Q2 2022 Ladder Capital Corp Earnings Call
Good afternoon, and welcome to ladder Capital Corp earnings call for the second quarter of 2022 as a reminder, today's call is being recorded. This afternoon letter released its financial results for the quarter ended June 30th 2022.
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 do not undertake any obligation to update our forward looking statements or projections unless required by law.
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.
These measures are reconciled to GAAP figures in our supplemental presentation, which is available in Investor Relations section of our website.
At this time I'd like to turn the call over to ladders, President Pamela Mccormack.
Thank you and good evening, everyone for the second quarter of 2022 ladder generated distributable earnings of $43 $7 million, what 34 cents per share.
In June following five successive quarters of earnings and portfolio growth, we increased our quarterly dividend by 10% to 22 cents per share.
Rising rates continue to provide a strong tailwind to our earnings given our 4 billion dollar predominantly floating rate loan portfolio and large component of long term fixed rate unsecured bonds and our liability structure.
As Paul will discuss in more detail our earnings in the quarter were again supplemented by real estate sales with their assets continuing to sell at a significant premium to underappreciated book value in.
In the second quarter, we originated $371 million of loans, including 17 balance sheet loans totaling $365 million.
More than 40% of those loans were made to repeat borrowers.
77% of our second quarter originations were either multifamily or manufactured housing with our multifamily originations focused on newly constructed properties.
Our balance sheet loan portfolio continues to be primarily comprised of lightly transitional middle market loans with a weighted average loan to value of 68%.
Due to the significant loan payoffs, we receive and our recent focus on newly built multifamily assets, our hotel and retail concentration on the balance sheet loan portfolio ended the quarter at five and 6% respectively.
Further in July we received an early repayment of our largest hotel loan of $57 million, reducing our hotel exposure to less than 4%.
Our real estate portfolio continues to contribute meaningfully to distributable earnings by consistently producing double digit returns on equity.
Folio was primarily comprised of net lease properties with an investment grade tenant and is financed with long term non mark to market that.
Our securities portfolio ended the quarter with a balance of $617 million.
On the asset and liability from our balance sheet has never been stronger.
The credit quality of our portfolio is very solid and 84% of our capital structure is comprised of equity unsecured bonds and nonrecourse non mark to market that.
Approximately 50% of our assets are unencumbered with 76% of those assets being comprised of cash and readily financeable senior secured first mortgage loan.
Also in July .
Volatile market conditions, and tightening credit standards, we successfully extended upsized and reduce the cost of our revolving credit facility with our nine bank syndicate, which now stands at $324 million.
With $2 $9 billion of unencumbered assets strong liquidity, although one eight times adjusted leverage ratio and 80% of our loan book now comprised of post Covid origination we are well positioned to continue to grow earnings by taking advantage of attractive opportunities in our space.
In conclusion, our multi film the business model is working and we are very pleased with our positioning from a credit earnings and dividend perspective, as we head into the second half of the year.
With the wind at our back and a rising interest rate environment with that I'll turn the call over to Paul.
Thank you Pamela as discussed in the second quarter ladder generated distributable earnings of $43 7 million or <unk> 34 per share.
Our three segments continued to perform well during the second quarter.
Our $4 billion balance sheet loan portfolio is primarily floating rate and diverse in terms of collateral and geography during the second quarter loan origination activity outpaced payoffs as we added a net $161 million in balance sheet loans.
As Tom will discuss approximately 80% of our balance sheet loan portfolio was originated in the last 15 months with floor set at the time of origination.
For our interest income continues to rise from increases in rates.
This benefit is complemented by our liability structure of which over 50% is fixed rate, including $1 6 billion of unsecured corporate bonds with our nearest maturity in October of 2025.
Second quarter also included a $3 1 million reversal of previously recognized provision upon the successful resolution of a non accrual office alone in Delaware.
Our $1 billion real estate portfolio also continues to perform well and includes 158 net leased properties representing approximately two thirds of the segment.
Our net lease tenants are strong credits primarily investment grade rated that are committed to long term leases with an average remaining lease term of 10 years.
During the second quarter, we sold two properties a multifamily property in property in Florida, and a student housing property in Oklahoma, which produced a net gain of $15 million and were sold at an aggregate, 30% premium to on depreciated book value.
Turning to our securities portfolio as of June 30th or $617 million portfolio was 85% AAA rated 98% investment grade rated with a weighted average duration of approximately one year.
