Q4 2021 Ladder Capital Corp Earnings Call

Good afternoon, and welcome to ladder Capital Corp, 's earnings call for the fourth quarter and full year 2021 as a reminder, today's call is being recorded.

Speaker 1: Good afternoon and welcome to Ladder Capital Corp's earnings call for the fourth quarter and full year 2021. As a reminder, today's call is being recorded.

This afternoon later released its financial results for the quarter and year ended December 31st 2021.

Speaker 1: This afternoon, Ladder released its financial results for the quarter and year ended December 31st, 2021.

Speaker 1: Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections.

Before the call begins I'd like to call your attention to the customary safe Harbor disclosure in our earnings release regarding forward looking statements.

Today's call May include forward looking statements and projections and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections we.

Speaker 1: We do not undertake any obligation to update our forward-looking statements or projections unless required by law.

We do not undertake any obligation to update our forward looking statements or projections unless required by law.

Speaker 1: In addition, Lader will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance.

In addition, later will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Speaker 1: The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Speaker 1: These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the investor relations section of our webinar.

These measures are reconciled to GAAP figures in our supplemental presentation, which is available in Investor Relations section of our website.

Speaker 1: At this time, I'd like to turn the call over to Ladders President Pamela McCormack.

At this time I'd like to turn the call over to ladders, President Pamela Mccormack.

Thank you and good evening everyone.

Speaker 2: Thank you and good evening everyone. For the fourth quarter, Latta generated distributable earnings of $27.7 million or 21 cents per share.

For the fourth quarter ladder generated distributable earnings of $27 $7 million or 21 cents per share.

For the full year 2021 ladder generated distributable earnings of $61 3 million or 49 cents per share.

Speaker 2: For the full year 2021, Glider generated distributable earnings of $61.3 million or 49 cents per share.

In addition to having another quarter of strong loan originations our earnings were supplemented by gains from our conduit securitization and real estate equity businesses.

Speaker 2: In addition to having another quarter of strong loan originations, our earnings were supplemented by gains from our conduit securitization and real estate equity business.

After initially emphasizing raising liquidity and reducing leverage earlier in the year, we began making new loans again in March of 2021 .

Speaker 2: After initially emphasizing raising liquidity and reducing leverage earlier in the year, we began making new loans again in March of 2021.

Speaker 2: We ended the year by having originated a total of $2.9 billion of loans, including a record 92 balance sheet loans totaling $2.7 billion, resulting in the highest annual production of lattice balance sheet loans and lattice history.

We ended the year by having originated a total of $2 $9 billion alone include.

Including a record 92 balance sheet loan totaling $2 $7 billion.

Resulting in the highest annual production of ladders balance sheet loans and a lot of history.

The growth in our portfolio led to strong earnings momentum over the course of the year and we are pleased with the risk reward profile of the resulting portfolio, which continues to reflect our rigorous credit standards and return expectations.

Speaker 2: The growth in our portfolio led to strong earnings momentum over the course of the year, and we are pleased with the risk-reward profile of the resulting portfolio which continues to reflect our rigorous credit standards and return expectations.

As of December 31st over 65% of our $3 5 billion balance sheet loan portfolio was comprised of post COVID-19 originated loans with fresh valuations and business plan.

Speaker 2: As of December 31, over 65% of our $3.5 billion balance sheet loan portfolio was comprised of post-COVID-originated loans with fresh valuations and business plans.

The composition of the portfolio remains consistent and continues to be primarily comprised of lightly transitional loans with a weighted average loan to value of 67%.

Speaker 2: The composition of the portfolio remains consistent and continues to be primarily comprised of lightly transitional loans with a weighted average loan to value of 67%.

Speaker 2: In the fourth quarter, LIDAR originated $1.3 billion of loans, including 43 balance sheet loans totaling $1.2 billion, with a weighted average loan to value of 64% and a weighted average coupon of 4.43%.

In the fourth quarter lot of originated $1 $3 billion alone, including forty-three balance sheet loans totaling $1 $2 billion.

With a weighted average loan to value of 64% and a weighted average coupon of 4.43%.

Approximately one third of our balance sheet loan originations were made to repeat ladder borrowers.

Speaker 2: Approximately one-third of our balance sheet loan originations were made to repeat ladder borrowers.

Since the start of the new year, we closed an additional $300 million of new loans and we continue to have a strong pipeline of additional loans under application.

Speaker 2: Since the start of the new year, we closed an additional $300 million of new loans, and we continue to have a strong pipeline of additional loans under application.

Speaker 2: In our conduit business, we securitized or sold $131 million of loans during the fourth quarter for total gains of $2.7 million and we are continuing to build our pipeline which we will target for sale of securitization over the coming quarters.

In our conduit business, we securitized or sold $131 million of loans during the fourth quarter for total gains of $2 $7 million and we are continuing to build our pipeline, which we will target for sale or securitization over the coming quarters.

In our equity business. The majority of our $1 1 billion dollar portfolio is comprised of net lease assets.

Speaker 2: In our equity business, the majority of our $1.1 billion portfolio is comprised of net lease assets leased primarily to investment grade tenants with necessity-based businesses under long-term lease conditions.

These primarily to investment grade tenants with necessity based business is under long term leases.

The portfolio contributed nicely to earnings again during the quarter with $7 $3 million of net gain further illustrating the embedded value within the portfolio.

Speaker 2: The portfolio contributed nicely to earnings again during the quarter with $7.3 million of net gains further illustrating the embedded value within the portfolio.

As of yearend, our securities portfolio totaled $703 million down from over $1 billion at the beginning of the year as we reallocated capital into our balance sheet loan business, which we continue to believe is currently offering the best risk adjusted returns.

Speaker 2: As of year end, our securities portfolio totaled $703 million, down from over a billion dollars at the beginning of the year as we reallocated capital into our balance sheet loan business, which we continue to believe is currently offering the best risk-adjusted return.

Our loan origination business was supported by $1 $7 billion of capital raised during the year through to managed Clo's and an unsecured bond issuance.

Speaker 2: Our loan origination business was supported by $1.7 billion of capital raised during the year through two managed CLOs and an unsecured bond issuance, including a second managed CLO we closed during the quarter, the details of which Paul will discuss.

Including a second managed CLO, we closed during the quarter the details of which Paul will discuss.

Speaker 2: As of year end, we have total liquidity of over $800 million and our adjusted leverage stood at 1.5 times net of cash.

As of yearend, we have total liquidity of over $800 million and our adjusted leverage stood at one five times net of cash.

Speaker 2: 39% of our total debt was comprised of unsecured bonds, and 83% of our total debt was comprised of unsecured bonds and non-recourse finance.

9% of our total debt was comprised of unsecured bonds and 83% of our total debt was comprised of unsecured bonds and nonrecourse financing.

We continue to maintain a differentiated approach to our capital structure within the commercial mortgage REIT space through our exceptional use of unsecured corporate bonds.

Speaker 2: We continue to maintain a differentiated approach to our capital structure within the commercial mortgage read space through our exceptional use of unsecured corporate bonds.

Speaker 2: In our view, this is the best, most balanced, and safest way to finance a mortgage origination platform for the long term. In our view, this is the best, most balanced, and safest way to finance a mortgage origination

In our view this is the best most balanced and safest way to finance a mortgage origination platform for the long term.

Speaker 2: with the highest corporate credit ratings in the space and ratings only one notch away from investment grade from two of the three agencies.

With the highest corporate credit ratings in the space and ratings only one notch away from investment grade from two of the three agencies.

We're making substantial progress on our path towards becoming an investment grade company.

Speaker 2: We are making substantial progress on our path toward becoming an investment-grade company.

Speaker 2: As Brian will elaborate on more later, we are well positioned to benefit from a potential rising interest rate environment, both by way of our large and growing portfolio of floating rate loans, as well as our significant base of fixed rate liabilities.

As Brian will elaborate on more later, we are well positioned to benefit from a potential rising interest rate environment, both by way of our large and growing portfolio of floating rate loans as well as our significant base of fixed rate liabilities.

