Q1 2021 Ladder Capital Corp Earnings Call
Kind of more than $900 million of additional new loans under application and in the closing process.
In connection with our growth we hired nine additional professionals across the organization.
With ample cash on hand.
We expect to continue to benefit from the unique environment before us as we pursue new opportunities to further expand our robust pipeline.
In conclusion.
We're proud of the progress we made on behalf of shareholders as we move into the next phase of our recovery at very low leverage and flushed with liquidity to invest.
Our business model. The same model, we opened the doors of ladder capital with 12 years ago prove durable during these most unprecedented and volatile times.
We are now moving forward in a position of strength as we put lot of balance sheet to work by investing shareholder capital at attractive risk adjusted returns in this new and dynamic environment.
With that I'll turn the call over to Paul.
Thank you Pamela as discussed in the first quarter ladder produced distributable earnings of $3 2 million or <unk> <unk> per share.
We originated $155 million of new loans in the first quarter of $150 million of which were funded at closing and we funded $9 million on advances on existing loans.
This was offset by loan repayments of 375 million and a $46 million loan sale in.
In addition, we completed a foreclosure and sale of a hotel property in Miami, reducing our balance of non accrual loans by 25%.
No new loans were added to non accrual status in the first quarter.
Also during the first quarter, we sold $329 million of securities generating zero point $4 million in gains in the value of our securities portfolio overall increased by $6 8 million.
Our seasonal reserve decreased overall by $5 4 million to $36 million on the first quarter as a result of loan payoffs and sales executed during the quarter.
And a moderately improved macroeconomic outlook.
Overall, we reduced debt by $442 million, including the redemption of $147 million of our $5 seven eight corporate bonds scheduled to mature on August.
We declared a <unk> 20 per share dividend in the first quarter, which was paid on April 15, and repurchased 20000 shares of stock at an average price of $10 71.
We expect our dividends remain unchanged in the second quarter of 2021.
On depreciated book value per share was $13 88 at quarter end, while GAAP book value per share was $12 two on $12 eight based on $126 3 million shares outstanding as of March 31.
Looking ahead, we have significant liquidity and strong and a strong and diverse capital structure with corporate leverage at historically low levels.
Our three segments reflect the same strong credit metrics, which ladder shareholders have grown accustomed to over the years.
Our $2 billion balance sheet loan portfolio is primarily first mortgage loans diverse in terms of collateral within with a 69% LTV and average loan size of $19 million and a short one six year weighted average remaining duration.
We have $141 million of future funding commitments.
Our balance sheet loan portfolio continues to perform well as we received 99% of interest collections during the quarter.
Going forward, we have a healthy pipeline of originations under application and expect our balance sheet loan portfolio and net interest margin from carry income to continue to strengthen as the year progresses.
Our $1 $2 billion real estate portfolio is diverse and granular and includes 164 net lease properties with strong tenants that include major drugstore chains warehouse clubs dollar stores and supermarket chains.
The portfolio as a result of letters long standing strategy of focusing net lease real estate investments on necessity based retail properties occupied by solid credit tenants under long term leases.
The portfolio continued to perform well during the quarter with 100% collections on our net lease portfolio.
Finally as of March 31st ladder $764 million Securities portfolio remained 85% AAA rated almost entirely investment grade with a weighted average duration of less than two years.
Financing term and cost associated with this portfolio have now recovered and surpassed pre pandemic levels.
Overall on our overall, our investments in balance sheet loans and securities portfolio have decreased in size due to strong levels of natural amortization and robust levels of payoffs on.
Our strengthened capital based on solid liquidity position position provide a strong foundation for.
For ladder as we ramp up investing activity and this new post pandemic commercial real estate environment.
For more details on our first quarter 2021 operating results.
Please refer to our quarterly earnings supplement, which is available on our website as well as our 10-Q, which we expect to file this week.
I'll now turn the call over to Brian.
Okay.
Thanks, Paul.
When we look back on the last year I think we may very well have witnessed how our credit models hold up under extremely sudden and negative downturn from the economy ever.
Every credit cycle has its own unique lessons on this one was no different there is always a few things we might do differently. If we had another test, but the one thing you can never change our actions and decisions leading up to the event.
At ladder, we have always felt that our strength is in our underwriting and our real estate valuation.
And after having now lives for four full quarters and a pandemic I'm very pleased with how our approach towards credit held up.
As Pamela mentioned, we had 79 loans paid off a total principal balance of just over $1 5 billion.
During our nearly complete shutdown of the U S economy.
With the stated goal is to lower our leverage and raise liquidity as we entered into a very uncertain market back in March of 2020 to say on this call that we had $1 $3 billion on unrestricted cash after paying down nearly $2 billion.
Of that including over $1 2 billion of repo debt and $426 million of unsecured corporate bonds before any of it matured gives me a strong sense of accomplishment.
Our goals on leverage and liquidity have been met our new goals are now being worked on tirelessly.
One is to restore our earnings back to a level that comfortably covers our cash dividend.
While loan payoffs provides a degree of confirmation of our credit skills. They unfortunately take a bite out of our quarterly earnings unless those payoffs are replaced with new investments I.
I am happy to note that on April our net monthly loan inventory increased for the first time in a year as we originated $93 $7 million on new loans and took in 44 $96 million in pay offs.
We think this trend will continue going forward as we deploy our ample capital position into attractive investment opportunities that are presenting themselves in the aftermath of the pandemic, while april's net loan growth is encouraging having over $900 million on loans presently in house on their application, we think April adjusted EBITDA.
Of a bigger trend.