Moving to the right side of our balance sheet, our capital structure remains anchored by a conservative combination of unsecured corporate bonds nonrecourse, CLO and mortgage debt with a corporate credit rating one notch away from investment grade from two of the three rating agencies.
As of June 30, we had total liquidity of $483 million and our adjusted leverage ratio stood at one eight times.
As Pamela mentioned in July we successfully extended upsized and reduce the cost of our revolving credit facility.
The facility was extended for five years to July of 2027, Upsized, 22% from 266 million to $324 million.
And Furthermore, the interest rate was reduced to sulfur plus 250 basis points with further reductions upon achievement of investment grade ratings.
This upsize of our revolver as an additional tool to our financial flexibility that complements our large pool of unencumbered assets.
As of June 30th our unencumbered asset pool stood at $2 9 billion and 76% of the pool was comprised of first mortgage loans and cash.
During the quarter, we repurchased $6 million of our unsecured corporate bonds at an average price of 88 point.
6% of par.
Also during the second quarter, we repurchased 400000 shares of our common stock at a weighted average price of $10 and 11 and in July .
By our board of directors increased the authorization level for our share buyback program for $50 million.
Our underappreciated book value per share was $13.57 a quarter end, while GAAP book value per share was $11.84 based on $126 8 million shares outstanding from June 30th.
Finally, as Pamela discussed in the second quarter, we declared a 22 per share dividend, representing an increase of 10% which was paid on July 15th.
For more details on our second quarter operating results. Please refer to our earnings supplement which is available on our website as well as our 10-Q, which we expect to file tomorrow with that I'll now turn the call over to Brian .
Thank you Paul the second quarter was a continuation of what we've seen over the last five quarters. We produced strong earnings from different parts of our multi cylinder business model and benefited from our carefully constructed capital structure after correctly forecasting the federal reserve's hawkish stance to battle soaring inflation.
In our last call. We indicated that we felt the fed would have little choice, but to raise rates into a slowing economy and that ladder would benefit from aggressive rate hikes.
So far this year the fed has increased the federal funds rate by 225 basis points and is likely to continue to hike rates through year end.
Because our earnings are positively correlated to rising short term rates were experiencing a tailwind in our distributable earnings.
I'd like to point out one item that illustrates one component of our earnings momentum.
Over the last 12 months, our top line interest income has increased to $65 3 million in the second quarter of 'twenty two.
From $37 6 million in the second quarter of 'twenty. One however, our interest expense actually has fallen over the same period from $45 2 million in 2021 to $42 7 million in the second quarter of 2022.
This kind of operational efficiency is helping to drive our earnings and we were very pleased to report an after tax annualized return on average equity of 11, 3% in a very volatile second quarter.
We expect the bulk of our earnings in the third and fourth quarters to come from growing net interest margin from our loan and securities portfolio and net operating income from our real estate portfolio.
Our highly curated real estate holdings are expected to continue to deliver strong returns in the years ahead as cap rates rise, we expect to add to our real estate holdings over the next couple of years.
For the second half of the year, we expect the market volatility to continue as the market wrestles with the inflation versus recession question that central bankers are trying to manage it.
The fed has raised rates and slowed the U S economy, they've also strengthened the U S dollar making earnings more difficult for multinational companies.
Ladder does not own any financial investments outside of the United States. So we don't need to manage any exchange rates.
As we look through the third and fourth quarters, we have ladder on very firm footing with plenty of liquidity to deploy into a wide array of investment opportunities that invariably present themselves. After a rapid rise in interest rates like we've experienced this year.
We intend to take full advantage of market dislocations and feel very optimistic about our earnings in the quarters ahead as the fed cools. The U S economy, our decades of experience will guide us in our lending efforts staying focused on job one always protect the principal column.
I will now go to Q&A.
Thank you as he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate the line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up the handset.
Before pressing the star. He is our first question is from Steve Delaney with JMP Securities. Please proceed.
Yeah.
So on the great quarter and the progress on the balance sheet as always I think it's important that we look.
Look at your earnings and tried to at least identify.
The gain revenue because clients will always ask is that it's great that you have it but the 34 since it looks like the.
There were gains on real estate of about 12 cents. So let's call. It down to 22, but then you had some loss on your investment securities. It looks like about two cents so something in the poll with something in the 'twenty four 'twenty five cents as if we were to look at your earnings ex gains is that a number that you feel.