Speaker 2: In conclusion, we continue to expect our strong origination's momentum and our long-term investment in our capital structure to benefit Latta shareholders in the quarters and years to come. With that, I'll turn the call over to Paul. Thank you, Pamela. As Pamela discussed in the fourth quarter, Latta generated distributable earnings of $27.7 million or $0.21 per share.

In conclusion, we continue to expect a strong origination momentum and our long term investment in our capital structure to benefit a lot of shareholders in the quarters and years to come with that I'll turn the call over to Paul. Thank.

Thank you Pablo.

Tom will discuss in the fourth quarter ladder generated distributable earnings of $27 7 million or 21 cents per share.

Originations and pipelines remain very strong.

Speaker 3: Originations and pipelines remain very strong and we're and we're accompanied by a CLO that generated five hundred and sixty six million dollars of gross proceeds.

Are accompanied by a CLO that generated $566 million of gross proceeds during the quarter.

The CLO financing as they manage deal with a 78% advance rate on $729 million of collateral contributed.

Speaker 3: CLO financing is a managed deal with a 78% advance rate on $729 million of collateral.

Speaker 3: The CLO has a weighted average interest cost of LIBOR plus 165 basis points and provides for a two year reinvestment period and has an expected average duration of $5.99.

The CLO has a weighted average interest cost of LIBOR, plus 165 basis points and provides for a two year reinvestment period.

It has an expected average duration of approximately four years.

Speaker 3: This type of match funded non recourse non mark to market financing complements a strategy of utilizing long term unsecured corporate bonds to finance

This type of match funded nonrecourse non mark to market financing complements our strategy of utilizing long term unsecured corporate bonds to finance our business.

Overall, 2021 saw significant and successful capital markets offerings in both the corporate unsecured bond market in the managed CLO market, which have further solidified and lengthen our liability structure, while simultaneously, reducing our use of mark to market financing as we continue to move towards our investment grade ready to go.

Speaker 3: Overall, 2021 saw significant and successful capital markets offerings in both the corporate unsecured bond market and the managed CLO market, which have further solidified and lengthened our liability structure while simultaneously reducing our use of mark-to-market financing as we continue to move towards our investment grade-rated goal.

As of December 31st we had total liquidity of over $800 million and approximately 88% of our capital structure was comprised of equity unsecured bonds and nonrecourse non mark to market debt. Our nearest bond maturity is in October of 2025.

Speaker 3: As of December 31st, we had total liquidity of over $800 million, and approximately 88% of our capital structure was comprised of equity, unsecured bonds, and non-recourse, non-mark-to-market debt. Our nearest bond maturity is in October of 2025.

Our three segments continued to perform well during the fourth quarter, a ladder is well positioned as we head into 2022.

Speaker 3: Our three segments continue to perform well during the fourth quarter and latter as well positioned as we head into 2020.

Speaker 3: Our $3.5 billion balance sheet loan portfolio is 91% floating rate, diverse in terms of collateral and geography with less than a two-year weighted average remaining maturity.

Our $3 $5 billion balance sheet loan portfolio was 91% floating rate diverse in terms of collateral and geography with less than a two year weighted average remaining maturity.

During the fourth quarter loan origination activity outpaced payoffs as we added $751 million in balance sheet loans.

Speaker 3: Our balance sheet loan portfolio continues to perform well, and the general portion of our SEASUL reserve decreased to 34 basis points as two-thirds of our balance sheet loan portfolio as of December 31 was comprised of 2021 originations.

Our balance sheet loan portfolio continues to perform well and the general portion of our seasonal reserve decreased to 34 basis points as two thirds of our balance sheet loan portfolio as of December 31st was comprised of 2021 origination.

With new valuations and sponsored business plans.

In summary, we feel good about the underlying credit of our loan portfolio.

Speaker 3: In summary, we feel good about the underlying credit of our loan portfolio.

As Paolo mentioned, our conduit business.

Speaker 3: As Pamela mentioned, our conduit business contributes $2.7 million of gains to distributable earnings in the fourth quarter with a sale of $131 million of loans in two separate transactions.

<unk> $2.7 million of games to distributable earnings in the fourth quarter with the sale of $131 million of loans in two separate transactions.

Speaker 3: Our $1.1 billion real estate portfolio includes 160 net lease properties, which represent

Our $1 $1 billion real estate portfolio includes 160 net leased properties, which represents two thirds of the segment.

Speaker 3: 70% of our net lease portfolio is leased to investment grade tenants with long-term leases and the portfolio continues to perform well.

70% of our net lease portfolio was leased to investment grade tenants with long term leases in the portfolio continues to perform well.

During the fourth quarter, we sold four properties contributing net gains of $7 $3 million of distributable earnings, including three net lease properties sold significantly above our depreciated basis.

Speaker 3: During the fourth quarter, we sold four properties contributing net gains of $7.3 million to distributed earnings, including three net lease properties sold significantly above our appreciated.

Speaker 3: In total, during 2021, we received $219 million in net proceeds from the sale of real estate properties, which contributed $23.6 million in net gains to distributable earnings.

In total during 2021, we received 219 million in net proceeds from the sale of real estate properties, which contributed $23 6 million in net games to distributable earnings.

As we continue to demonstrate the embedded value in our real estate portfolio and to be consistent with our peers. One real estate equity assets. In addition to mortgage backed assets as we do in the fourth quarter, we updated our definition of adjusted leverage to add back the impact of GAAP accumulated depreciation and amortization to equity.

Speaker 3: As we continue to demonstrate the embedded value in our real estate portfolio and to be consistent with our peers, we want real estate equity assets.

Speaker 3: in addition to mortgage assets as we do. In the fourth quarter, we updated our definition of adjusted leverage to add back the impact of gap accumulated depreciation.

As of December 31, 2021, our adjusted leverage ratio stood at 1.8 times.

Speaker 3: As of December 31st, 2021, our adjusted leverage ratio stood at 1.8.

Turning to our securities portfolio as of December 31st our $703 million portfolio was 80, 787% AAA rated 99% investment grade rated with a weighted average duration of approximately two years.

Speaker 3: Turning to our securities portfolio, as of December 31st, our $703 million portfolio is 87% AAA rated, 99% investment grade rated, with a weighted average duration of approximately 2 years.

Speaker 3: Portfolio continues to benefit from strong natural amortization and therefore liquidity as the majority of these positions are front pay bonds.

The portfolio continues to benefit from strong natural amortization and therefore liquidity.

Majority of these positions are front pay bombs.

Further as of December 31st our unencumbered asset pool stood at $2 8 billion.

Speaker 3: Further, as of December 31st, our unencumbered asset pool stood at $2.8 billion and is comprised of 76% cash and first mortgage loans, thereby continuing to provide us excellent financial flexibility.

It is comprised of 76% cash and first mortgage loans, thereby continuing to provide us excellent financial flexibility.

During the fourth quarter, we repurchased $8 5000 shares of common stock, bringing our share repurchases for 2020 one to 823000 at a weighted average price of $10.95.

Speaker 3: During the fourth quarter, we repurchased 8.5 thousand shares of common stock, bringing our share repurchases for 2021 to 823 thousand at a weighted average price of ten dollars and ninety five.

Speaker 3: We have 44.1 million remaining under our $50 million board authorized.

We have $44 1 million remaining under our $50 million board authorized stock repurchase plan.

Our unappreciated book value per share was $13 70, 979 cents at quarter end or GAAP book value per share was $12.01 based on 125 5 million shares outstanding as of December 31st.

Speaker 3: Our underappreciated book value per share was $13.79 at quarter ends. Our gap book value per share was $12.01 based on $125.5 million shares outstanding as of December .

We declared a <unk> 27 per share dividend in the fourth quarter, which was paid on January 18th.

Speaker 3: We declared a 20 cent per cert dividend in the fourth quarter, which was paid on January .

And for more details on the fourth quarter in 2021 full operating results. Please refer to our earnings supplement which is available on our website.

Speaker 3: And for more details on the fourth quarter and 2021 full operating results, please refer to our earnings supplement, which is available on our website, as well as our 10-K, which we expect to file tomorrow. With that, I'll turn the call over to Brian .