Holding over $1 billion in cash may be a fine idea on when stock price is well below book value, but now we are working to rebuild our earnings stream and drive our share price back to where it reflects the earnings power of our company.
Thankfully the commercial real estate sector, despite receiving no support from the government programs never felt the full brunt of what many thought possible as a result of the government mandated shutdown of the largest economy in the world.
While the credit cycle is not yet complete there's plenty of reason for optimism going forward and we think the next couple of years will provide excellent growth opportunities for ladder.
As the year ahead unfolds, we expect our loan inventory swell with only minor increases in leverage as the recovery of our earnings gets into full gear.
We also expect some of our higher cost debt to amortize down as the year progresses and to be completely behind us by this time next year, adding a further tailwind to our earnings growth story.
If interest rates rise one might think this could flow transaction volume and newer loan originations, but we believe this will be a positive development for us as we deploy capital into higher rate loans. We also think that current tax changes being proposed by the Basel administration will create additional volume and loan origination driven by tax planning and reactions to those.
Proposed changes.
The investment picture looks very attractive at this point on the recovery and we are planning to take full advantage of it operated with that we can open up the call for questions.
Thank you we will now be conducting a question and answer session.
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Our first question comes from Tim Hayes with BTG. Please go ahead.
Hey, good evening, guys hope you're doing well.
First question, just kind of around capital allocation.
Allocation day in the pipeline, yes, Brian where are you seeing the best risk adjusted returns.
The pipeline looks pretty strong year for from the second quarter and I'm curious.
If you could give me a little bit of a breakout is that mostly first mortgage is at certain asset types, you're focusing on.
And are you willing to do mezz or some construction lending at this point as kind of the world continues to recover or be focusing more on on senior defensive asset types, just again looking for color on.
The best risk adjusted returns.
Thanks, Tim.
I thought on the last earnings call I, probably said that about three quarters of our loan production would be in bridge loans transitional loan book and I saw a 25% would be on the conduit business.
Yes.
We're witnessing is 90% and the bridge loan portfolio and 10% in the conduit book.
We're really not acquiring a lot of real estate.
It's pretty expensive, we haven't seen anything too cheap.
And obviously you havent been buying a lot of securities either.
Although the financing in those yields interestingly are pretty attractive, but I still think the best pound for pound investment. We can make is the transitional bridge loans portfolio and Thats, where literally the whole company is focused on.
Unfortunately, we've been experiencing more payoffs and originations, but I do think this is the last quarter will be it wont be saying that.
In April as I indicated we had about a two to one ratio of origination to pay offs.
That will turn into something that sounds more like 401 or five to one on the <unk>.
Orders ahead so.
Given our large amount of cash on our lack of leverage I suspect that we will probably be able to.
We get a lot to the bottom line on the revenue side.
Because we're not picking up any expenses so.
I think your question has several parts to it but so first mortgages, we're not writing mezzanine loans are not against writing a mezzanine loan, but we're not targeting them.
We tend to think with interest rates as low as they are right now if you need a mezzanine loan it's probably on over leveraged assets.
On.
And I guess on your other question was are there any assets that were defensive around no not really.
We wrote one very small hotel loans for about $5 million.
To a repeat borrower.
It's a very low leverage.
Very comfortable with it and the rest of it is bridge loans and I think I indicated in our last call I thought it would be a 6% yield unlevered.
I think I've been a little bit timid on that number I think it's higher than that but I hesitate to indicate that we're going to right $2 billion of loans at that level. So far so good we're very optimistic.
Volume has picked up demand has picked up and I think what's really going on is you're seeing people go on outside now because after the vaccination rollout so pretty optimistic as to how things look going forward certainly in the next couple of quarters I do not think we have been seeing a series of.
Lower earnings as we've been taking on pay offs.
On payoffs are a good thing, but it as I said in my discussion there.
They take a bite out of earnings too, but I think we would reverse that at this point and I expect that the worst is over as far as any credit situations doesn't mean it is I tend to think that we're talking about a pandemic that's coming to an end I sure do hope so.
But given what we see right now we expect the volume is picking up it's a little bigger than we're used to we are writing slightly larger loans, but.
Very strong returns and pretty comfortable lots of.
Equity in the transaction people naturally understand that.
You have to have a little more equity in deals these days to get alone. So.
All looks good and Pamela I don't know if you want to add anything to the pipeline there but.
Feel free.
I would just say I think it's a regular way business. We're just seeing more attractive opportunities. We think in part due to some on liquidity in the market, but that as you hear from others.
We're definitely I think we will see a little spread compression over time, especially as our loans pay off but we feel.
Very strong about the pipeline on the returns we're seeing we've held up just by way of backward I think we said it on the call we did $250 million of loans.
You may 1st and of that over 200, it was balance sheet at a weighted average.
Floor of 632%. So I think that's really indicative of the pipeline ahead.
Yes.
Sorry to come on did you say a weighted average floor of what was that number.
It was low.
Weighted average floor I'm sorry on the on.
All of the $200 million of balance sheet was 632%.
Okay. So the all in coupons and including the floor sorry, if I just wasn't following yeah.
Okay got you.
Got it okay. No. That's good color on so it sounds like just to recap all that youre, primarily focusing on your balance sheet bridge lending business.
Mostly whole loans, but senior whole loans, but not afraid to maybe step outside of that if a good deal comes but and not concentrating on any specific asset class just kind of what makes sense is that a decent recap of yeah. I would just circle back I think I didn't say anything about one of the things you said construction loans.
That is just not a strong suit of ours and.
We can do shy away from those.
We tend to them so that isn't because we're afraid of them we just.
Theres a lot of dynamics on a construction loan that we don't really care for.