As is reasonable.
Yeah, I don't we didn't have any losses on securities. This quarter I think you might be looking at.
Our mark to market on our loans loans held for sale that really should be looked at offset by our hedging gains but.
Youre absolutely right. It was the sale of loans I guess not sure securities.
Some G&A to be net off those numbers.
You have a reversal of a provision when we resolve the nonaccrual loan at again effectively.
I think youre in the ballpark, Steve maybe slightly lower from a run rate.
Okay, well, that's that's very helpful. Thank you I will try to clarify that note and then I guess Brian .
This think cuts both ways on.
The interplay between interest rates and cap rates.
Im curious what obviously you mentioned on your real estate side and you've you're obviously still.
Finding some gains in your timing may have been earlier in the quarter before everything blew out light as it as it has.
But it sounds like you still think you will realize some in on the other hand, you may be opportunistic and if things get really crazy with cap rates in and buy more.
On your loan portfolio are you starting to see any signs that borrowers who have projects that are completed.
Reasonably completed in May could be considering an investment sale process are just deciding to extend their loan with you and ride this out and I guess the question is there could there be less turnover in your portfolio, which I would think would be something of a benefit on really good.
Almost fully developed properties.
Oh, yes.
Really we're not running into too many extensions right now because.
Portfolio as new if you remember it's broadly yes.
In the second quarter of 2021, so we're not even near the first maturity date on 80% of the portfolio that said I can speak generally and I think what's going on right now is.
Property that we purchased a long time ago in particular apartment buildings, you know those those rent increases have been attractive enough that they're keeping everybody in the game and regardless of rate it probably doesn't matter what.
What I have gotten into trouble or are the guys who bought the three inch four caps.
Month's end anticipating we're going to have a period of rehab and maybe a class C go into a class b.
Building and raising.
Raising rent 30, 40% I think that portion of the population.
When you throw in gas and.
Yeah, just similar inflation.
Dan shelter I think theres, a limit to how far you can push those rents.
There hasn't been a problem, but I, but I do think some of the equity numbers are not penciling out on the recent purchases where people will pay up AR and what really happened is when the fed lowered rates effectively 10 years financial assets insulate it and it's important to realize that when you're witnessing right now when you said everything in Blue Oh.
All you're seeing is the fed trying to slow down in the economy and the economy is slowing down so it's the opposite of them lowering rates and creating all kinds of liquidity and puffing up financial asset now you're saying the opposite but this this feels very much like a constructive situation it doesn't feel like that.
Can fix it it feels like you're exactly what they want to happen housing prices, we're getting into a little crazy if they really want us.
If it's going to slow for the more or the pace of decline in the economy is too fast they can easily yeah slowed things down and sell less mortgage backed securities and do lots of other things. So I think a pretty healthy economy. In this this this should be a shallow recession and it was very much under control at this point.
I think no question, they waited too long, but since since they've acted aggressively the 10 year has come down 80, some basis points from on top of 315, Oh excuse me $3 50, you know on June 14th two to where we are today at 267. So you got to give them the fed some props for that thank you.
But you don't want to I would just add also I know, we talked about how credit spreads got really wide, especially in the CLO business I.
I think that was a function of a technical one and I think we've talked about this we're all.
The two year was just galloping higher than LIBOR wasn't moving I know at the end of it.
The tier $2 86, and three month LIBOR that 78, so all the spread widening I think that use the law, which you know if I have done for technical reasons.
See too far below the 10 year, I think youre going to see a sharp reversal in a tightening in spreads here.
That's awesome color I think everybody will appreciate that thank you Brian .
Our next question is from Gs Renata <unk> with <unk>. Please proceed.
Thanks very much.
Ryan where are you seeing the best relative value you noted that as cap rates increase you think Gil.
A lot of it would be looking to buy buy more real estate in the past you've also bought back bonds and I think that some of the mortgage REIT bonds might be attractive.
Where would you look to incrementally allocate capital.
It is a target rich environment right now I. It is hard to find things that are not very attractive at this point.
Because a lot of the steam has been taken out of some of the prices. So I'll I'll go in order I think like short term when we purchased some of those bonds.
We had some corporate bonds outstanding.
Short bond that's due in 25 for US we were purchasing that between 91 to 92.
2027 was around 82, and the 2029 it was actually around 78.