Well as our 10-K, which we expect to file tomorrow with that I'll turn the call over to Brian .

Thanks, Paul.

We're pretty happy with the results of the fourth quarter and the earnings momentum that's been established quarter over quarter in 2021.

Speaker 4: We're pretty happy with the results of the fourth quarter and the earnings momentum that's been established quarter over quarter in 2021.

Speaker 4: As we restarted our lending activities in March of 2021, we knew that all we had to do was invest our large cash position into earning assets using modest leverage and our earnings per share would increase and rising dividend coverage would follow.

As we restarted our lending activities in March of 2021, we knew that all we have to do is invest our large cash position into earning assets using modest leverage and our earnings per share would increase and rising dividend coverage would follow.

We originated $2.9 billion in loans in 2021 and that pace of originations continued into January of 2022, when we originated over $300 million of new loans.

Speaker 4: We originated $2.9 billion in loans in 2021, and that pace of originations continued into January of 2022 when we originated over $300 million of new loans.

Speaker 4: I'd also like to mention that so far in 2022, we received 76 million in payoffs on two hotel loans that we modified in 2020, deferring some interest until maturity and all deferred interest and exit fees were collected.

I'd also like to mention that so far in 2022, we received 76 million in payoffs on two hotel loans that we modified in 2020 deferring some interest until maturity and all deferred interest and exit fees were collected.

Our pace of originations should moderate somewhat as markets have reacted to central banks pivoting into a decidedly more hawkish tone in recent weeks along with higher interest rates.

Speaker 4: Our pace of origination should moderate somewhat as markets have reacted to central banks pivoting into a decidedly more hawkish tone in recent weeks along with higher interest rates.

At ladder, we had been waiting for this turn towards higher rates as inflation has taken on a more structural than transitory feel in the last few months.

Speaker 4: At latter, we have been waiting for this turn towards higher rates as inflation has taken on a more structural than transitory feel in the last few months.

By balancing our differentiated liability structure between a larger component of unsecured fixed rate corporate borrowings that a combination of floating rate CLO and a minor component of short term repo that we have positioned ladder to let the fed do some of the work for us in the coming years.

Speaker 4: By balancing our differentiated liability structure between a larger component of unsecured fixed-rate corporate borrowings and a combination of floating-rate CLO and a minor component of short-term repo debt, we have positioned Ladder to let the Fed do some of the work for us in the coming year.

Speaker 4: We expect that our floating rate balance sheet loans will produce more income as short-term rates rise, while our average interest costs stay relatively fixed.

We expect that our floating rate balance sheet loans will produce more income as short term rates rise, while our average interest cost stay relatively fixed.

If short term rates move up by 100 basis points, We project, our net interest income to increase annually by approximately 16 cents per share.

Speaker 4: If short-term rates move up by 100 basis points, we project our net interest income to increase annually by approximately $0.16 per share.

If they rise by 200 basis points, we project net interest income to increase annually by approximately 36 cents per share.

Speaker 4: If they rise by 200 basis points, we project net interest income to increase annually by approximately $0.36 per share.

That may sound like a lot of rate movement, but in the last 12 months the yield on the two year U S. Treasury has climbed by a factor of 15 times from nine basis points in February of 2021 to about 135 basis points last night, while LIBOR has only moved from nine basis points to 13.

Speaker 4: That may sound like a lot of rate movement, but in the last 12 months, the yield on two-year U.S. Treasury has climbed by a factor of 15 times from 9 basis points in February of 2021 to about 135 basis points last night, while LIBOR has only moved from 9 basis points to 13 basis points.

Basis points.

The fed seems to be significantly behind where the market seems to indicate they should be and recent forecast from several economists are predicting at least four hikes in 2022 with some estimating as many as seven hikes this year.

Speaker 4: The Fed seems to be significantly behind where the market seems to indicate they should be, and recent forecasts from several economists are predicting at least four hikes in 2022, with some estimating as many as seven hikes this year.

Also remember that in 2019, one month LIBOR was at 2.50% in a market that seem to have only benign levels of inflation inflation forecast look quite different today, and we believe ladders earnings will feel a nice tailwind in the quarters ahead.

Speaker 4: Also remember that in 2019, one month LIBOR was at 2.50% in a market that seemed to have only benign levels of inflation. Inflation forecasts look quite different today, and we believe Ladder's earnings will feel a nice tailwind in the quarters ahead.

As I look back over 2021, the lending business was rather difficult with astonishingly low prevailing interest rates and fierce competition.

Speaker 4: As I look back over 2021, the lending business was rather difficult with astonishingly low prevailing interest rates and fierce competition. All lenders experienced high loan volumes and lower rates. However, those absolute rates allowed for credit spreads to be quite attractive relative to historical spreads.

All the lenders experienced high loan volumes and lower rates. However, those absolute rates allowed for credit spreads to be quite attractive relative to historical spreads.

When we went into the pandemic, we had a floor of approximately $6 five zero percent on our balance sheet loans and we are now originating loans at a faster overall pace, but at rates with Florida, just under 4.5%.

Speaker 4: When we went into the pandemic, we had a floor of approximately 6.50% on our balance sheet loans, and we are now originating loans at a faster overall pace, but at rates with floors just under 4.5%.

This comes as no surprise to us and due to our decades of experience in the mortgage lending business. We made a decision about 10 years ago to accumulate a highly curated real estate portfolio that delivered double digit returns year. After year expecting you to appreciate in value if rates move decidedly lower and they did just that.

Speaker 4: This comes as no surprise to us and due to our decades of experience in the mortgage lending business, we made a decision about 10 years ago to accumulate a highly curated real estate portfolio that delivered double digit returns year after year, expecting it to appreciate in value. If rates move decidedly lower, and they did just that.

In 2021, we selectively sold real estate assets generating gains of $23 $6 million the gains on sale supplemented our lower top line interest income as higher rate loans with floors paid off and as we ran the company with a higher liquidity profile appropriate for the times we were in.

Speaker 4: In 2021, we selectively sold real estate assets, generating gains of $23.6 million. The gains on sale supplemented our lower top-line interest income as higher-rate loans with Flores paid off, and as we ran the company with a higher liquidity profile, appropriate for the times we were in.

We have successfully deployed the liquidity we amassed prior to March of 2021, and we now expect our top line interest income to increase short term interest rates rise throughout the year.

Speaker 4: We have successfully deployed the liquidity we amassed prior to March of 2021 and we now expect our top-line interest income to increase as short-term interest rates rise throughout the year.

Because of our growing loan portfolio, we saw our top line interest income jumped from $37 6 million in the second quarter to $46 2 million in the third quarter with a further increase in the fourth quarter to 53.0 million.

Speaker 4: Because of our growing loan portfolio, we saw our top-line interest income jump from $37.6 million in the second quarter to $46.2 million in the third quarter, with a further increase in the fourth quarter to $53.0 million. And the first quarter of 2022 is off to a great start, so we expect this growth in income to continue, even if the Fed does nothing.

And the first quarter of 2022 is off to a great start. So we expect this growth and income to continue even if the fed does nothing.

As we built up our loan portfolio, we took advantage of lower rates and sold some of our real estate assets at substantial gains we expect to see some additional sales in the first quarter, but it is likely this activity will be somewhat curtailed toward the end of the year.

Speaker 4: As we built up our loan portfolio, we took advantage of lower rates and sold some of our real estate assets at substantial gains. We expect to see some additional sales in the first quarter, but it's likely this activity will be somewhat curtailed toward the end of the year.

Speaker 4: We continue to believe that our real estate portfolio is not properly reflected in our stock price, even after we sold a small portion of our holdings at attractive gain.

We continue to believe that our real estate portfolio was not properly reflected in our stock price even after we sold a small portion of our holdings at attractive gains.

Speaker 4: We believe the bigger gains in this book of business are not yet realized.

We believe the bigger gains in this book of business are not yet realized.

Speaker 4: To wrap it up today, I'll end by saying that we're back to siding off the front foot, and we expect the quarters ahead to be very rewarding for our shareholders as the positive operating leverage we've designed will start to deliver the results we expect. We can now take some questions. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone.

