the United States in just 30 days as the government essentially turned off the economy to stem the spread of the virus.
I won't repeat the details of the steps, we took but as with most negative surprises. It helps to be prepared and we were having just issued $750 million of corporate bonds only six weeks prior to the pandemic beginning.
Fast forwarding to today, we present, we have over $1.3 billion of unrestricted cash and keep in mind that after we reduced debt by $1.9 billion over the last 11 months.
Building up of liquidity cushion of that size was made possible by our ownership of high quality investments going into the downturn. We were very pleased to see that many of our loans coming due over the last year, we're able to pay us off at maturity and full.
When we sold some of our investments at what was probably not the best time to do so in order to raise additional liquidity, we were still able to achieve sales prices near our basis during the worst of market times, while deleveraging the company overall.
We took appropriate steps to conserve cash during the remainder of 2020 always anticipating debt in 2021, the health emergency of the country was dealing with would begin to subside.
We said on the prior call that we were anticipating a deep recession that would probably last about one year and while we're not out of the woods, yet that position has not changed.
The second step we took to defend book value of our stock would take time patience and a hell of a lot of hours in asset management.
By staying on top of our inventory and working with our borrowers we were able to monetize many of our investments during the year.
When underwriting loans, we obsess of leak concern ourselves with asset values first and foremost since the start of the pandemic in March and into 2021, we were able to monetize over $2 $8 billion of assets at nearly 100% of our investment amount.
In the last four and a half months alone we have sold over $680 million of securities at an average price above par.
I'll now move to the go forward plan at ladder and start by saying that I am very pleased to report that we began issuing new loan applications in January and business has been brisk with over 200 million in new loans under application at this time.
I've waited a long time to say those words.
We were repeatedly asked about when we plan to deploy our large cash position and achieve the operating leverage we see returning us to increased earnings and that answer is now.
We are not restarting our lending operations solely because we see adequate demand, but mostly because we are seeing the attractive investment opportunities that invariably come about after of deep downturn in the economy.
We still think of the economy has some serious challenges ahead, but the relationship between the risk and reward the seems to be producing the kinds of situations we've been waiting for it.
We turned the corner at ladder and I'm very happy with the way our team reacted to some pretty horrible market conditions in 2020, we.
We made the necessary sacrifices to have the liquidity needed to navigate the shutdown of the economy, which has had some devastating effects on parts of the commercial real estate sector. We then made sure our management of our existing investments preserve book value and now we finally get to the third step we've been waiting for we now move ahead in an offensive manner to create dura.
And growing earnings in the quarters ahead.
We still have some housekeeping to do with the liability side of our balance sheet, but in starting from a very low leverage position today. We feel this can all be accomplished rather easily over the next year or so since we paid down over $450 million of our corporate bonds in advance of their due dates we hope to return to the capital markets.
With another bond offering of acceptable conditions prevail.
There's no immediate need to access additional capital at this time and we can continue to sell down our securities portfolio to provide additional capital if needed to avail ourselves of the high yielding opportunities. We're now seeing in the equity and debt markets.
It's nice to sign off today by saying, we look forward to building our earnings in the quarters ahead with the future looking much brighter. These days, we're looking forward to it and referring to the next chapter of our growth as the post pandemic period at ladder in the meantime, we're very happy to be back in the business and writing new loans at attractive risk adjusted returns.
With that I'll open up the call to questions.
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One moment, please while we pull for questions.
Our first question is from Tim Hayes with BTG. Please proceed with your question.
Hey, good evening, everyone I hope you're doing well.
My first question Glen I'm happy.
Happy to see that you guys hit that inflection point, where you're starting to play some offense now if we could just.
Touch on the pipeline here.
What are the Levered returns that you're seeing across your asset classes.
Where do you expect most of your capital deployment.
To go and if you could just touch on the asset types and any other color from the pipeline that.
That that you can that would be helpful.
Sure happy to help with that.