There wasn't a post 2029 trading in the low seventies at one point and these were attributing at those discounts because anybody thinks that the companies are having a problem. That's just we're double b's a training.
With eight years of duration or seven or eight years left on them. So we need a little advantage of that however, the yields that we were looking at on all three of those were really around eight to nine.
And as I said, we had an 11 three.
Turning this here on on on assets in the quarter rather.
And I, we're not having any trouble hitting a double digit number across the board I think in the short term one of the easiest places to add although it will be in the.
The static CLO portfolios of a class of bonds.
Because they know what the collateral is it's not going to change and are I think we saw last week with a complete multifamily deal traded the AAA is priced at $2 75 over LIBOR.
LIBOR.
Okay.
75 <unk>.
Levers to about 24 return and it is 90% Levered. If you when you can lower that would be it feels like it but yeah.
Yeah, and those deals was about 85% levered. So I it it's clearly an attractive by the.
The other one that I like in particular, and where we've been trying to find him. We have won a few lately or the a S bonds from 2019.
Because they have the a class and some of them paying off or else. There's little left and then some of those cases, the subordination level is up in the seventies.
So they're effectively insulated from credit losses, but.
They are still under long because they have office buildings and a few hotels in some industrial properties, so, but where we're looking for that.
We really like them in the long term I would say the stretch senior business is going to come back in a lot of the deals that are getting done today are 65% leverage. It's just what is the right thing to do when you've got declining rents or or any form of a liquidity disruption.
But yeah, I think that when they come up for refi or another little hidden landmines and a lot of these deals is a LIBOR cap.
We're capturing a lot of them LIBOR moves so fast.
A lot of the caps for 2021, and a half or so.
If they come up for an extension and LIBOR is at 3% when they have to buy 1.5% cap you'd get extraordinarily expensive.
I think that theres going to be opportunities. There, we actually had a situation where we sold one of our properties and the cap that we had put in place just a year earlier was worth 20% of the gain that we took.
When we unwound the contract so a little wonky, but are there there are plenty of opportunities out there and I think.
Unfortunately, I think the least attractive one is the actual loan origination process, but I think that's going to correct itself very quickly because I do think these days I don't think you're going to see a classes on static or on a classes on a CLO deal at 275 billion.
I think that's going to stop them pretty hard.
Yeah.
So putting that in context with respect to ladder should we expect the company to be buying more securities should we expect the company to slow originations pivot that way, what what do you think disposals or ladders.
<unk> for the rest of the year, well I think we did flow origination a little bit inadvertently we didn't do it on purpose. What happened was rates moved up so quickly that some some transaction just fell out because the yields were falling apart on the on the equity side.
Others did get to the finish line, but at slightly lower prices, but no I think we're going to pick up the origination we believe spreads are going to tightened in the CLO.
And.
So we're pretty comfortable.
So we're going to move our spreads and origination and as far as securities I would love to add a lot of securities whether they'd be pricing in the last.
But I don't think we're gonna be able to.
Well I get 100 or $200 million, but I don't think we're going to be able to buy it.
And a large amount of AAA bonds that are yielding 21%.
Okay.
And in terms of the real estate portfolio do you anticipate continued sales for the rest of this year or steady state.
What what what what's realistic to expect.
Well things are first of all let ladder often if people want to buy something again, the 10 31, Mark sometimes right.
But we felt the rates were quite low and interest rates were very low so we.
In in places, especially in some of the high dollar per foot.
Well, but the way we look at really what we like cap rates wider when we're acquiring but we also have to have and accompanying low interest rate in order to create the rights.
To lever the return so I think we will be adding.
Because I think cap rates are just higher.
And I don't know whether that has to do I don't know if I. If the stretch senior is a lot of people are writing, 65% loans and we will too, but if you want to write a 75% loan yeah, we could do a 65% senior and a 10% Madison just pushed it together into a first mortgage and and I think we've got that kind of flexibility. So I think that's another real good opportunity it's not for everybody.
But it's going to be yet on the best credits I think we'll do that.
And then in terms of credit across the portfolio.
And Ah looming potential or probable recession, what's been the company's approach are buckling down in terms of asset management, and making sure that credits across the portfolio look good how how do you feel about the credit.
Standpoint.
I think you know well the credits in great shape, right now and I think you'd have to go back to 18 months to see like how we got there. We had originated some loans that were not in the multifamily area. Because we thought they were very attractive nobody wants to sell you know, making those loans and we got most of those into two CLO that we did last year.