To wrap it up today I'll end by saying that we're back to fighting off the front foot and we expect the quarters ahead to be very rewarding for our shareholders as the positive operating leverage we've designed will start to deliver the results. We expect we can now take some questions.

Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question is from Tim Hayes of B T. I D. Please proceed with your question.

Hey, good evening guys.

Speaker 5: Hey, good evening, guys. First question, since you ended with kind of the comments around the pace of real estate sales, Brian and the embedded value there, I would love to just kind of...

The first question.

You ended with kind of the comments around the pace of real estate sales, Brian in the embedded value to I would love to just kind of.

Speaker 5: harp on that a little bit, you know, are you seeing a softening in bids for

Harp on that a little bit.

Are you seeing a softening in bids for you for your net leased assets now that there's you know obviously a much more.

Speaker 5: for your net lease assets now that there's, you know, obviously a much more much higher expectations for rates over the course of the year or You know is when you say that you expect that to curtail the back half of the year Is that just kind of your your estimate? Are you seeing that already? and then if you could just talk about the types of assets that you did sell this past quarter if that's part of a bigger pool a bigger portfolio of more that you think you can harvest in the near term and Just any comments around the embedded value that you think is there

Much higher expectations for rates over the course of the year or you know is when you say that you expect that to curtail in the back half of the year or is that just kind of your your estimate or you're seeing that already and then if you could just talk about the types of assets that you did sell this past quarter. If if that's part of the a bigger pool a bigger portfolio of more that you think you can.

Harvest in the near term and just any comments around the embedded value that you think is there.

Sure Kevin Thanks first of all no no softening in our bid levels are interested in and then at least arena that we own today.

Speaker 4: Sure, Tim, thanks. First of all, no softening in bid levels or interest in the net lease arena that we own today. However, I do expect it to soften a little bit only because of naturally with rates going higher in order to finance these things.

However, I do expect it to soften a little bit only because it's a naturally with rates going higher in order to finance these things.

Speaker 4: you know, you'll be borrowing at higher rates. Interestingly enough though, in almost all, when we first started selling some of our real estate assets they were generally sold to people who had 1031 exchanges where a guy with a first and a last name and he wanted to avoid a tax payment.

I'll be borrowing at higher rates interestingly enough, though in almost all of it when we first started selling some of our real estate assets. They were generally sold to people, who had 10 31 exchanges, where a guy with a first and last name and he wanted to get a border tax payments, whereas the publicly traded REIT would not usually.

Speaker 4: Whereas the publicly traded REITs would not usually buy these assets, and the reason why wasn't because they were not good assets, they just don't like to assume.

Buy these assets and the reason why it wasn't because they were not good assets. They just don't like to assume.

Speaker 4: of CMBS debt and many of our assets have CMBS debt, all assumeable, and they also don't, you know, the prepayment penalties were pretty high. Interestingly enough...

C N b S that in many of our assets has the MBS that all assumable and they also don't Oh, the prepayment penalty is where we're pretty high interestingly enough.

The public companies I think they've rallied quite a bit so their dividends there are quite a bit lower than they used to be and as a result of that they are now absorbing and literally paying the prepayment penalties for us to retire some of our C. M. B as debt so what you're seeing in these gains on sale with our triple net properties or the.

Speaker 4: date the public company but i think they've rallied quite a bit so their dividends are are quite a bit lower than they used to be and uh... as a result of that they are now absorbing and literally paying the prepayment penalties for us to retire some of our cnbs

Speaker 4: So what you're seeing in these gains on sale with our triple net properties are the net gains after expenses are taken out for prepayment penalties and things like that. The other thing I did was we wanted to see really what was our real estate portfolio worth because it's a little bit of a niche business and it does very well at certain times and then at other times it's not always so interesting.

The net gains after expenses are taken out for prepayment penalties and things like that the other thing I did was we wanted to see really what was our real estate portfolio worth because it's a it's a little bit of a niche business and it does very well at certain times and then at other times, it's not always so interesting, but usually does very well in a low inflationary environment.

Speaker 4: but usually does very well in a low inflationary environment.

Hum.

Speaker 4: and with our long-term leases, we've been able to sell both.

And with our long term leases.

You know, we've been able to sell both Sydney assumed mortgaged properties as well as paid off a more Ah properties, but what's interesting is we tend to go a little deep into the names when we own things. So I think we owned about seven or eight bj's wholesale clubs are at towards the I don't know call it a year ago.

Speaker 4: assumed mortgage properties as well as paid off more properties. But what's interesting is we tend to go a little deep into the names when we own things. So I think we owned about seven or eight BJ's Wholesale Clubs towards the, I don't know, I'll call it a year ago. I could be off by a quarter there. And I think we sold three of them. And we still have four or five of them.

I could be off by a quarter, there and I think we felt three of them and we still have four or five of them. So we've got a very good idea that in that scenario, assuming there's nothing wrong with the business. We're still holding that were probably up about 30% of those and I think we could solve them. In fact, we sold three to three different parties are the second thing. We've witnessed is we also want.

Speaker 4: So we've got a very good idea that in that scenario, assuming there's nothing wrong with the VJs we're still holding, that we're probably up about 30% on those. And I think we could sell them. In fact, we sold three to three different parties.

Speaker 4: The second thing we've witnessed is we also own a private grocer. We bought about seven properties out in Iowa with a company called Hy-Vee. We purchased them with about a 6.3 cap rate, and they just sold a portfolio of similar properties with longer leases than we have because we've owned ours for seven years. They sold them at a 4.2 cap.

On a private grocer about sat and we bought about seven properties out in Iowa.

A company called Hy Vee and Hy Vee are we purchased them was about a six three cap rate and they just sold a portfolio of similar properties with a longer longer leases than we have because we found ours for seven years, but they sold them at a four two cap.

Speaker 4: And so we think that we're up substantially there, and in order to prove that to ourselves, we actually sold one of them. And in fact, that is exactly, you know, we did feel a big gain there. So keep in mind, we still own about five or six of those.

And so we think that were up substantially there in order to prove that to ourselves we actually sold one of them and in fact that is exactly you know we did a feel a big game. There. So keep in mind, we still own about five or six of those.

Speaker 4: I think that basis is about 55 million, but we can easily extrapolate and say we're probably up 20 to 30 percent on those.

I think that that basis is about 55 million, but we can easily extrapolate and say were probably up 20% to 30% on those I don't usually go too deep into the individuals' statistics here, but I will say, we all know a dollar generals are we've been accumulating those are we actually havent bought one in a while now but we have about $140 million of those and.

Speaker 4: I don't usually go too deep into the individual statistics here, but I will say we own Dollar Generals. We've been accumulating those. We actually haven't bought one in a while now, but we have about 140 million of those. Those we own at a seven plus cap, and those are routinely trading in the market at about a five, four and a half cap in pretty good locations.

Those we own at a seven plus cap and those are routinely trading in the in the market at about a five four and a half cap is in pretty good locations. So I think we've got a substantial game. There also and we do own over 100 of them. So we don't that's just a smattering I'm, giving you. An example, not not all of them.

Speaker 4: So I think we've got a substantial gain there also, and we do own over 100 of them.

Speaker 4: So that's just a smattering. I'm giving you an example, not all of them. So we do expect higher rates, certainly, to impact the pool of borrowers. However, what is not showing any signs of deterioration is the public company.

So we do expect higher rates certainly to impact you know the pool of borrowers. However, what is not showing any signs of a deterioration is the public companies that are bidding on these things. So it's kind of funny that and the reason we pointed out in our call. Today is that we really don't feel like our real estate is appreciated in our stock price.

Speaker 4: that are bidding on these things, so it's kind of funny, and the reason we point out in our call today is that we really don't feel like our real estate is appreciated in our stock price, because we're basically a public company and we're selling them to other public companies, and they're buying them from us at a gain.

Just because we're basically a public company and we're selling them to other public companies and are there, they're so they're buying them from us at a at a gain and and gives us yet their dividends are substantially lower than ours. So are the price appreciation is different so and we have more to talk about I think and where we're gonna start talking.