We opened up really applications, just a few weeks ago and already I think Pamela mentioned, we're a little over 200 million I actually think of are approaching $300 million as they check this right before we got on the phone I'd imagine most of our allocation for new investments is going to come in the form of bridge loans and conduit loans are the cause.
Do it.
Probably would've answered that with a little bit more of a 50 50 attached to it.
Five hours ago, but with the 10 year moving up rather briskly today then.
I think that there will be of very attractive conduit business, but I have the suspect we're going to see a little pause here and in all likelihood of because a lot of people who were refinancing have done the pull forward. So sometimes that takes a few of you know 60 90 days to for to really set in although I certainly wouldnt call of one 6% the tenure of high rate.
So you know it.
We'll see but I think we'll we're always on the lookout for equity investments are we've seen a few that we like we haven't gone under contract with any of them yet.
But I think the lion's share of what we're gonna do is gonna be involved with the bridge loan portfolio off the balance sheet.
And Securities will got it on you to come down.
Okay. So securities will be a provider of capital than you guys going forward. So on the on the bridge portfolio can you just again talk about the types of assets that are in the pipeline how that hasn't I guess compares to how the pipeline.
Brian has fared in the past and maybe how Levered returns because Brian you mentioned that the.
The shift to offense.
Our largely is because of the returns youre now seeing there yes.
And your liquidity position has been pretty strong for a couple of quarters now. So I'm just wondering if if you you've seen returns in the end.
The spreads widen on certain loans debt, even from six months ago or what caused the shift.
Sure well I think.
It's really come about because I think you've had a situation here where the fed has been on T V.
The banks are.
Cleaning up their balance sheets, I think that everybody was all lenders I think we're pretty much tolerant of the need for forbearance agreements you know when the initial pandemic hit and some of the some of the borrowers are now in their second forbearance agreement and I think it's hitting the point where are you now.
It's either going to get straightened out of our they'll sell the note and then we have seen that too. So we've seen definitely seen some bank sales of notes where people are acquiring things or where the sponsor finally woke up and said Wow. My Bank sold my note the Guy who bought it probably wants to take it over so I need to refinance the as quickly and pay all of the penalty interest.
When a sponsor is in that mode. That's usually a great place to step in because you're no longer competing with your competitors, you're competing with his default interest and your you have to try to close as quickly as possible. So there's definitely been a shift of I would say it's in the last 30 days.
And.
It's a little bifurcated I would say I think that the market because of the CLO market has kind of rebounded and there have been a few new CLO was issued and big fan of just a few weeks ago. There was no alternative for end of yield at all so.
You'll see L O new CLO AAA is we're trading well inside of 100 over so I think the weighted average financing cost of a call. It on 90 over Triple a deal was probably about $121 25 over LIBOR. So you can get a lot of things done there you can get a lot of business done.
But I think that the market because of that as over bidding multifamily.
And I think it's kind of a bifurcated opportunity set.
And the multifamily sector is LIBOR, plus 350 to 400 and it doesn't matter if it's the class C.
Oh, Yeah rehab, just coming back online in two years after they they put a new kitchens or else. If it's a brand new apartment building in the coming off a construction loan and just going into the lease up.
When do you see the same price on every single thing that usually means that it's a bit of a dislocated market or else the one way market the.
Once you get past.
Apartments at LIBOR, plus $3 50, the say 400 is kind of a GAAP. There is very little in the LIBOR, plus 500 or of LIBOR, plus 600, I would say that the people that are in a hurry of LIBOR plus 600 is not at all out of the question and if you have the hotel I don't even think it's LIBOR plus anything I think it's the nine or 10.
And so those are just rates, but that they were looking at at that point. So we are seeing a you know it's one of these markets, where there's a lot coming due in the next couple of years and a lot of it is in the C. M. B S business, but also there's a lot of it and in the insurance companies on the banks too. So I think we're going to be going through an enormous amount of opportunities and we'll be selecting.
A few but if if the last 30 days or any indicator I think that it'll probably be about a 6% yield unlevered.
And then get them.
Given that we have almost 1 billion foreign cash at this point I think we'll probably the either.