And those are financed for a long time. So it's match funded in that regard around November we felt that multifamily was a yeah a lot of people thought the spread widening was a year end phenomenon and we did not believe that.
So we moved to.
Focus on new apartment buildings that were coming off construction loans, and we would take the lease up risk and I would say if you'd asked me. This question in March I would have told you that the two property types I'm pretty comfortable with our apartments, because housing prices, yeah, but the whole Daisy chained housing prices got great.
If people could have a desk payments purchased the property in New York.
Price what.
What happened is they stayed in their apartment.
The two graduating classes of college kids, because before nobody built in because of the pandemic. This year. They will graduate at so you had a lot of demand going on and then people who sold their homes because they were trading at such high prices. They also moved into apartments. So the apartment market is and what is very very attractive and our rent.
We'll go higher I think the lower end apartments, it's gonna be harder because the income is being zapped by gasoline prices food prices and rack.
The higher end, though I think there's a lot of room, where people can afford those things and even in the senior housing areas. The cost of living adjustment is gonna be bear high this year and most of those cost of living adjustments and social security can be paas circumstance right.
So how are we preparing for it when we started preparing for it last November when we move to newer a multifamily.
Multifamily today, we see less proceeds because rates are higher and but we're very comfortable and as Pamela mentioned, we had three pay offs.
In the end of the quarter and the first week of July where we had a modified the hotel loan for $57 million and that paid off a year early it was not levered and we had all of our office building, which had been a defaulted loan that we had been managing and we wound up reversing three and a half million there and then in addition to that.
Got to pay off on a mall, which was.
A $28 million that was also unlevered. So we took a 112.
Well, a couple of weeks and all that.
Little bit on where we think it's readily replaceable.
We want you.
Oh assets.
Okay.
Thank you yeah.
Yes.
Our next question is from Ricardo Chinchilla with Deutsche Bank. Please proceed.
Hey, guys. Thanks for taking the question I was wondering if you could comment on you know.
How you feel.
Your liquidity position is for a recession at this point in time and you know try to compare your position and your strategy.
These natural recession versus the prior recession, and maybe you know what policies have you implemented to BP barrel. What lessons did you learn from the last recession that you are thinking about you know applying into these nasty recession, particularly when looking for opportunities where to you know make incremental.
Gains.
And he was actually the last recession, you're talking about.
The big recession last recession, 2000, and Nate maybe.
2008, and 2008, where I'll call it the great recession, where effectively residential homes were over levered.
We were I was running the global commercial real estate group at UBS.
And my team and I had been backing down the portfolio for a year and a half at that point.
So we when we left U B S.
Left around June of 2008 were actually up close to $200 million and so and that wasn't because we were making that much because we were selling everything so.
Telegraph recession I thought.
They didn't really anybody you.
You saw first pay defaults on subprime mortgage isn't area to 20%.
Hum.
I always question the wisdom of making loans to individuals are the only thing you didn't know about them is they don't usually pay their bills.
So we we avoided that and we.
Got out of that pretty clean for the most part I Wouldnt say old state certainly they were.
Just buying things in bulk and securitizing them.
And so it was mostly from residential mortgage problem I think so that when we set up later.
And the team and I left and the team that I Love quick set up the company through private equity as they don't suddenly went public so there won't be any of the individuals at ladder with me in 2008 at that time as far as going into this recession.
We are very low levered relatively.
We are one notch below investment grade at two of the three rating agencies.
Long term goal.
People, who know what we've been saying that for.
Oh, Hey, here's yourself getting laughed that a lot of years ago, not getting laughed that anymore.
So we have plenty of cash, we just extended and upsized the revolver.
The revolver to 324 million online team did a great job on that.
And we have lots of cash and we have great access to the corporate bond market and I would just point out that we have on.
The differentiating features of bladder because we have $1 6 billion hours and corporate bonds outstanding none share due until first one.
The bulk of them are not due until 2025 26.
29, so and the rate.
The $1 3 billion. That's due in 27 and 29 is on average about four 5% fixed so as LIBOR goes higher and we're now adding loans at six and a half and 7%.
The bottom line, because we're still paying for.
Gordon a four 5% on that $1 3 billion of corporate bonds and that's really the operating leverage we keep talking about and it's showing up I mentioned in my.