Speaker 4: And yet, their dividends are substantially lower than ours. So the price appreciation.

Speaker 4: We have more to talk about, I think, and we're going to start talking a lot more about our real estate portfolio.

A lot more about our real estate portfolio.

Just wanted a further example, we own a student housing portfolio out in Santa Barbara and if you have any interest at all in standing up reading too much Charlie Munger is trying to build a dorm out there called and there there's a lot of our publication and in the press on it Theyre, calling a dorm zyla because they are so pressed for.

Speaker 4: Just one further example, we own a student housing portfolio out in Santa Barbara and if you have any interest at all in staying up reading too much, Charlie Munger is trying to build a dorm out there called, and there's a lot of publication in the press on it, they're calling it Dormzilla because they are so pressed for housing in this college that they're looking to build a dormitory with about 2,000 rooms and most of them have no windows.

Housing in this college that they're looking to build a dormitory was about 2000 rooms in most of them have no windows. So we own a substantial portion of assets. There and then in the island Vista neighborhood of a <unk> of Cowen and Southern California.

Speaker 4: So, we own a substantial portion of assets there in the Isla Vista neighborhood in Southern California. And so, as we look through our portfolio, some of them have stories behind them, some of them don't, but most importantly, I think, on the TripleNet side, we've been selling a couple of things that we own a bunch of. So, we've got a pretty good idea now on what we think they're worth.

And so as we look through our portfolio Theres some of them have stories behind them some of them down, but most importantly, I think on the triple net side, we've been selling a couple of things that we own a bunch of so we've got a pretty good idea now on on what we think they're worth.

So hopefully that helps.

Yeah, that's that's really granular helpful information, Brian I appreciate it so it sounds like clearly a lot of embedded value in this portfolio and you are proving it out it seems like your appetite to continue doing that is still pretty high I guess I'm. Just curious you know like obviously for the rating agencies like to see you guys.

Have that sticky and come in and how you know how that portfolio is financed is nice too. So I mean are you okay with continuing to harvest these gains and let that portfolio kind of run off to be a smaller percentage of the overall business like where do we see that going over time, assuming that you know the bids are there.

Speaker 5: income and how that portfolio is financed is nice too. Are you okay with continuing to harvest these gains and let that portfolio run off to be a smaller percentage of the overall business? Where do we see that going over time, assuming that the bids are there?

Speaker 4: We don't try to figure out where interest rates are going over a 10-year period of time. We go into each of these investments with a view as to what we think they should yield over time. And when we begin to exceed those gains that we were planning for, we'll start to winnow them back a little bit and sell some of them.

We don't try to figure out where interest rates are going over a 10 year period of time, we go into each of these investments with a view as to what we think they should yield over time and when we begin to exceed those those gains that we were planning for will start to win them back a little bit and sell some of them Oh, there's no wholesale sale I will tell.

Speaker 4: There's no wholesale sale. I will tell you, though, the sale that iSTAR conducted of their net lease portfolio certainly caught my eye, and a few of our shareholders have even indicated to us, perhaps.

Although the sale that I start conducted of their net lease portfolio certainly caught my eye and a few of our shareholders have even indicated to us perhaps if a if we thought we could replace it and we do think we can replace it by the way, perhaps we should sell our entire portfolio or else put it off balance sheet and are in a net lease REIT.

Speaker 4: If we thought we could replace it, and we do think we can replace it, by the way, perhaps we should sell our entire portfolio or else put it off balance sheet in a net lease REIT that we manage externally. So these are all scenarios that we occasionally look through.

We manage externally. So these are all scenarios that we occasionally look through but we haven't made any decisions in that regard just yet but for the most part net lease properties are best in our opinion or our best purchase when you have a fairly steep yield curve and that's been a long time since we've seen that I do expect to see more.

Speaker 4: But we haven't made any decisions in that regard just yet. But for the most part, net lease properties are best.

Speaker 4: in our opinion our best purchase when you have a fairly steep yield curve and that's been a long time since we've seen that I do expect to see more of that going forward and I think that the a lot of their net lease REITs don't use a lot of mortgage financing so they don't really they're not impacted by

More of that going forward and I think that the a lot of their net lease REIT don't use a lot of mortgage financing. So they don't really they're not impacted by our by the yield curve, but we are because as you know well will write a C. N b S alone into a trust and then we all right.

Speaker 4: by the yield curve, but we are, because as you know, we'll write a CMBS loan into a trust, and then we'll take what we target double digit returns for the next 10 years, and then when the loan comes due, we usually have another 10 years behind it, and at that point we make a decision to sell, blend and extend if we wanna talk to the operator. But this all breaks down if you have bad credits in those pools.

We target double digit returns for the next 10 years and then when the loan comes due we usually have in another 10 years behind it and at that point it would make a decision to sell blend and extend if we want to talk to the ER. The operator, but this all breaks down if if you have bad credits in those pools. So if he will.

Speaker 4: So we're very, very meticulous about who we will purchase 10-year assets from. And we focus on, as Pamela said, the necessity-based retailers. And listen, there's always a time for a necessity-based retailer, but rarely has there been a time where the wholesale clubs and the grocery stores have done better than in the last couple of years.

Very very meticulous about who we will purchase a 10 year assets from and we focus on as Pamela said, the necessity based retailers and listen there is always a time for a necessity based retailers, but rarely has it been in a time, where you know the wholesale clubs in the grocery stores have done better and in the last couple of years.

Right right well, if I could just rephrase my last question a different way because it's not saying you're going to sell your net lease portfolio, but it sounds like you are potentially open to the idea and you're obviously also rotating capital out of the sea MBS portfolio into loans like are you.

Speaker 5: Right. Right. Well, if I could just rephrase my last question a different way, because it's not saying you're going to sell your net lease portfolio, but it sounds like you are potentially open to the idea. And

Speaker 5: you're obviously also rotating capital out of the CMDS portfolio into loans. Like, are you, Ladder has historically been this diversified commercial real estate investment company, but are you okay with going more towards kind of like a pure play lending platform with maybe Conduit on the side? Is that something, not saying it's going to happen, but like, would you be okay transitioning more to that model than where you're at today?

Later, he has historically been this diversified commercial real estate investment company, but are you, okay with going more towards kind of like a pure play lending platform with maybe conduit on the side is that something not saying, it's going to happen, but like would you be okay transitioning more to that model than where you're at today.

Oh, Yeah, I think so I don't I don't think there's anything wrong with our model today.

Speaker 4: Yeah, I think so. I don't think there's anything wrong with our model today. And oftentimes we talk to people who are...

And oftentimes we talk to people who are for whatever reason inquisitive went out to bring it up but but.

Speaker 4: for whatever reason, inquisitive enough to bring it up, but I think there's a possibility that our multifaceted approach has been a little too complicated, whereas I see some of the monolines, even though you've got to be very careful in those monoline businesses when you're…

I think there was a possibility that our our multifaceted approach has been a little too complicated, whereas I see some of the mono lines, even though you've got to be very careful in those mono line businesses when you're because when it's not trying to buy them you have to keep buying and that's never a great idea, but I'm not against I don't think anybody on the team.

Speaker 4: When it's not time to buy them, you have to keep buying them, and that's never a great idea. But I'm not against. I don't think anybody on the team is against it. You know, moving more towards a balance sheet, recurring earnings, you know, sustainable cash flow model. The conduit will always be something that we'll parachute into here and then because of the inherently high ROE and little use of capital, frankly.

[noise] against it.

Moving more towards a balance sheet recurring earnings you know sustainable cash flow model.

The conduit will always be something that we'll parachute into here and then because of the inherently high ROE and little use of capital frankly, but I didn't know where everything's for sale, we own a fairly hefty real estate portfolio still are what do we sell the whole thing Sherwood I'm on the other hand I tend to think we're moving.

Speaker 4: But everything's for sale. We own a fairly hefty real estate portfolio still. Would we sell the whole thing? Sure we would. On the other hand, I tend to think we're moving towards a.

Towards.

An environment, where if the curve doesn't steepen, we're going into a recession if.