Just go through the first 500 to a $1 billion Unlevered and then just possibly do of CLO, where else take it to the banks at that point.
We have a country club problem of too much liquidity right now.
Yeah, that's a good way of putting it but yeah no that was gonna be the part B of that question was going to be on the financing side. So it sounds like you're interested in maybe testing the waters of the CRE CLO.
Is there any timing around that I mean, do you need to kind of build the portfolio of back a little bit before you look to do that or.
Any color on that would be helpful.
We could do one rather quickly we have over $2 billion worth of loans, but I think it is.
If I had the fast forward and think what's the best way to do this I suspect probably out around June or July.
We'll probably do a.
Think of Cielo is so far looks a little bit easier than bank creep of lines. So let's assume nothing changes there will probably fix of the CLO and my suspicion is it will work better if we go with all loans that are originated after the pandemic.
Okay got it that's helpful and just one follow up to that and then I'll hop back in the queue, but just in terms of your funding costs have you seen costs come down on your warehouse lines with the repo Counterparties are banks.
Our day and we've heard this anecdotally, though but are they feeling kind of pressure to compete with the CLO market now that it's so hot and you're seeing issuance pick up there and just curious if that in the in the form of cost or leverage as the benefited you guys.
Well the securities repo market has fully recovered to where it was pre pandemic in fact, it might be it can be through where it was so there's plenty of leverage if you want to be in the in the securities business. However, the yield is quite low so even levered returns are 3%. So that's one of the reasons, we've drastically cut down on.
Our our holdings of Securities at this point and I suspect, we'll continue to do that even though very attractive financing terms at the end of the day, we'd rather have the capital Delever. The company through the repo line and then get Unlevered, 6% returns and then use the CLO market to to Amp that number up a little bit.
On the banks are not I, Wouldnt say theyre very comfortable yet because we are still in a difficult time in the economy and there's plenty of headwinds are they certainly don't want to look at too many hotels.
Apartments, you can do and I think the healthier banks and we won't get into who they are but the healthier banks are more apt to a reasonable of about financing you know there the rates havent gone up necessarily from before but the what they will accept has gotten narrower and of the advance rate has maybe dropped about 10%, which.
Fine.
That's an appropriate situation I think that you know real estate in general has been pushed a little here and the CLO market keeps the risk in the hand of the originators and that's probably the way it should be handled.
So and you.
You can do of managed CLO deal, where he can do a static CLO deal we have the luxury of probably doing either but I suspect, we'll we'll wait until we get about six or $800 million are the of new loan originations.
Got it no. That's good color I appreciate it Brian I'm going to hop back in the queue, but again, thanks for taking my questions sure.
And our next question is the from Randy Binner with B Riley. Please proceed with your question.
Yeah. Good evening. Thanks that was really interesting I guess I would like to go back though.
Mentioned $2 million to $300 million of new loans.
The application of this year post pandemic and.
Yeah I heard in their multifamily is a little tight for your preference on on.
Spread which makes sense.
But then it was or all the way back out the hotels again, and I know that you've gotten the smaller in hospitality. So I just I guess I'd like the maybe ask the question of the two to 300 can you give us a rough buckets of where you're actually right in it and if it is hotels again maybe.
Maybe a little bit more color.
On the on on how those makes sense, you know occupancy location that sort of thing.
Oh of the I'm going to say closer to the 300 million at this point because I've got a pretty good sense of what came in even in the last day of.
Very little of it is hotel I think there is one on there for about $18 million and the one that is on there.
The sponsor of the hotel has it's a very it's a brand new hotel and.
He's putting in more capital to to refinances construction loan so you're going to pay down debt principal and while we know we're operating on.
On a dollar per unit basis, because there really isn't no underwriting for the new hotel.
I suspect that you know, we're going to be able to generate.
Comfortable enough given the rest of the hotels are we now in the area of their densely populated area and so I don't know if we'll get there either by the way. The these are just under App at this point and but I wouldn't want you to think that because I said, we're going to get about a 6% unlevered return on that we're loading up hotels that that would be the furthest thing from the true that's why I wanted the Claire.