In my comments, you know what has gone on with the top line interest income line versus our interest expense. So I think we're well positioned as anyone and we do believe there's going to be a mild recession again.
Fed pause that he did this on purpose and Oh.
It was very expensive to hire people you couldn't get enough people housing prices were out of control gasoline was flying and so they wanted to slow the economy down in and I know that a lot of people haven't seen a recession like this but this is a little bit.
And it's not something to be afraid of this.
This is not an over leveraged finance.
Situation, where there's I think China is having a 2008 style downturn in their real estate sector.
Sector.
I'd say, there's going to be a relatively shallow recession in a quick recovery and I don't really think it's a great idea to have zero interest rate for 10 years. So hopefully we won't revisit that again.
Perfect that was very helpful. Thank you. So much you are thinking the question sure.
Our next question is from Eric Hagen with B T. I G. Please proceed.
Hey, Thanks, Good afternoon, guys hope you're well so for for loans that are maturing this year.
Some sponsors that have typically relied on financing from the MBS market or an asset sale.
So in cases, where those options are either unattractive are uneconomical. What do you think is the source of take out if you will.
And those kinds of situations. Thanks.
Well, if it's a C. L O I think the issue or is going to be very.
Holidayed oven and modifying the terms.
Keeping it going but to the extent that it's on on any line or if the loan is due at bank I think the banks, especially with the regulators are going to be less tolerant.
And so as a result of that I think the for sale sign will go up on the property or else as I mentioned earlier that stretch senior concept, whereas the other guys can't say I can't really refinance the loan I had even though I didn't do anything wrong, what rents are doing what they're supposed to be doing but interest rates such as eclipse all of the income we've gained taxes in certain places are going higher.
And so it's a lot of the effort on the part of the equity sponsor has been for naught.
Whereas I do think from the lenders perspective, you're going to have a situation, which I would think you know when you are cap rates in the sixes and Sevens. This was more normal.
And and there's less leverage and people who can meet their <unk>.
Maturity date with the full balance Mike very well wind up in a in a.
A first mortgage with a mezz or as I, often kind of called.
Call that a stretch senior and and those are those are attractive.
Cause it isn't like that the properties are falling out of bed is value, there's simply drifting down because cap rates are going up because interest rates have moved but once interest rates stop climbing the values tends to stabilize our we're pretty quickly.
And with the dollar being very strong I think there's a whole lot of international interest to that that might make this a very interesting.
Scenario going forward, we're pretty we like what we see coming here. It it may be a little difficult for some of the big guys.
Capitalized, but the debt guys should be fun.
That's really interesting perspective, thank you.
And the net lease portfolio can you discuss how well masks the underlying lease term is with the mortgage financing that you have against it.
And does that have any bearing I mean, the maxon.
Have any bearing on the assets that you choose to sell and then in cases, where there's maybe a more meaningful mismatch in term how do you think investors should approach the value that they're getting there.
Well, it's a big portfolio.
Triple property, so, but I will say that for instance, I know that we have for Bj's wholesale clubs and we've owned them for 10 years and there is C. N B S deals and they're open to prepayment without penalty in September .
So that's about $45 million worth of mortgages that have been out there for 10 years I believe even at higher interest rates given the fact that in those 10 years Bj's wholesale club with a private company to a public company.
The pandemic didn't hurt them and so the cap rates have really collapsed there and so we've got a reasonable gain there if we want to follow them. However, we also have a fortunate scenario that if we refinance them, we will probably refinance into higher proceeds and do a cash out refinance and the cash flows are.
Excellent and then the lease terms are 10 years left on the average term I'd say the average lease term is 10 years. So we're pretty comfortable with those assets and we can do either with them. Once we put them into some other C. M. B S deal, we can't really sell them because the prepayment penalty is too high although the loans are assumable.
So it's a little hard to just to talk generally we don't usually sell things if there's large prepayment penalties or if we do we asked the buyer to pay the prepayment penalty and for the most part they've been accommodating that.
So we don't have a lot of leverage in that portfolio and the reason most buyers didn't pay that prepayment penalty because they're able to borrow more than the debt. We put on those assets. So we like that portfolio, we've been selling it will always sell it if it feels like the price is right, but we're happy to hold it forever.
We don't think that we have assets and tenants.
We actually pay very close attention to dollars per foot are in case, we get the thing back make it so.