Speaker 4: an environment where if the curve doesn't steepen, we're going into a recession. If the 10-year doesn't get moving. And in that environment, we'd probably, in a flat environment, we would hang on to those net lease assets. In a rising rate environment, I think we would just as soon sell them and replace them with other loans, other assets we can buy, because we think we can find them. The fact that we haven't acquired a lot in the recent past is not a statement as to we can't. It's a statement as to the conditions don't seem right.

If the 10 year doesn't get moving and.

In that environment, you know, we'd probably we're probably in a flat environment, we would hang on to those net lease assets in a rising rate environment. I think we would just assume sell them and replace them with other other loans or other assets. We can buy it because we think we can find them. The fact that we haven't acquired a lot in the in the recent past is not a statement as to we can't it's a statement as to that.

Conditions don't seem right.

Got it got it well I appreciate the comments. This evening is it was a very interesting and in depth and then I'll hop back into queue for now.

Speaker 5: Got it, got it. Well, I appreciate the comments this evening. It was very interesting and in-depth, and I'll hop back into Q for now. Okay.

Okay.

Our next question is from Jade Rahmani of K B W. Please proceed with your question.

Thanks, very much just a while we're on the subject on the <unk>.

Speaker 6: Thanks very much. Just while we're on the subject, on the

Overall commercial real estate owned portfolio is the debt transferable and how easy. It is is it to refinance because another option would be to just increase the leverage since you have these unrealized gains.

Speaker 6: Overall commercial real estate owned portfolio, is the debt transferable and how easy it is, is it to refinance because another option would be to just increase the leverage since you have these unrealized gains.

Speaker 6: those portfolios rather than selling the assets outright.

Those portfolios rather than selling the assets outright.

Oh, that's a good question, because we have actually rolled some of them over and refinance them and in nearly all instances they turn into a cash out refi and in many instances because of the cap compression that's taken place over the last 10 years.

Speaker 4: That's a good question, because we have actually rolled some of them over and refinanced them. In nearly all instances, they turn into a cash-out refi. In many instances, because of the cap compression that's taken place over the last 10 years with a rather stagnant, low interest rate environment,

With a rather stagnant low real estate environment, well, I mean low interest rate environment.

Yeah, we we almost have no basis in some of these assets when we do that so sure it.

Speaker 4: We almost have no basis in some of these assets when we do that. So sure, we tend to target a double-digit rate of return over the long term.

We tend to target a double digit rate of return over the long term.

Speaker 4: and we think we can manage that and we think we can find new ones that do that. So sometimes it's helpful to take gains and harvest 25-30% increases in valuation and then go do it again. However, if we were to stop selling them, because we won't sell them at a price we don't like.

And we think we can manage that and if we think we can find new ones that do that so sometimes it's helpful to take gains and harvest you know, 25% to 30% increases in valuation and then go do it again, however, if we were to stop selling them because we won't sell them at a price that we don't like but if we were to stop selling them.

Speaker 4: But if we were to stop selling them then we could easily, yeah, just in all likelihood put them into a lower rate refinance where there is cash out because the valuations have increased. The valuations are what they are. We don't control that but by virtue of the fact that we have been selling them at hefty gains we would expect the appraisals to do the same thing.

Then we could easily yeah, just look for in all likelihood put them into a lower rate refinance where theres cash out because the valuations have increased the valuations are what they are we don't control that but by virtue of the fact that we've been selling them at a hefty gains we would expect the appraisals to do the same thing.

Speaker 4: But, you know, it's always hard to say goodbye to a double digit rate of return.

But you know, it's always hard to say goodbye to a double digit rate of return, but yeah, sometimes it's time to let them go in and do it again, where do you think you might have a better or are we situation. It's important in those environments have to remember these leases are getting shorter and not longer and other companies are doing quite well in fact.

Speaker 4: But sometimes it's time to let them go and do it again where you think you might have a better ROE situation. It's important in those environments. You have to remember these leases are getting shorter, not longer.

Speaker 4: And the companies are doing quite well. In fact, the market cap rate on...

The market cap rate on dollar general and Bj's in the several of the companies we own has tripled in many cases, so they're much stronger credit. So we're not really in a credit conversation anymore at least not now.

Speaker 4: Dollar General and BJ's and the several of the companies we own has tripled in many cases, so they're much stronger credits. So we're not really in a credit conversation anymore, at least not now.

Speaker 4: But with rates expected to rise and lease terms getting shorter, I would expect there to be some view towards perhaps wealth seldom. But if we were to refinance them, it's gotten a lot cheaper to refinance them now because rates have gone up. I know that seems weird, but because the prepayment penalties have come down so much because of the 10-year movement and the defeasance calculation.

With rates expected to rise and lease terms getting shorter.

Would expect there to be some some of your tourist perhaps well sell them, but if we were to refinance them. It's gotten a lot cheaper to refinance them now because rates have gone up I know that seems weird, but because of the prepayment penalties have come down so much because of the 10 year movement in the defeasance calculations.

Okay. Thank.

Speaker 6: Okay, thank you for that. You know, it seems like most of the non-bank lenders

Thank you for that you know it seems like most of the nonbank lenders.

Speaker 6: But the overall lending market was pretty gangbusters the last two quarters. Some of that momentum seems to have continued this quarter. Maybe it'll slow with all the volatility. But CMBS has significantly lagged. So I guess the two questions would be, one, what are your thoughts around the surge in originations? You know, why do you think that took place? But then why also do you think CMBS was such a laggard?

But the overall lending market was pretty gangbusters. The last two quarters some of that momentum seems to have continued this.

This quarter, maybe it'll slow with all the volatility.

But see MBS is significantly lag so I guess the two questions would be one what are your thoughts around the surgeon and the originations you know why do you think that took place. But then why also do you think see MBS was such a laggard.

Thanks, so much.

Sure I will let me take it in reverse order I think see them be as it has been lagging.

Speaker 4: Sure, let me take it in reverse order. I think CMBS has been lagging. The answer to both questions is the pandemic, but with different.

Both questions as the pandemic, but with different.

Speaker 4: reasons why. To sign off on a 10-year CMBS loan, you generally need trailing 12-month cash flows from tenants that are in occupancy and paying rent. And there was such an interruption in who's in an office building. And I can remember underwriting loans where we would write a loan on an office building, and you go see the office building out in Indianapolis, and there is no one in it.

Reasons why are the Chinese tourists to sign off on a 10 year C. M. B S alone generally you need 12 months trailing 12 months cash flows from tenants that are in occupancy and paying rent and there was such an interruption in who's in an office building and I can remember underwriting loans, where we would write off a loan on an office building.

And you go see the office building out in Indianapolis, and there's no one in it so that presents a problem two or to a lender on a 10 year loan, whereas under normal times and circumstances of course, you show up its bustling and people are downstairs ordering breakfast, but and then you get the the estoppel from the CEO and you just go on.

Speaker 4: So that presents a problem to a lender on a 10-year loan, whereas under normal times and circumstances, of course, you show up, it's bustling, and people are downstairs ordering breakfast, but, and then you get the estoppel from the CEO and you just go on. So I think CMBS was burdened by two things. One, it was tough to get a fix on trailing 12.

So I think see MBS was burdened by two things one it was tough to get a fix on trailing 12, but as you can imagine with everybody staying home the apartment market did very well. So it wasn't hard to find a you know 10 year loans in the apartment market. However, the apartment market is dominated.

Speaker 4: But as you can imagine, with everybody staying home, the apartment market did very well. So it wasn't hard to find, you know, 10-year loans in the apartment market. However, the apartment market is dominated by Fannie and Freddie. So as a result of that, the CMBS business suffered. And the second thing that hurt the CMBS business is...

By Fannie and Freddie So as a result of that to see MBS business suffered in the second thing that hurt to see MBS business is.

The flat yield curve.

Speaker 4: the flat yield curve. With a 10-year, right now even, let's say it's 2% and you sell a AAA at 90 over, you get a 2.9% and you just start an inflation print of 7.1%.

With a 10 year a year right now even at let's say, it's 2% and you fell a triple a and 90 over you know if you've got a two 9% and you just saw an inflation print a seven point.