So the.
But with all the hotels, it would be nine or 10%.
That's fair enough, but I just wanted to clarify that so what what are the categories that you're mostly looking to go into it if it's not.
Apartments in the it's not as much hotels.
We have some apartments and the most of ours are north of 400 over but we're losing plenty of them of $3 50.
We have some office and we have some.
Conversion, where where you know.
Industrial is changing into something else. Some of it is land land deals are are traveling at a fraction of the basis. They were traveling at the two years ago and most land loans, you're right alone with the double digit rate with a 50% of acquisition cost and the oftentimes with recourse. So again, we don't want them.
A career out of writing land loans, but if you're pretty comfortable with the basis. That's another place you can get good yield and the and what I like in particular about it is if we were concerned about our ability to finance a bridge loan for an office building, where the one of our line lenders try to imagine how out of la.
<unk> loan is getting financed with the same banks, it's a it's a very difficult. So well you know I would say there is a little bit of a bifurcation going on that you know there are some cash flowing assets that are simply coming off construction loans and theyre going to be out for a year and then there's others that are there, they're just being acquired but the one thing we're spending more time on.
On is the acquisitions of new assets now and the oftentimes, there's a seller selling because he has to not because he wants to and that's always helpful. And typically people who are acquiring assets at this point with no real history of they're usually very deep with capital and had been waiting for these opportunities. So we're pretty comfortable with that if there.
Is the situation, where there's a bridge loan coming due on the CLO when somebody asks us to refinance that that's kind of thought we look at it as a bridge to bridge financing that's kind of of dangerous animal because you have to think that the previous lender probably could keep it if he wants to when he has decided not to so we understand that they know more about that loan than we do so we're trying to avoid that in many ways.
That's really the only of follow up I have is just on the on the <unk> the size.
Size of the loans in this new batch of nearly 300 of thumb.
Does it can pour to your normal distribution of loan sizes that average around 20 million or is it or is there a change.
I'm going to let I think of animal health for the listing for out of her yeah I can jump in and just just by way of just to go back of the answer is it's it's it's the same business plan on the same strategy with an average loan size of about $20 million of ourselves and we're focused on all of the asset groups. Most of what's signed up is a combination of multi and a lot of multi with some off fastest.
The city based.
The product so it does not look very different from what we've done historically, both in terms of product type and at that time.
Alright, great I'll leave it there thanks a lot.
And our next question is from Charlie and the rest of you with J P. Morgan. Please proceed with your question.
Hey, good evening, everyone. Thanks for taking the questions Mark by the way I just wanted to say it's been a pleasure working with you best of luck in your new chapter and Paul and I look forward to continuing our discussion.
You guys have built up obviously.
Obviously, the sizable pool of capital here.
The amount of cash on the balance sheet of 1 billion, three or or or more.
Do you think about the cadence of deploying that throughout the year.
And how should we really think about the economics of those new investments for.
Flowing through to generating distributable earnings growth above the dividend.
It's really a several part question there because we also have to gauge if you noticed we actually take quite a few payoffs every quarter also so the good part of that is that it's a pretty good statement as to what our portfolio of underwriting underwritten the loans look like.
We mentioned that we sold some nonperforming loans of this quarter and it got almost par for all of them. So we're pretty comfortable that our underwriting has withheld.
Held its mud throughout the pandemic the <unk>.
<unk> is what is the pace at which we're going to originate loans versus what is the pace at which we're going to get pay offs in the portfolio, which tend to be pretty high rate anyway. I think we had on I don't know, what our Florida now, but I'm sure. It's in one of our documents, but it probably begins with the six anyway.
And and what is the pace at which we decide to Delever our securities portfolio, So and dispose of that as I mentioned the in the call I think we sold $680 million of securities on the last couple of months and we didn't do that because they werent, making money, we do that because of because we saw this pipeline building and <unk>.
<unk> of them go to repo lenders.