Such as the early pay off when you.
Take all the risk.
Somebody signs a big lease then you get paid off and if no one signs a lease you have the full loan outstanding for the full term.
We've never really been comfortable with that business and nor are we now so I would I would exclude that from our thinking going forward.
I'll just add because everything closed to date and everything in the pipeline is a senior secured first mortgage loans.
Got it got it that's helpful.
Okay and then.
Just on credit I know Paul.
Mentioned that there was no new non accruals and you resolved one loan that was on non accrual, which brought down the balance I don't have the Q in front of me, but were there any.
Other material upgrades or downgrades in the portfolio worth mentioning.
And I think I saw the keto reserve.
There was a bit of a release this quarter as the portfolio contracted but I think the seasonal reserve as a percentage of the balance might have gone up a little bit. So just curious.
You can provide any color on kind of the movements. There I can start with that one and then I'll have Paul chime in but first of all.
On the seasonal reserve with decrease not increase and he can give you the specifics, but we do not have any impairments. This quarter I think one of the things that I think youre going to see about ladder, we because our loans turnover. So quickly and we tried to make the 0.13rd of our balance sheet paid off on the balance sheet loan portfolio. We've had like really I think on.
Parallel with levels of payoffs due in part to our short dated loans, but also just strong really very strong underlying credit performance.
And I think we feel like.
At this point.
We expect nothing but a positive trend going forward and Paul can give you the specifics on seasonal.
Yes to be clear no new loans relative to non accrual status during the quarter.
The decrease as I mentioned in the prepared remarks.
Regarding the hotel will be resolved in Miami and yes, We released we released our seasonal reserve than that.
From a from a basis point standpoint, the reserve went down from 92 basis points to 85 basis points during the quarter.
Okay, I must have good and bad back of the envelope math there. Thanks for clarifying I think thats as a result of the portfolio getting a little smaller and that's usually what drives that right.
Right right.
Okay and then just.
In terms of cash interest collection on the loan portfolio net rents in the real estate portfolio any major change quarter over quarter.
We are still at from all from the beginning of COVID-19, 9% collection rate across our entire loan and equity portfolio with a 100% collection rate in our chip on triple net lease portfolio.
John I think that takes it hanging on to them to Tim with the payoffs that we've witnessed the $1 5 billion write off.
We had I don't remember exactly with day, one, but we generally had a floor in our portfolio of six 2% and <unk>.
<unk> got strong cash flows and stabilized properties that are coming out of their transition period. Then obviously there is plenty of cash available to lend on those assets today below well below our floor. So I think that's why we're experiencing a higher prepayment free.
Frequency than a lot of our competitors.
Makes sense.
I'm going to leave it there guys. Thanks for the comments.
Next question, Charlie Arrester with J P. Morgan. Please go ahead.
Hey, good afternoon, everybody thanks for taking the questions.
First a quick follow up on on the seasonal discussion.
I appreciate all the color on the previous answer there, but as you guys kind of hit this.
Inflection point this quarter and really start to.
Go back on offense here.
Should we expect that reserve to really start to kind of grow from these levels in line with new originations.
Maybe offset by.
You know a lower overall reserve rate on the existing book.
The macro picture improves.
Yes, I think I think what Youll see is as our post COVID-19 loan book growth our reserve level should go up however.
With the accounting rules every every new loans has actually a piece of the general reserve, but as pre COVID-19 loans continue to pay off.
The loan book the reserve should shrink because those those were made a different basis. So it really will depend our view on the economy.
Moderately improved quarter over quarter will depend on how.
How fast the economy opens up into our macroeconomic view so yes.
All else equal as our loan book growth the reserve should grow with it but it shouldn't grow it shouldn't grow.
By a large number.
It does makes sense, Charlie though because for a while now as our portfolio has been shrinking you've been seeing a lot of these give backs.
Out of the seasonal reserve, we expect our portfolio to grow quite a bit in the next 12 months. So yeah. If that if that's the item that drives us and I would expect it to go up.
Okay, Yeah, no that makes sense and then if I could ask one more.
I'm just wondering if you guys have any appetite for looking at deals overseas.
Your peers have been pretty active in Europe over the past quarter or two and just curious to get your view on the competitive dynamic there on both the financing side and also kind of the.
Regional disparities on Lockdowns and the COVID-19 impact there.
Yes, that's an area interestingly enough, Iran Global commercial real estate for two European banks on one Japanese bank yet.
We think that there on where the company our size and what the opportunity set in front of US we feel very comfortable here theres nothing against.
Doing something in Europe, or in the Caribbean or anywhere else for that matter, but it's not a business that we're focused on so I would anticipate U S growth at ladder.
Yeah.
Thank you.
Sorry, I just wanted to add one thing that's really the hallmark of ladder right. We are a diverse granular loans I think it is why you saw so much payoff, where essentially basis lenders and just going back to the early question on sort of the pipeline of loans.
We are focused on.
Domestic strong basis opportunities and I think we have this opportunity to reset our basis and that's one of the thing I think that we're most excited about when we look out on the pipeline all of the loans that we're originating now we have the benefit of the <unk>.
Reset in basis and since we do focus very much on basis, it's been a great opportunity for us to make some of the better risk adjusted returns that we've seen in a long time.
Got it thanks, Pamela I appreciate that extra color.
Yes.
Next question Stephen laws with Raymond James Please go ahead.
Hi, good afternoon.
First.
Touched on the pipeline.
Very strong I know things have picked up since.
<unk> 93 of originations sorry, if I missed this Brian but can you update us on where the balance is on the C. MBS assets today, and what how thats changed since quarter end.