Five I think so that that's always a dangerous thing to be holding a long term piece of paper that might go upside down on you on funding.

Speaker 4: So that's always a dangerous thing to be holding, a long-term piece of paper that might go upside down on you on funding, not because anything's wrong, just because spreads have moved out and rates are moving higher.

Because anything is wrong, just because spreads have moved out and.

And rates are moving higher.

Speaker 4: Not a lot of people in the market are used to dealing with that, but in the old days, in the 80s and 90s, those were things that if you made a loan like that, you had to sell it almost right away, otherwise you risk having a negative carry situation. On the beginning of your question, you talked about how the leveraged CLO lenders, I'll call it, have been having a hell of a time with a lot of volume here. Well, I think deep down inside, interest rates have been very low.

Not a lot of people in the market are used to dealing with that but in the old days in the Eighty's Ninety's, but you know those were things that you had to if you've made a loan like that you have to sell it or almost right away otherwise you risk having a negative carry situation on the beginning of your question you talked about how are the the leverage CLO lenders.

So I'll call it have been having a hell of a time with a lot of volume here, well I think deep down aside where interest rates have been very low and that's actually one of the things I mentioned, while I was talking on the earnings.

Speaker 4: And that's actually one of the things I mentioned while I was talking on the earnings, uh, you know, the initial call there.

The initial call there is that while rates were low when LIBOR is at nine basis points spreads were high.

Speaker 4: is that while rates were low when LIBOR was at nine basis points, spreads were...

Speaker 4: And most experienced lenders in the space, if you're writing apartment building loans at $350 over LIBOR, you're doing pretty well on a historical basis. However, $350 over LIBOR is a 3.59% rate, and that's not terribly interesting. I think as rates go higher here,

And you know most experienced lenders in the space. If you were writing apartment building loans at $3 50 over LIBOR and you're doing pretty well on a historical basis. However, 350 over LIBOR as a 3.59% rate and that's not terribly interesting I think as things are.

As rates go higher here are you.

Speaker 4: you will see spreads tighten, so just because LIBOR is moving up, don't naturally assume

You'll see spreads tightened so just because just because LIBOR is moving up don't naturally assume that the prevailing rate that that the investors get will naturally go up it will go up it has been going up spreads had been widening now, but I think the spread widening is taking place because of LIBOR hasn't moved.

Speaker 4: that the prevailing rate that that the investors get will naturally go up it will go up it has been going up spread have been widening now but i think the spread widening is taking place the live or hasn't moved

I think the investors are rightfully building in some version of it shouldn't move by now and it just hasn't happened I mean, the two year moved 25 basis points. This afternoon.

Speaker 4: and uh... i think the investors are rightfully building in some version of it should have moved by now and it just hasn't happened i mean the two-year move twenty five basis points this afternoon

Speaker 4: So I said in the original discussion there, I was afraid to say where the two year was because I didn't know where it would close. But as I said last night, it was at 135. Right now it's at 155. So I think spreads will tighten in the CLO business as LIBOR begins to move. So it won't naturally be just this ratcheting higher in absolute interest.

Oh I'm sorry.

So I said in the original discussion there yeah, Yeah, I was afraid to say, where the two year was because I didn't know where it would close but that's what I said last night. It was at 135 right now it's at 155. So it's a I think spreads will tighten in the CLO business as you know as LIBOR begins to move so it won't naturally be justice.

Actually higher than an absolute interest rates. So I think that's the other reason that there's been a lot of availability there because I think in the in the post pandemic era. There were a lot of people, who thought about selling their assets and just didn't get around to it before the pandemic hit and I think those people, especially the older folks that own small apartment buildings in New York, San Francisco and somebody on the brake.

Speaker 4: So I think that's and the other reason that there's been a lot of availability there is I think in the in the post pandemic era, there were a lot of people who thought about selling their assets and just didn't get around to it before the pandemic hit. And I think those people, especially the older folks that own small apartment buildings in New York, San Francisco, and some of the other bigger cities, they, they just sold them at that point. They got tired of carrying them for a year or 2, and the investment has probably been very good to them over the last 20 or 30 years. But we did see a lot of old time families selling assets that they've held for decades.

Cities. They they just solve them at that point, they've got tired of carrying them for a year or two and the investment has probably been very good to them over the last 20 or 30 years, but we did see a lot of old time families selling assets that they've held for decades.

Thanks, very much for taking the questions.

Speaker 1: Thanks very much for taking the questions. Sure. As a reminder, if you would like to ask a question.

Sure.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue for participants using speaker equipment. It maybe not.

A handset before pressing the star key.

One moment, please I'll even call for additional questions.

Our next question is from Steve Delaney of JMP Securities.

Proceed with your question.

Speaker 7: Thanks and congratulations everyone on a great close to a comeback year. Um, oh and Brian , I just checked check my screen the two years at 161 up 26, so If you walk away for five minutes today, you can't you gotta stay you gotta stay glued to the screen man Especially if you're a bond guy

Thanks, and congratulations everyone on a great close to a come back year.

And Brian I, just check check my screen. The two years at 161 up 26, so if.

If you walk away for five minutes today, you can't you got to you got to stay glued to the screen man.

Sorry, if you're a bond guy.

Wanted to just ask a couple of quick things cash 549 million down about 200 million from 750 at 930.

Speaker 7: I want to just ask a couple of quick things. Cash, $549 million, down about $200 million from $750 at $930. So what would be sort of the minimum level? I know it fluctuates day to day and week to week. But as far as sort of a target, maybe I'll sit this way.

So what would be sort of the minimum levels I know it fluctuates day to day and week to week, but as far as sort of a target.

I will maybe ask it this way.

Speaker 7: 550 million is some of that excess cash and if so, you know, how much okay, that's yeah

Oh $550 million is some of that excess cash and if so you know how much okay. That's yeah.

So maybe I think I know, where you're going here. So what's the carry rate what do you want to go home every night with Ah Yeah. In General I think I think we generally say about $100 million I personally.

Speaker 4: So maybe, you know, yeah, I think I know where you're going here. So what's the carry rate? What do you want to go home every night with?

Speaker 4: In general, I think we generally say about $100 million. I personally think that number is probably a little high, and it probably comes out often when we say $100 million because we still own about $700 million in securities. And I do expect our securities portfolio to become much smaller as time goes on. They're paying off very rapidly right now. These are the A-classes from CLOs from 2009.

Suddenly think that number's, probably a little high and it probably comes out often when we say 100 million because we still own about $700 million of securities. However, if if and I do expect our securities portfolio to become much smaller as time goes on they're paying off very rapidly right. Now there there are in that part of the these are the eight classes from cielo as from 2000.

Sure.

Speaker 4: So those are kind of taking care of themselves. If we need to sell them for capital, we certainly will. We have no problem with that. The collateral is in excellent shape.

So those are kind of taking care of themselves if we need to sell them for capital. We certainly will have no problem with that the collateral is in excellent shape.

But.

Speaker 4: We also have a $250 million revolver that's not drawn. You don't wanna draw the revolver for any reason other than a short-term reason, but so I can tell you I'm pretty, with a lighter securities book, I would be comfortable with 50 to 75 million, although I believe we generally think 100 million is the overnight minimum that we'll go home with. Yeah, that's helpful, thank you.

We also have a $250 million revolver, that's not drawn you don't want to draw the revolver.

For any reason other than a short term reason a button. So I can tell you I'm pretty well with a lighter securities book I would be comfortable with $50 million to $75 million. Although I believe we generally think of $100 million the overnight a minimum that will go home with.

Yeah. That's helpful. Thank you.

Rates, you know I mean I think.

Speaker 7: Rates, you know, I mean, they've obviously broken out, but, you know, volatility scares everybody. It scares the stock market, and it's looked to me just in the last week or so that the credit markets, that the fixed income credit markets are responding. In the last week, we don't see what you see on your screen, but it appeared that new issue triple A, 10-year triple A's widened by about 10 basis points.

Obviously broken out, but you know volatility scares everybody it scared the stock market and it looked to me just in the last week or so that the credit markets, but the fixed income credit markets are responding in the last week, we don't we don't see what you see on your screen.