And the hang onto the assets that were only yielding 3%, we decided let's get rid of the 3% yield let's get the leverage down and I think Pamela mentioned I think we're at 0.8 leverage if you get rid of our securities on cash. So we do use corporate bonds unsecured we probably use the more of the most are in the business that we're going to try to do another.
Corporate bond deal.
Hopefully will be welcome in that area, we paid off $450 million of those.
Before schedule a two day this year. So the real question is how quickly does it translate through and Charlie I can't really tell you I can set the based on what I saw on the last 30 days I think we could put $1 billion out of 90 days. If we wanted to we will not do that but I assure you yeah, we could go to larger loans.
But really it is a bit of of flea market right. Now we are seeing a lot of transactions come in that's it.
Rarely do you see us internally, having discussions that don't agree with each other but we do have some disagreement here occasionally where we think well maybe we shouldn't do that even though that's a pretty high rate and it looks like a pretty good loan and it's somebody gave me the reference of it's like when you go fishing and you're allowed to catch to fish. If you catch them both on the first half hour day.
And your car in the home or do you throw a couple of them back in the hope for bigger ones and I think right now we believe the opportunity set is expanding because of the patience of the financial institutions that are holding these loans is waning.
And if in a rising interest rate environment I think of that patients will get gets shorter and shorter as time goes on so we we are this is as good as it can look going forward. This is pre minds of so much of how it looked in 2008, when we opened the doors of the company and.
Love not having to rely on repo love not having to rely on being able to borrow money.
And in a world where the only problem here is rates are pretty low and I think I said in one of our previous calls just didn't like the idea of lending 10 year money at $2, 80% to 3%, which is where a lot of it was well.
In 90 days that one straightened itself out and of course there'll be some demand destruction as a result of higher rates, but I still think the the lending apparatus in the United States is dramatically smaller than it was last year. The banks are open there's a lot of competition for apartment buildings, but there's not a lot of competition for other things and.
That is so symptomatic of a recovery after a deep recession that the this is this is what we've been waiting for this is why we have been holding all of our capital.
I appreciate the color there Brian thanks, so much.
And our next question is from Jade Rahmani with VW. Please proceed with your question.
Thank you very much good to speak with everyone wanted to start off by asking if there's any credit items of note.
All of that took place during the quarter.
Noting the remarks, you made about the for defaulted loans that were sold so hopefully you could give the dollar amount and percentage of loans that are either in the foster on non accrual at this point.
I think Pamela probably has a better handle on that than anybody if do you have that Pamela available for you I can do that are non accrual I think Paul mentioned in his script was that $2 million to $201 million is now down to $130 million.
As of today.
On the end of Paul that's through Q.
For but I think it's accurate as of today.
Yeah with the resolution of the hotel loan that we exited in 2021 on non accrual loan book is down to $131 million.
And when you ask about the credit quality Jade I think we feel really good.
I think that's one of the things that just the distinguishes us.
No.
We we have short duration loans that turned very quickly we have not kicked the can on anything at all I you know I don't know how others are treating their books, but I can tell you we've been really proactive and we've moved literally.
Almost every large problematic loan off our balance sheet to free up liquidity that as Brian said, we're excited about the opportunity ahead of us and we wanted to free up more capital to do that and we feel like we have a really strong balance sheet right now and that's reflected both in our seasonal reserve and then on non accrual status.
Thanks, that's good to hear in the $131 million is a pretty low statistic.
Relative to total assets of close to $6 billion and even the loan portfolio at around $2 3 billion at 12 31.
I think there is a myth about ladder that the reason that you're sitting on such a high liquidity position is that there is some you know some.
Some outsized risks some things are worrying about the loan portfolio that could cause issues from a credit perspective. So I guess when you think of the ladder versus peers why is it that the company has such an outsized.
<unk> cash.
Cash position of $1 3 billion Starwood got.
The market cap of close to 7 billion of ne.
They have about the liquidity of 700 million at this point so.
How would you answer that.
Well I try not to figure out what other people are doing but I know internally at our on our end of things. It's not a surprise I think we're probably getting more payoffs than anybody else.