Overall, we've been selling here and there, but not at all a concern we think are filled with option with five to six years left on the mortgages, where we're not talking about the prepayment penalty is simply too high although going down as rates rise. So are the real estate book has ample games in it I think we've we've taken.
A few of them at this point.
When people are buying cap rates very tightened the range and ask themselves at very low interest rates I think you have to have the system sometimes.
I, sometimes say I love, our real estate assets, but it's like the kids going off to college, you you're going to Miss them, but you have to go and.
And and that's the way we approach it.
That's very interesting. Thank you very much appreciate it.
Okay.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Matthew Howlett with B Riley. Please proceed.
Thanks for taking my question.
Yeah, Brian on the you know last quarter, you talked about the four since impacted library 150 at the end of June .
Yeah. We're we're we're you know took close to two and a half can you just talk a little bit about the cadence on what to expect in third and fourth quarter given the fed hike. This week and then were probably maybe 50 bps.
September .
Yeah, I mean last quarter in our last call I think we were we're talking it's funny, we mentioned I think our estimates where the fed raised.
And we kind of talk about the fed funds rate and LIBOR as if there's the same so forgive me there, but when they do track together and so we no one thought I think at the time in April when we were talking that the fed would raise rates 200 basis points by year end, we did.
However, we did not think they would do it before the end of the next quarter.
And so they they did that all very quickly. These 275 really there's been a little bit of a surprise I'm not surprised in the last week, but certainly from the April perspective.
Paolo.
On a gross basis one.
100 basis points, given where we are with our portfolio would probably add 16 cents a share and a 200 basis points would have 36 cents a share growth. So I always knocked off about 15% of that for expenses.
So at 36 cents, maybe call it 28 or 29 cents a share.
And the other part of that was that we had an estimate of what would pay off going into that and the second part was we had and that's what we would originate going into that also I think your origination part of that conversation has been a little bit slow, but I don't think it's I don't think it's a problem I think it's just delayed.
Because there are transactions that we're working on right now that have been going on for a while but you know the loan proceeds were just not as high as they were you know two three months ago. So there was some price negotiation that's going on now.
So I'm pretty comfortable that the market is a little rate shock because it moves so quickly however, I'm relatively certain through many years of experience at the commercial real estate market will do just fine with rates at.
6% I don't think that's going to be a problem. It just takes a little while for those rates to set and so I do anticipate the fed and I think that that will keep raising rates I think they're probably going to get to around 3% by the end of the year.
Yeah, I would expect our our topline interest income to keep our eyes and as you know our fixed rate billion six does not rise with it. So it's just additive and Theres a lot of operating leverage as a result of that.
Well, we we haven't pick up a little.
Gotcha.
Glenn are you to keep raising the dividend.
Obviously, you've covered the dividend next real estate gains from the real estate sales this quarter and I know, there's obviously as you know.
Going into what you think will be a potentially soft plenty, but a minor recession, how much do you want to you know.
Raised the dividend.
Oh, I love raising the dividend one of the biggest shareholder friendly company, However, and Paul you can chime in here or Pamela, but I'm pretty sure. We're covering the dividend now a lot of interest and expect a golfer and again in the third and fourth quarters and unless the fed starts cutting rates are we stopped originating loans I don't see that ending so I see.
We've got an attractive runway here and I will never get tired of raising the dividend as long as the funds are available and I think we've really built a machine right now that has the ability.
People say what are you gonna raise the dividend to I say, what do you tell me where the fed is going.
And you know what all the confidence in the world and our origination machine.
The machine as well as our credit standards. So we will get that right and I think the world is simply less liquid than it used to be and access benefits lenders and I think we're one of them. So I'm very optimistic about the quarters ahead here.
And then lastly, just whats the update on the investment grade I mean.
I'm, a little surprised to hear the bonds you bunker opinion that much of a discount when you or not.
Two away from investment grade it just sounds.
It seems ridiculous to me, but where are you in terms of the rating agencies and I know you said the line if he could go down if you get the upgrade just what how important that is T. T to you and where how close are we.
I won't speak on behalf of rating agencies.
I'll speak on behalf of my opinion.
Yeah, we have some general guidelines as to how how rating agencies and they they have different guidelines, but we generally understand how they look at it.
But you know that's a so we don't think we're too far away from that if we wanted to do it rates got too high for us to attempt to get that done but.
Instead of that being a problem when it isn't it too into an opportunity and we acquired some of our bonds back but.