I know it is the overall picture is about Paul you may have the numbers, but I think it's about $700 million, but it didn't.
Yes.
If you can give the increase and decrease on the on the securities portfolio.
As of quarter end was 760 $64 million and we've seen some amortization since quarter end. So I think it's around 740 or $50 million I don't have the exact number but I think it's.
<unk> decreased slightly this quarter.
And the more around it was.
On the fourth quarter, I think we sold over $400 million.
And securities. So it's down at a point now where what we own is pretty high yielding in that space and it's very safely levered and so we're pretty comfortable with that that portfolio is also paying off very quickly, we took $50 million on amortization and payoffs.
Months.
So and we've taken $200 million in the last year, so that portfolio will take care of itself. It doesn't really need to be sold it will just continue to wind down and.
We don't see too many reasons to leave the bridge loan portfolio to add securities right now.
And on the loans side are you covered the pipeline covered.
Near term repayments for the next three to six months kind of what our expectations.
Trying to get to.
At what point this year. It is does net interest income trough is that in the rearview mirror or do we have maybe one more quarter where.
For the loans really settle in and contribute per full quarter on <unk>, so trying to do.
To kind of get an idea of when the trough in NII I'll take place.
Yeah, I think youre going to start seeing that in the upcoming quarter.
I think Charlie said it backfired, a real inflection point at ladder I think we just we went to work on on the balance sheet liquidity and deleverage intentionally we now are sitting with a lot of cash seeing great risk adjusted returns and we feel very confident I think just by the nature of our portfolio and the seasoning. We have on average had about 20.
Nine months 30 months of seasoning on loans at any given time and we're seeing just by natural.
Normal duration of our pipeline, we don't have a lot maturing through year end, we have some initial maturities that they even look like they qualify for extensions and the ones that don't will pay off. So I think you know I think youll see actually lower levels of pay offs, just based on our natural timeline overcoming quarters, and youll see loans repayment and without.
Huge pipeline ahead of us youre going to see very quickly our pipeline outpacing loan repayments I think starting with the next quarter.
And Stephen I would add I think youre seeing the trough this quarter. The one we're reporting on right now.
And frankly.
Not very very happy with this earnings number.
However, the reason the earnings number is not where we want it to be is because of our preference for liquidity and lower leverage it's not because we're taking write downs all over the place so well.
We've been asked for several quarters when are you going to start deploying all that cash flow, let's start it.
Last quarter.
Well April is really the first month, where we saw originations not net origination closings outpaced payoffs on a two to one factor I think that will become 401, possibly six to one on the months going ahead. So I think the portfolio will swell pretty quickly and I think our a lot of the.
Net interest income that we're going to be generating here is going to go right to the bottom line.
Great and.
And that May make this next question.
Let's valid, but can you talk about given the liquidity you have anything on the capital stack equity or debt that that looks attractive, but you might look to retire earlier repurchase.
I'm sure you guys are doing those types of comparisons versus new investments.
All the time, so any thoughts around that.
Sure we do it all the time, we look at it constantly.
We do have.
$452 million due.
September 22 more than more more than a year from now so and that is pre payable at par and three one in September.
No no I'm sorry, that's pre payable at par in September the 20, Fives, which is our next maturity date on the corporate side those are pre payable at par spot three one ends in October so we look at them and if we can borrow money and in the corporate space below five on a quarter, where we might very well do something earlier rather than later, but.
We have more than enough ability to handle it regardless of whether or not we do.
Another corporate bond issuance, we would like to we prefer to the unsecured bond market to a secured markets. However are creeping up lately, you've been seeing quite a bit of activity on the CLO market.
We have more than enough inventory and we're closing at a pace that's comfortable enough that we could issue a CLO also.
And that actually has a very attractive cost of funds.
Associated with it the leverage on those is probably between 80% 85% in the.
The all in without fees cost of funds is probably LIBOR plus 160, so when we think about our corporate bond issuance. When you actually look at it versus net CLO scenario and in addition to that we look at it against normal repo, which.
We all have to be a little careful with as we now so the CLO is probably the second favorite to the corporate bond issue and repo is third but all are available on our attractive, but we do enjoy somewhat of a low cost of funds right now anyway on the corporate bond market, we have the coke facility, which we will be paying.
Off as soon as possible but.
We're not going to incur any unnatural friction costs. There. So again I think our interest cost year over year will be falling quite a bit.
Yes.
All helpful. Thanks, very much Brian Pamela appreciate it Sir.
Next question, Steve Delaney with JMP Securities. Please go ahead.
Hello, everyone nice to be on the call with you this evening.
Just one from me we noticed an article in a New York City Real estate publication, where ladder had provided some rescue capital to the owner of a couple of office buildings, just curious whether youre seeing additional opportunities like that as well.
<unk> per mile mentioned that.
First quarter loan yield was seven 3%, so assuming that close in the first quarter.
We assume that the loans particular, probably had a lot to do with that attractive weighted average yield.
Hey, Steve It's Brian I'll, let Brian quickly and then I'll send it over to our head of originations at a site for sure.
Sure.
There's something going on in the background that I don't know that a lot of people are fully aware of.
And I don't know exactly what caused it I wonder if it might have been that our tiger situation that took place.
The bank's net a little blindsided, but the regulators are on top of the banks pretty seriously right now and the.
The banks are occasionally doing some unusual things with their loan portfolios that you wouldn't expect them to do so I know that for instance in that scenario I would not normally talk about this but the borrower himself actually gave the interviews. So I feel like we can say a few things, but it was it was a very low leveraged loan in New York City and.
It's funny when we finance a lot of these loans coming out of the banks were writing loans at around 5% or even 6%.