And one of the there's two reasons for that one is we have very high floors, and we deal with smaller loans and so our loans are readily financeable by lots of people as opposed to people, who can write 100 million dollar of loans.
Secondly, we have short maturity dates we don't usually use the CLO market, which tends to default to a three plus one plus one.
With the LIBOR floor, we write two year of loans, where the one year extension and if youre not doing well after two years than the one year extension isn't there.
So as a result, we get right on top of our.
Problems very quickly and I learned a long time ago, it's better to get on top of things when there's a lot of liquidity around and banks are not taking losses.
And you know of course, you always want to pressure test your portfolio and by being able to move of $100 million loan in bankruptcy in Texas for $100 million in moving our hotel in Miami I think it was of $45 million alone. We sold it for just under $44 million slight loss, there and probably we could have done something with.
Net asset, but given the damage I think we can do right now with a lot of capital I think it's much easier. It's we're trying to run of low friction business, we're not trying to run of big real estate operation, but we are seeing some pretty good opportunities here and I would say that some of these assets that we're selling in many ways. It's similar to when we sold six.
<unk> back in April.
That probably wasn't the best idea to sell those at 96, but out of a first of all we were able to prove to ourselves we kept on all of them at 96, one of the World was thinking maybe we went down 20 points, which was crazy.
So the you know that all came back but I think the opportunity set that we see here and.
And just holding capital we held capital for liquidity purposes, because one it had a high rate bond outstanding five and seven eights, we have raised our interest costs temporarily and we're aware of that we.
We do have some.
Maturity dates coming up so I know for instance, we of about $450 million coming due in a in a year from now now most people don't even think about that a year from now we think about that two years from the before its due date. So we're going to try to get that refinanced and so I think we have a lot of cash around so that we can't really get pushed around by lenders.
And and also have the ability to pick and choose our spots. We don't have to worry about if it's securitize. The bowl of weather of Bp's Guy will buy it or whether a rating agency likes it we handle our own credit and.
We always talk to the rating agencies, when they said well we're going to see how you guys do in a recession, alright, well theyre going to see how we did on this recession and we're not out of it yet. So we're not we're not doing any premature of victory laps, but it sure looks pretty good to me I think if you've got rate floors that sick low 6% yields.
And rates on the 10 year were below 1% and your loans are not paying off.
You ought to be getting ready for a couple of problems and and I don't know how it gets handled elsewhere in the world, but I would expect to see a lot of pay offs, if the credit underwriting as tight and lots of pay off creates lots of liquidity.
Especially when you're not writing alone.
I think the the postmortem on this whole pandemic hopefully at ladder will be we shut off the earnings column and just wrote earnings for for 10 or 11 months and then we turn it back on and hopefully it'll be just like the health emergency that we all experienced here.
Pamela is bucking here.
It's something so I'm gonna letter I get in but.
I think the difference is we.
There isn't and there was only for assets in the company right. We have real estate, we have securities. We have loans and we have cash we were trading at 50% of book value of six months ago. This is the first time, we've been on a call where our cash holdings are lower than our market value.
And so despite the fact that the stock went up about 60 per cent in the last quarter, our cash rose faster than the stock and so I guess the this this company hasn't begun to stretch yet and the fact that we're holding a lot of cash I don't know why it scares people. It shouldn't it should I would think that's pretty prudent, but if we're going to go out in the face bonds.
Holders for unsecured debt, we bet on look them in the eye and say when the pandemic hit here's what we did a b and C. We bought back bonds. We paid you off early.
We're looking to come back to an unsecured market again and here we are walking through the door at <unk> eight times leverage and you know the REIT market you know the one thing we see on the residential mortgage REIT side, if they don't give it I'm sorry, they don't care of the companies are levered tend to one.
And I personally think it's a very dangerous situation, if you're levered like that and we've preached lack of leverage for years now on these calls and in April people thought we were overleveraged.
Okay, I don't I can't I can't explain to the stock market why they think what they think I hate is baffling to me and I Miss the days of being a private company badly because you know you walk in and you talk to people who understand what you're talking about but you know we we have been issued sell recommendations because people think we're going to cut our dividends.