But it appeared that new issue AAA 10 year AAA has widened by about 10 basis points on C. N B S. I talked to a couple of people. This week that did close in the last two or three weeks and they said thank God I'm glad I got my deal done because what I'm hearing now as you know.

Speaker 7: I talked to a couple people this week that did CLOs in the last two or three weeks and they said, thank God, I'm glad I got my deal done because what I'm hearing now is, you know.

Speaker 7: bankers are saying, you know, we're not taking anybody out. So I'm just curious, you hear, you hear all this chatter all day long, and has this, what impact has this

Bankers, who are saying you know we're not taking anybody out. So I'm. Just curious you here you hear all this chatter all day long and has this would impact has this.

Rapid move higher in rates it was volatility a month ago now its just wonder.

Speaker 7: rapid move higher in rates. It was volatility a month ago, now it's just one direction, right? So where do you see credit reacting to this rate move? Thank you.

One direction right, so where do you see credit reacting to this rate move thank you.

Speaker 4: I think the two things that are driving the investor wider on credit spreads in the long-term fixed-rate market, so that's the conduit, is the VIX.

I think the two things that are driving the investor wider on credit spreads in the long term fixed rate market. So that's the conduit.

Vault is a the VIX you know and it's been cut.

Speaker 4: Comfortably above 20 now for quite a while and it was in the 30s for a little while Those are pretty near panic levels of 30

Comfortably above 20, now for quite a while and it was in the 30 for a little while that was a pretty near panic levels of 30.

Speaker 4: So that naturally causes people either to not bid at all because there's too much volatility or else widen out their price. So that's one, it's just general volatility. The second, and by the way, there's plenty of reasons to be volatile too. You know, I can go through a litany of them at this point, but you know, it doesn't surprise me at all that people are a tad nervous when you think about what's going on and the virus is only one of those things on a list of about seven.

So that naturally causes people either to not bid at all because there's too much volatility or else widen out their price. So that's one they've just general volatility the second and by the way there's plenty of reasons to be both to Ah I can go through a litany of them at this point, but it doesn't surprise me at all the people.

All are a tad nervous.

When you think about what's going on in the virus is only one of those things on our list of about seven.

Speaker 4: So, and the second part is the CLO market. The CLO market is simply oversupplied.

So and the second part is the CLO market the CLO market is simply oversupplied.

Speaker 4: And there were too many LIBOR-based loans trying to be sold to a rather large investor base, but large in dollars, not large in names.

And there there were too many LIBOR based loans trying to be sold to a rather large investor base, but but large in dollar is not large in name there. So about five or six big accounts that if youre going to try to do it one $5 billion CLO youre going to need them in that transaction.

Speaker 4: uh... there's about five or six big accounts that if you're going to try to do it one-and-a-half billion dollars below you're going to need them in that transaction and if they're not there it's going to be a problem

And if they're not there it's gonna be a problem. So I think that they were inundated there were too many deals going on they couldn't catch up with them fast enough and so they kind of gravitated toward the apartment loans are the ones that have the highest highest degree of apartments in them, which is what you would expect and they they've driven levels wider I.

Speaker 4: So I think that they were inundated. There were too many deals going on. They couldn't catch up with them fast enough. And so they kind of gravitated toward the apartment loans, the ones that had the highest degree of apartments in them, which is what you would expect. And they've driven levels wider. I think there's a deal in the market today where the A-class is at 175 over.

There's a there's a deal in the market today, where the eight classes at 175 over we did a CLO in June where the a class executed at 120 over couple of years ago. There was a tight done at LIBOR plus 85 on an H class mhm and what's what's interesting the dynamic that's developed here in Alaska.

Speaker 4: We did a CLO in June where the A class executed at 120 over. A couple of years ago there was a type done at LibraPlus 85 on an A class. And what's interesting, the dynamic that's developed here in the last, just the last few months I would say, is that a lot of people wrote...

Last few months I would say is that.

A lot of people wrote a lot of apartment loans, because they are considered very safe and they probably are but they were writing them in low three hundreds on the whole loan side call. It LIBOR plus 325, and then you know they they go to the CLO market with their pool, when they get to about 83 or 84% leverage and then they they have.

Speaker 4: because they're considered very safe and they probably are but they were writing them in low 300s on the whole loan side call it Libra plus 320.

Speaker 4: And then they go to the CLO market with their pool and they get about 83% or 84% leverage. And then they have fees and they have library costs based on where the bonds trade. And for the most part, those multifamily deals were levering the equity with 84% leverage and across collateralized pool into about a 13%, 14% rate of return.

Fees and they have LIBOR costs based on where the bonds trade and for the most part those are multifamily deals we're levering the equity with 84% leverage in a cross collateralized pool into about a 13, 14% rate of return today at LIBOR plus 175, and then I don't think so.

Speaker 4: Today, at LIBOR plus 175, and I don't think the apartment deals are at 175, so let me put that down to 155, 160 maybe. Those transactions are levering the owner, the seller of those assets into about an eight and a half or a nine.

The apartment deals are at 175, So let me, let me put that down to $1 $55 60, maybe those transactions are levering the owner or the seller of those assets into a bottleneck and a half or a 9% rate a rate of return for for Bp's equity on apartments that might be okay.

Speaker 4: percent rate of returns for BP's equity on apartments, that might be okay. However, what I find fascinating in that market is if you buy the A-class in that transaction, which has about 50% subordination on every single loan in the pool and they're all apartments,

Hey, however, what I find fascinating and that market is if you buy the a class in that transaction, which has about 50% subordination on every single loan in the pool and they're all apartments, you can use 90% leverage on that which is I know that sounds high but keep in mind. The equity is at 84, So it's not.

Speaker 4: You can use 90% leverage on that, which is, I know that sounds high, but keep in mind the equity is at 84, so it's not that much higher. And they actually are levering, given a cost of funds of LIBOR plus 50, they're levering into a double-digit return. So the AAA portion is levering to a return much higher than the BP.

That one notch higher and they actually are levering given our cost of funds of LIBOR, plus 50, Theyre levering into a double digit return. So the AAA portion is levering too to a return much higher than the b piece at.

At 84% and that is a phenomenon probably should not last for very long and I think where these widening in spreads we will see some demand I mean, some originators backing up those spreads in the whole loan market from 325.

Speaker 4: at 84% leverage. And that is a phenomenon that probably should not last for very long. And I think with these widening in spreads, we'll see some demand, I mean some originators backing up those spreads in the hold-on market from 3.25%.

Speaker 7: Yeah, that's great, Collar. Thank you so much. I had not realized, but I heard this last week about that the CLO market is a mile deep, but, you know, maybe 100 yards wide. It's exactly what you were saying about the five or six guys. So thank you so much for the comments. And again, great, great, great quarter and wrap up on the year. Thank you. Sure.

Yeah, that's great color. Thank you so much I had not realized but I heard this last week about the CLO market as a mile deep, but you know maybe 100 yards wide. It's exactly what you were saying about the five or six guys. So thank you so much for the comments and again, great great great quarter and wrap up on the year. Thank you.

Sure.

We have reached the end of the question and answer session I will now turn the call back over to Brian Harris for closing remarks.

I'll just thank you everybody on a very interesting day in the markets I'm you know we.

Speaker 4: Just thank you everybody on a very interesting day in the markets. We are fortunate to be positioned not just to...

We are fortunate to be positioned not just to do well with a rising rate environment, but to do exceptionally well and I think so we haven't earned anything on that yet, but I think that we're about two so I look forward to talking to you all again in April and if you believe the pundits today there.

Speaker 4: do well with a rising rate environment but to do exceptionally well. And I think we haven't earned anything on that bet yet but I think that we're about to. So I look forward to talking to you all again in April and if you're to believe the pundits today there should be another 50 basis points on the Fed Funds Rate at that time.

Would be another 50 basis points on the fed funds rate at that time, so well look forward to it and see how we did talk to you soon thank you.

Speaker 4: So we'll look forward to it, see how we did. Talk to you soon, thank you.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Yeah.

Speaker 8: .

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Okay.

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