They're coming off loans at LIBOR plus 175, so those are very high quality loans, but for whatever reason banks are getting a little jumpy around concentrations I know apartments in New York City are making people a little little scared, but that would that just happened to be.
Couple of garment District office buildings, and the leverage on them was frankly, where I think.
Well below where I think those buildings with sales they were vacant and what really happened is some of the garment district tenants. They couldnt make their rent payments. So of course, you had the same thing that happened in the rest of the country and the banks that held that note handled it a little differently and sold it to.
So a real perhaps from investor.
<unk>, who aren't on the building so.
We were able to if you call a rescue I don't think we rescued it I think he could've sold the building to but Brian.
Brian It was not a very courageous loan it was something that we closed quickly, but before I take up too much air time, I'm going to give you a Adam cyber who handles a lot of these these interactions with the banks and.
Sure.
Great color Thanks, Brian.
Brian.
Adam I think you're on mute.
Yeah.
No.
Mike is not working.
But.
I just I wanted to add one thing well hopefully Adam fixes technical issue, but what I wanted to say is I think one of the things, we always talk about ladder being basis lenders and we will and we can and we write a lot of the heavy cash flowing loans like everyone else, but we don't price loans I think a lot of our peers price loans to a CLO, which requires a lot of cash flow to make it work in that model.
We look at replacement cost.
Dark value and we have the opportunity I think to do a lot of.
Strong loans at great bases, where we as Brian just said, we think that loan.
And they just I think one of the things that you didn't mention on that Brian is day signed two leases with very strong tenants.
And we feel comfortable on a dark value so I feel like.
The opportunities we're seeing right now are just outsized.
I do think a lot of people are forcing their loans into a CLO model that some work and some don't and.
And that's the benefit of our hybrid financing and diverse capital structure.
Yes.
I just wanted to add one thing there because like take an example of that so the cash flow got interrupted in the building, but the actual loan on the building was pretty low.
$300, a foot and obviously well below replacement cost, which is usually anybody who's been on lending for a very long time. If you are below replacement costs, you hardly ever get hurt but that.
That will not do well NFC low because of the rating agencies will look at the cash flow as if theres a problem now that cash flow is ramping up quickly as people return to work and if you've been in New York City, you can certainly see that picking up.
That is one of those examples where if that was a cash flow and instrument in the CLO market LIBOR plus 300.
For everybody would mitigate them on and because I mean, it's not even that is lease that just tenants not making payments because you know the garment district and the tenants are and that's why they are factors in that business.
We're not heavy cash flow business, they're perpetually late on builds but I'll be honest.
It keeps moving so yes, we love situations like that we love when there is some level of stress somewhere we don't like it when it's at the building and in this case.
We think bank got jumpy, and we think the regulatory environment may create great opportunities and when you don't have a lot of cash flow the CLO lenders on not there.
Great well hope you, Brian So hope you find some more.
I know I've got to hop off here, but in closing I just want if Marc Fox is on the call I just want to want to wish him all the best for the future. It's been a pleasure to know you and work with you and all the best Smart.
He he said it wasn't going to be on the Mike. This time, Mark if you're on we'll call. It the equivalent of drive driving year round in the golf cart on Yankee stays you can do you can pass my regards to loans.
Well, thank you everybody.
Sure.
Our next question comes from Jade Rahmani with <unk>. Please go ahead.
Thanks very much.
I also have never said anything positive about anyone in management, but I also.
On a commend Marc Fox he's been a.
Really great to work with.
No.
We love them too here.
Thank you.
Well I have to ask this because I've asked it for.
Sure.
On a different hasn't been teams and I was getting very colorful answers.
Brian This is for you.
What do you think about the ground lease business and the uptick in entities focused on that space is that something that ladder could predict given its high low.
Quiddity in cash position and perhaps.
Near term.
You know more greater flexibility on the hurdle rates that ladder is willing to pursue.
Uh huh.
Ground lease business has gotten a little more institutionalized here, but it's been around for very long time.
They don't have anything to do with interest rates sit on have anything to do with interest rate movements there.
They are very safe assets.
And I think theres nothing wrong with investing in them. However.
I think.
The returns to be generated.
If theyre going to look great.
And then we're going to look like a tremendous value, they're going to look that way in a market fraught with danger.
In a pandemic with low interest rates that that will be in their best day on a ground lease. So I don't really have a lot of interest in ground leases and it isn't because they don't like from a I'm happy to do them if somebody wants to please call but.
I think for the most part they are very safe very low return businesses and I suspect they will gravitate back to where they generally have been over the last.
50 60 years.
Theyre going to be.
Trade like treasuries.
Zero.
I know you won't hear anything from me about them not being safe they are but.
I think.
We'd probably rather and we think if you move out a little further on the spectrum you can invest safely with higher returns.
And what are you also think about.
All of that from that.
Provides COVID-19 that now have chosen multifamily and industrial as their favorite asset classes, because I've been thinking a lot about this and.
I think that hospitality is such an interesting asset class right now because people are going to stay 50% longer than they ever would before because theyre going to work hybrid from.
Five two hotel, which boost the occupancy and then you can have a virtual checking.
All of the operating expenses are going to go down turnover is going to go down so hospitality.
NOI margins are going to increase the drive to markets are going to have higher occupancy than before and people are scared to London them. They want only lend on multifamily and industrial.
Well I think what Youre seeing there first of all.
Separate multifamily from everything else because multifamily is probably the only sector on the commercial real estate business, that's really supported by the U S government.
And so as a result of that.