We said, we werent going to I don't know why that Didnt count we have of $1 billion in cash and we have a clear path to growing into our dividend and we raised our dividend five times when LIBOR went up we cut it once you know when we said we're doing this one time, so I I must tell you I'm a little baffled by what people are looking at one one day.
I think we're going to cut our dividend.
I always just kind of I'm not I'm not backing I'm laughing because I, Brian you've covered a lot of it but at the end there, but I think what I was going to say, it's just at the end of the day I watch the same movie back when we opened the doors in 2008, we exercised the led by Brian enormous patients. Yes, we have a lot of capital yes, we can.
The boy quickly, yes, our originators were out there looking and anxious to redeploy months ago and you heard what happened to returns in the last 90 days, we've weighted because we thought they would be better opportunity on there was and when any of you know I just I'm laughing because people speculating about cash if you just listen we have $2 $7 billion.
The unencumbered assets half of ladders assets are unencumbered, we have a securities portfolio of $800 million with very little leverage against that it could be it could be.
Stoled, we're selling it at par as opportunities come in we could sell it all tomorrow at the end of the day, our balance sheet loan we have $2 billion of loans, we've turned the portfolio with no almost no losses when.
When we have loan maturities coming up I think we've probably taken more payoffs than the than anyone.
And especially if you look at our size and when you look at we have like $240 million of loan repo on our balance sheet. So if we needed to raise liquidity notwithstanding everything Brian just said I just gave you buckets of liquidity across the board.
And our triple net lease portfolio of outperforming the market as 100% collections. It's the necessity based on its one of the strongest assets on the street that I. Just think is off of looked so I just we can't as Brian said, we can't help what people think but we've been as transparent as we can be through this process and I think the thing that gets.
Overlook the little bit is we turned our balance sheet and took off and I hope over time this will be seen.
Really all of the problem assets and we are moving into this new origination opportunity with a very strong clean balance sheet and tons of capital to deploy.
Thank you for that.
Two follow ups, firstly share repurchases.
Does that fit into your capital deployment plans, how much of the $1 3 billion of cash.
Would you allocate the share repurchases. It just stands the reason that as an internally managed the commercial mortgage REIT for the value of control of the entities is worth about 15%. So just the apples to apples ladder should trade, 15% higher than a plain vanilla mortgage REIT.
That would suggest relative to 80 per cent of book value.
More than 30% upside versus unlevered yields of 6%.
So how does how does share repurchase factor into your calculation.
You know, we I said last time I thought of our stock was very very cheap and I felt we'd go out and buy in as soon as we got off the phone you know I, let the period go by that it has to go by before you can buy stock and we went right into the market and began buying it and I think the sake of was down around 695 or seven and it very quickly went to eight and I can give them.
For all of the credit I get is the trade or let me tell you I was pretty off on this one I thought the stock would come back to me. It never did it it just kept going up. So it went from eight then I went to nine and then it went to 10 and then it went to 11, so I was slow.
So I wouldn't hire me to be of stock repurchase or if I were you, but because I've been a little bit slow on that I do a little better on the bonds when net when they're really low but I think if that is the next the best alternative investment. We've got then that's what we'll do but the two separate us from capital in this kind of of market is going to be difficult, although I certainly.
We can understand the benefits of buying our stock at 80 per cent of book value.
Okay, and then last question and I get this from a lot of investors in my view, there is probably a decent cohort of very high quality institutional investors evaluating ladder, but they look at the dividend.
And that keeps them on the sidelines, because you get by fixing the starwood or even something like AI at a much higher dividend yield than those companies seem to have convinced the market for now that the dividends are not going to be cut their sustainable when you look at ladder, the 80% dividend relative to its unappreciated book value of $13 94.
Acknowledging book value did take a hit a little bit of the hit.
Due to the coax exercise of their option. Nevertheless, the current dividend of $5 seven 5% yield.