The rate rating agencies don't stand still some of them will take a look at what they think or whatever recession is that's coming but you know given that are 80% of our asset.
A lot of pay offs. After the pandemic started because we had very high floors and we had very good credits when the fed lowered rates, we got paid off more than most so I think it might remember wasn't that long ago, we were holding $2 billion in cash and so we simply move that $2 billion into the loan category. We're only levered one eight times.
So we are going to maintain rational leverage in and hopefully allow us to have the option of making a run at going to an investment grade level, whether it was an issue us, but you know that.
A lot of things have to fall into place there none of them have promise, but we feel pretty good about it. We we we've studied this ad-nauseam and and we understand where we have to be as long as the goalposts don't move too much but as far as the.
Bonds, just getting down in trading that low.
That was indiscriminate selling and.
We were not singled out as one of the bad one one of the good ones as they work their way.
So everything as high yields sold off as this coffee.
The recession took hold which surprisingly because so much of the high yield complex was energy related.
A lot of it was being caused by energy prices, but.
Well I'll never figure out what makes.
Yes.
So things like rather than fight was it all just.
Tried to take advantage of it as a as it presents itself.
You know when we see yields in the eights and nines on our own paper I E. We can be eight or nine or are we pretty easily. So I can make a case for not buying them back but.
Given that we're uniquely positioned to take a 20 point gain.
We buy the bond, which no one else can do because they'd have to wait for the principals come to eliminate in seven or eight years, sometimes that's a little tempting.
Oh by the way one of the unique features of bladder and that we we have that ability to go buy a lot of our debt back in the open market at deep discounts if you're on a repo line you don't have that opportunity.
And we.
Yeah.
I mean, we will see the peers, but I doubt many many of them bought back there are you know, they're good but I'd say that are there some of the securitization debt I'm glad to see ladder doing and I you know my message to the board would be key.
Are you buying back both debt and stock when it's you know what is there for you I think that's one of the benefits of being internally managed.
Thank you.
We try to always buy them, both because we don't want bond investor.
I'm Gonna want equity investors thinking where we're just taking care of the bond guys and we don't want both investors thinking we just buy stock back but in this case given the the selloff that took place and it was the worst half year in 40 years.
And in the stock market, so that presents great opportunities and we have plenty of cats. So we can buy a lot.
Spent a little bit, but we were doing very well in the overall portfolio, but if those opportunities present themselves. You'll you should expect us to wait in there and and that's I also want to point out during the pandemic when our bond sold off Oh.
We bought them too I think we bought about 100.
And that goes with a 27 that are out there now that wasn't there used to be 750 of them out there now there's 650. So those are those are very nice instruments to have in the open market and if it's if the overall market get shaky and you're in good shape and we always try to be on the front foot in my as I said today, we are on the front foot.
And we're not against buying other people's instruments either.
When the whole sector gets sold off.
And the reason is I would say.
What will step in there and take advantage of it.
That's what I need because we got a dividend in the low sevens, we've got yields on our bonds in the sevens.
So should we buy them back yeah, they're pretty cheap but.
We can make so much more by investing money right now and I think that's how we best serve our shareholders.
Yeah.
Just one follow up on I mean, do you think with some of the bigger reads could have problems mortgage rates you know, it's like a hotel or big office exposure and it could be an opportunity for you guys to step in somewhere.
Oh.
I don't know I don't pay too much attention to other companies, but you know the sector is the office market will have to see where it goes.
I I'm generally optimistic I think that come September I think the country is getting one more summer in.
Even though most people are acting like Theres nothing wrong out there no one's in the office I think that in the fall the office market will come back I think the hotel. So just doing fine right now the only reason you're not seeing a lot of financing there is because they don't have 12 months of a trailing 12 month cash.
Quechuas, but once they do I think hotels are going to should be just fine.
Thanks, a lot thanks for answering my questions.
Sure.
We have reached the end of our question and answer session I will turn it back to Brian Harris for closing comments.
Don't have too much to say other than yeah work.
Okay. So on our plan our plan has come full circle at this point and.
They were supposed to do and we're set up to take advantage of it and our rates are higher than that benefit slender and we really do look forward to the year ahead that we are good signs for so thanks for staying with us and listening to us so well.
Okay.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Okay.
[music].
Right.
Yes.
[music].
Yeah.
[music].
Yeah.
[music].
Yes.
Yes.
Yeah.
[music].