There is a constant buyer for it interest rates are low a lot of people are selling their homes, because they've gone up so much on value. That's one of the salient differences in this turnaround as opposed to 2008 2009, you don't have people, losing their homes here.
People are selling their homes and moving into apartments. You also have a graduating class of kids, who wound up living with their parents, an extra year and so there is plenty of reasons why the fundamentals of an apartment.
Because there's plenty of demand people I think it's like five or 6 million kids living with their parents that want to live in an apartment.
Then you have to take the backdrop around it like so for instance, I think it is very different in San Francisco apartments relative to Manhattan apartments Brook.
Brooklyn is not having a problem Manhattan is having a problem and is that simply because you press a button and go up more than five floors I think it's a little more complicated than that.
I think the Manhattan rents were so high and it was a reasonable value with the finest restaurants on the world museums and Broadway and bars open all night long with <unk> with Uber driving but when you take the value away and you just leave the high rent and you can't even use the gym on the pool of course, there is a problem.
To back up what you just said there if you take a look at the drive to hotels in and around San Francisco. It is amazing what is going on because San Francisco office buildings. Many of the Big Tech tenants have already said you'd never have to come back to the office.
So as a result, a lot of their executives are in Lake Tahoe snowboarding for a few hours a day and then heading to the office, which is their hotel room.
We're seeing this also in one country in Napa Valley.
And I suspect is happening in other coastal regions, but youre right Theres really no reason to rush off the beach on the Hamptons on Sunday afternoon anymore to beat the traffic. So it's going to set up some interesting dynamics in the hospitality business I tend to agree with you.
I think people are making a lot of loans in apartments and industrial for the obvious reasons. One is uncle Sam on the other one is uncle Bezos and so those are pretty safe and again not nothing wrong with those businesses, but they are in my opinion overbid.
You have a apartment building coming off construction on its least theres 20 lenders.
When there's 20 lenders you probably don't want to be one of them, but on the hotel sector sort of interesting because can you really hear something about a hotel today that is bad news that hasnt come across your plate already.
Yes, I think you can actually but it has to do more with Airbnb and has more to do with <unk>.
People, just renting out their rooms not on Airbnb.
There's plenty of competition, but I think then you factor in the unions the hotel the hospitality unions in New York City and many of these hotels have changed have closed permanently. So we'll see where that shakes out, but I don't know that answer no. One does really well see where it goes but we are looking as plenty of large hotel loans in default right.
Now.
Most of the ones that I know and like and they look cheap they happen to be in large cities that still scares me a little bit not so much from the standpoint of the investment or the people, but from the politics.
I think a hotel in Chicago right now causes me some concerns I don't know where the taxes are going on.
I think in a hotel in Manhattan, I'll feel a lot better about it after November.
But these big cities have really taken.
A turn against.
Landowners property owners, so but hilton.
Garden Inn in Cincinnati sure.
They should be fine.
And what you're really seeing is a resort hotel is doing very well Hawaii. There is some articles on the paper, they're doing fine Miami is you cannot get a room and it is hotter than Hell on Florida, right now and but.
And Florida by the way is open there is nothing there are no restrictions in Florida whatsoever, not saying, that's a good answer or a good thing to do on this.
Telling you that you walk into a hotel you are right to the bar stand elbow to elbow with people without masks on so we'll see if that's a good idea later, but right now it has returned and I think a lot of the states that have rushed the reopening if theyre going to be right there going to be they're going to be really right. Because they are experiencing the lower unemployment rates than the states that have really.
And held the Lockdowns in place.
And David I, just wanted to add I think you are kind of like opened up our conversation on I think there's a ton of opportunity I think right now and the way Youre thinking about it is exactly how we're thinking about it and that's why we're so excited to be sitting with all of this liquidity right now we think that day.
You're finally, seeing transparency and people are able to make some of the judgment calls like you've just made and I think youre going to see us expressing that view in first mortgage loans are always focused on basis like you know like we always have.
And Theres a lot of capital in the hotel business I mean, we had to foreclose on a few hotels and we sold them right away and several on several of them we made money.
Remember, saying to the borrowers why given to US just put them up for sale and they don't I don't know why but yeah. So we're we're pretty comfortable I mean, we've been able to move out of our.
Defaulted loan category, you know there was a $100 million alone.
That was attached to some buildings, but also on 1 million square foot vacant building.
And we're able to sell it at our principal balance.
That's pretty amazing I've never seen that kind of liquidity and then well.
I just I hate the term bank on property, but that's what people call us once in a while but.
And loans in default or routinely trading at par or higher.
Yes, well you guys have a great asset management.
Assets and I think that.
The proactive next day you've shown.
It's definitely a differentiator.
You don't want to take too much time I'm sure there's more people on the queue, but I think that the two things that investors would like to ask about is number one.
When does this inflection point in terms of the earnings outlook Hum.
Because you're looking at a company with.
At least as of last quarter.
$10 a share on cash.
So deploying that cash in historical returns would easily cover the dividend. So when does that come and then the other thing is just optionality because ladder.
Brian you.
Okay.
You could probably raise a lot of funds third party capital.
So I guess the two <unk>.
Sorry for taking time, but number one inflection point on earnings number two.
Just on would you consider raising a fund to be that bridge between where you know when ladders balance sheet gets fully the book then when you know earnings start to pick up.
Two part question. The first one is I believe obviously no guarantees, but I think we're talking about the inflection point, but I think it's in the past it was the first quarter and that's really frankly, if I have to tell you. The biggest problem in the company right now as we're getting too many pay offs and which as a lender I hesitate to say that because the opposite can be very very challenging.
So we are taking a lot of payoffs, we believe on the $5 paid off in 12 months without any.