On that book value historically ladder generated an 11% to 12% ROE and I remember, Brian Youre, saying you don't go to work every day to generate you know of 10% to 12% ROE you'd shoot for something much higher.
So that would suggest if you can just get back to the 11% ROE and do an 80% payout ratio.
There should be about 50% of potential upside for the dividend. It's just about the timing of deploying this capital so validates.
Validates the idea that the dividend is going to be once capital gets deployed on a growth path ladder will be back to raising the dividend you know.
On a measured pace, but that's basically what investors should be expecting.
Yeah.
The whole lot of forecasting, but but a lot of what you said there is kind of the business plan and it gets a lot easier in a rising rate environment.
I'm, hoping I know that most mortgage guys don't say that but I kind of liked right smart rising.
And I will.
It will be as patient as we need to be and we're kind of at that part of the juncture I think we're aware.
The recession isn't over I mean, theres still high unemployment, Yeah, 33 million jobs got lost and maybe now it's the only 10 million, but that's how many jobs were lost in the great recession of O eight or so so we're not done here and I wouldn't tell you the we're done having.
Discussions with borrowers that are having a tough time, but I think what we've proven out now by getting to some of our larger most illiquid and like most elastic.
Non performers like hotels on land loans and loans and bankruptcy is its kind of proven to us all that we do know how to underwrite and this pandemic has been a shock to the system and in the teeth of the worst recession I've ever seen in my life, we've been able to sell securities whole loans hotels land.
Faulted loans bankrupt loans and all of them with a 98 ish type number you know across the board. So I don't think that's going to change with the next the roster of of loans that are coming due at ladder. So I'm going to speculate a little bit there that you know we have some some legacy that's coming due that we think is fine we're getting paid off on a lot of loans, but.
We still have some wood to chop and some of that transition that took place.
Not a lot of transition.
Well in the in 2020, unless you were on zoom or.
What you're one of the delivery of companies, but you know so we are now we're looking at is this new class and we're going to reset the inventory here and we're going to set the reset the inventory with very little in the way of competition with an extremely support of Federal Reserve Bank on.
And I think if youre going to shoot for what gets done in the bank market you know you're going to struggle at LIBOR plus 350, but if you just expand that target just a little bit and maybe you can go to 75 per cent instead of 65, I often times find when you come out of these recessions. It's the year. It's it it's almost like you should've done every loan you looked.
At and because of its five years Lady of realize with all of the stimulus every damn thing you'll look that worked out just fine but were still pretty particular about it we're still dealing with the possibility of who knows what can happen. You know this has been a lots of deal with as far as the election goes out of the election that we thought would end in November ended in January by the way of few here.
And of those dogs of those are mine and I have no control over them. So I'm just kind of [laughter].
The Hardie party for this.
And so the way I look at it it's like it's a great opportunity set of you cant get overly cocky here like I said, we could probably push of $1 billion out the door in 90 days, but that would be insane. Because you could have another leg down here and we're gonna be cautious about it but will we grow into that dividend, yes easily oh do we have any plans.
To cut it no let me say it again no one more time no. So the for the for the people who keep writing that we're expecting to cut it I wish they'd call my phone number, but we don't think that's going to be difficult at all we don't think we're going to be there next quarter, but we do think of in a year, we're going to be there and hopefully even getting to the good news that you talked about.
There is a possibility.
Great well, hopefully that happens and maybe even faster than you anticipate considering ladders high Roe.
The track record and thanks, so much for taking the questions.
And we have reached the end of the question and answer session I'll now turn the call over to CEO, Brian Harris for closing remarks.
Alright, well, thank you everybody for listening and sorry about my dogs. The they have a few questions too, but I guess as we end here I want to welcome Paul.
Our new CFO and end market of I can't grab your honor zoom call, but he knows all kiss them right in front of anyone so I. If I were around I'd give you a hug right now so but thank you for all of your help and I. Appreciate all your time with our investors on our patients I know, it's been a difficult year, but we look we look forward to better times ahead. So thank you.
This concludes today's conference and you may disconnect your lines at this time thank.
Thank you for your participation.
Okay.
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