Push from us so in the middle of a pandemic for 80 loans 79 loans to pay off and it was pretty remarkable I haven't I have not physically been on our office on a year and yet we still took 80 payoffs are 79 pay offs. So the inflection is should be there I think as I said earlier April was the first month, where we had two times the pay.
In the loan.
<unk> area closings not not under App closings I do believe we could easily put up a five or $600 million loan origination quarter.
In the next two quarters, we will not receive $600 million in pay offs without that I'm quite certain of and so I think we've hit that point and the question is and I think the question you will be asking me in the quarters ahead is.
What is the multiple of that.
That youre originating is outpacing your pay offs and I think it's done on a go to five or six to one here pretty soon and then I think it will probably level off to about 401. So I think in our last call I said I thought we were like $300 million in the.
On the second quarter of 300, and a third in 400 in the fourth I would double all of us.
And so the question is how do we restored the dividend is very easy.
$2 billion worth of loans, where you don't even need leverage if you can get a season right at 6% on leverage to get there. The question is though you have the right $2 billion net so if you take $1 billion in payoff you won't you are in the wheel you've only you've only made $1 billion worth of loans net and unfortunately, no matter how hard we try and most of the new loans were.
Writing are at lower rates than the loans, we were writing previously so it'll be a bit of growth there, but everybody else's in it too, but I think our we're more confident than ever in our ability to understand what we're underwriting, whereas I said fascinating observations took place in some of our defaulted loans in Oreo properties.
We're still learning after all this time I remember turning around and looking at panel on Robert on the saying I don't think we should we're going to want to sell some of these loans, but we're in a REIT that pays a dividend and everybody wants to talk about hotels and defaulted loans and frankly, we're not on the vehicle that that benefits.
From that now a lot of our competitors have another vehicle that kind of does that and so you know we think about it sometimes but the one thing I have always told our investors is that I would have one job full time and I worked here for ladder capital and for the shareholders and so if we were to set up a fund.
Probably.
It could have had.
A whole lot to do there.
If you remember when we went public we closed all of our funds. We had we had a few of them and but we didn't like the conflicts associated with it. So but you are raising money in a fund on trying to buy distressed debt, while the fed has putting rates at zero and that is capital everywhere, that's kind of on an exercise in futility and I think youre going to hear that from a lot of the distressed real estate.
Funds.
Lot of money was raised to take advantage of all the distressed.
Does this stress didn't come and when the fed started buying junk bonds.
That took away a couple of Punch Bowl is also but the question is what happens at the end.
Interest rates go up what happens to zombie companies, what happens to people that.
Need is I've been looking at how many companies got taken off the respirator because of.
<unk> stocks.
How many of them were able to actually issue equity hurts was looking to issue equity going into bankruptcy court. So we're going to have to learn how to manage around some of that stuff, but I don't anticipate setting up third party funds unless we're invested with it because we think it competes and we don't want to be viewed as bailing out or any mistakes, we made by putting it in a fund.
And frankly I.
I wish we could buy distressed debt in a REIT, but if you buy a lot of it with that dividend you start getting into this dividend coverage conversation that we've been in for a little while if you remember a year ago. We were on our liquidity conversation then we're on a credit conversation now we're in a dividend conversation and on earnings conversation. So.
It depends which one you want to talk about on any given day, but I think we're going to be talking about growing earnings next quarter.
I would just add that the focus for us will be you know restoring earnings that we have the flexible capital here, if we see something really compelling we have the ability to take advantage of it with our flexible capital keeping in mind the constraints, Brian mentioned about covering the dividend, but right now everybody is 100% focused on ladder earnings.
It would work better kind of purchase of distressed assets and borrowed money from someone else.
Well your corporate governance has certainly been very clean and something I admire.
About you guys.
Brian you kind of get it probably launched three different fund at this point can be dovetailing those against ladders balance sheet and be co investing in sort of all kinds of co investment vehicles.
On the back.
Kept a clean structure definitely.
In my view is a benefit to shareholders I think right now.
You know the stock is reflecting probably kind of the minimum dividend yield.
Of where peers should trade and in anticipation of the future uptick.
And it's kind of a waiting game one of your peers just raised the dividend 40%.
That's up 9% I'm sure ladder when it raises its dividend would have a similar rise but.
Really that well, we will get there we raised our dividend five times when rates were going up we last time, we thought rates were going to go up we loaded up the bridge loan portfolio, we benefited from that and yeah. I think we're kind of seeing history repeat there. So I don't think this is going to be terribly difficult I wish to hell rates would go up it would be a lot easier.
And I think day do you hit it earlier when you said, we got in front of issues I think one of the things Youre going to see is there isn't really any noise coming out of ladder other than new loan originations for the next you know.
Foreseeable quarters, and I, you know I I hope that's true for the whole industry, but I feel very confident it's true for ladder and I think that's for US that's the focus.
Okay, turning over the balance non of loans that rib, sorry, I just want to say that the amount of loans that repaid combined with the fact that we've reduced loans on non accrual by 25% in the middle of a pandemic.
It it says a lot about the credit quality of the assets on our balance sheet and that's the one pizza day said I'm not sure.
Fully being rewarded for right now with the work that we did our capital structure is clean and strong and our credits are as good as ever with tons of cash to deploy in this environment and I think that's what you know.
I think thats, what youre going to see happening.
Great well, thanks, so much for the update and look forward to speaking with you all soon.
Thank you next question Matthew Howlett with B Riley. Please go ahead.
Oh, Hey, thanks, guys, thanks for getting on getting in and.
Cost control going on from what I, just wanted to get one or two questions and first when you said the legacy Coke and April 'twenty CLO debt will be behind you a year from now are we to assume that there'll be fully cold or just amortize down enough, where they don't have an impact on interest expense.
Yes, they are they have make holes.
And frankly, if they didn't have them, we pay them off right now but.
But given the fact that there is no savings by paying them off now we think it'll app, but because there is a structure where they get paid down as loans pay off. So so both of them are paying down quickly already and they're not as big as they were when we borrowed them, but I'm I'm estimating don't hold me too and it's not a due date on in fact theyre not due dates but I do believe next year they'll be gone at this time.
Yeah.
Remind us again, what was the rate on the CLO was.
I'm going to I'm going on yes here, but Paul makes sense I'm getting the sign don't guess.
Yes.
5% coupon on all in wood costs.
On a quarter percent, but it's amortized down just this quarter alone on amortized down $30 million and subsequent to quarter end in April on amortized down another $30 million on continues to amortize down.
And the new market, if you would issue again, it would be what something at the <unk>.
2% area.
I'm sorry, what was the question where would be the new issue market a day, if you were to it.
On a say a lot about LIBOR plus 150 plus fees.
Got you at 80% event.
Okay. Okay got you and then.
I guess the other question is obviously on on the condo business.
She has been weighted towards the traditional loans.
What's your just give us the overall outlook on the C. N B S World, what do you need to see to see that market rebound.
There's been obviously a huge contributor since the financial crisis, we've heard things like you know properties need two years of stabilized retail properties to get in the MBS market.
What does it take to get that market going and how should we think about game.
Income in the future.
Hello.
On the arbitrage associated with anything you can securitize is as attractive as you could possibly imagine in pink.
It's very attractive.
But the problem is it at its core is a is a cash flow based analysis and when you interrupt cash flow for 12 straight months theres not a lot of things that fit very easily into it then you take in a couple of property types like regional malls that are blowing up all over the place and then you take it.
In Big box retail with bankruptcies, and then you've taken names of companies Big names like Saks Fifth Avenue.
They're not paying their rent in many buildings.
And it is absolutely a moment to stop and stare and see just what should be going into that because there is a I don't think the credit cycle has found its end in the <unk> MBS World now you won't see a hotel until you see 12 months of.
Trailing 12, month's income, which I don't know I don't even think we've got from month, one yet except in the state of Florida. So I think it'll be a good long time and so what's it going to take it's going to take volume, it's going to take eligible collateral and I suspect, we're going to be dealing with higher rates going forward. So you know.
I think the economy will be fine I think that there's a lot of pent up spending that will find its way into a lot of these assets but.
How is the hybrid work model and office is going to work I think Jade was right I think hotels will do very well, especially.
Short type.
There's a lot of uncertainty there so what youre seeing is tremendous demand because theres been nothing.
On the production of hand, and it's a cabal of banks really stay together and they do very low leveraged loans and they do them on institutional accounts that don't borrow a lot of money and God bless and Theres nothing wrong with that but I don't believe that.
Writing, a 75% loan to value on an office building or a retail center, where the shopping with a grocer is terribly pioneering stuff. So but yeah. We will continue to write loans and in fact, we've been writing them, but we don't anticipate being able to contribute meaningfully into a C. MBS steel for six months.
And it isn't because we don't want to and we just can't find the collateral that's eligible that now you have to remember that the rating agencies factor into this also and the rating agencies have a generally negative opinion of commercial real estate.
Right of course.
So I just think it's a supply problem more than anything else.
Got you, but there are a lot of maturities. The next four or five years. So can we think about maybe this is being 22.
In terms of an impact of ladders P&L I mean, how do you just think about it from us.
I think we're as good as it gets in the conduit business and there was when we started the company. There was one year, we've made $180 million on the conduit right.
Seven or eight points when could that happen, yeah, I guess, so but.
It's going to take a real stabilization not of people going to work, but are people getting out of lira ongoing.
Going to their office when they work for one and also going out of their house to buy things and you know Theres just a you've got to figure out how much of this is pandemic related and how much is this a secular.
And if you go to a hybrid work schedule and an office building and everybody's on the office three or four days a week well that's fine from our landlord in the office building not a big deal, but the guy that sales pizza downstairs on the daily across the Street just lost 20% of his income.
So there are knock on effects that you really have to follow it through and try to understand what it's going to mean.
A lot of this stuff happens, what's going to happen to.
Yeah.
Just look at New York City Mass Transit subway ridership in New Jersey, and long Island Railroad.
These guys werent being built out their day.
So we'll see but I think the jury is still out as to how the healthy U S population is going to interact with commercial real estate going forward.
Gotcha, well look you've got a great.
On balance sheet transitional loan business. So I guess, we'll just focus on that and wait for the say on this market to recover at some point well that's the incubator right, where we're kind of making a bet here that the world will find its feet and people will prefer to get out of the house prison, they've been in and but it's going to take a while.
It's not going to be this summer I mean, it'll it'll start falling out certainly and I remember when 911 happened everybody thought no one would ever go on an office building again, and we began writing loans on skyscrapers and I had rating agencies trying to tell me how they could hit that building with a plane and I don't really think you can do it but.
And ultimately it.
Emory's on rather short.
Absolutely I.
I appreciate it thanks, a lot alright.
Alright.
I will now turn the call to Brian Harris for closing remarks.
Well. Thank you sorry on the call ran a little bit late Tonight, I'm, sorry about our technical difficulties here on.
Unfortunately, that's living in a pandemic as it ends but I look forward to future quarters, I think we're going to have better news going forward and thanks for hanging with us during these quarters alright. Thanks.
On close todays teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.
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