Q2 2023 Ladder Capital Corp Earnings Call
Good afternoon, and welcome to ladder Capital Corp, 's earnings call for the second quarter of 2023 as a reminder, today's call is being recorded.
This afternoon lot of released its financial results for the quarter ended June 32023.
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.
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 the Investor Relations section of our website.
We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may site on today's call at this time I'd like to turn the call over to ladders, President Pamela Mccormack.
Good afternoon.
We are pleased to report that the second quarter of 2023 that are generated distributable earnings of $41 $5 million or 33 per share, reflecting an after tax return on equity of 10, 8%.
Our dividend remains well covered from net interest margin and net rental income.
As of June 30th lateral remain flushed with liquidity and modestly levered with an adjusted leverage ratio of one seven times.
As of quarter end ladder had $777 million or 14% of our assets in cash and cash equivalents with $1 $1 billion of same day liquidity, including our undrawn unsecured revolver.
In addition over 50% of our assets are unencumbered and 84% of these unencumbered assets comprised of first mortgage loan investment grade securities and cash and cash equivalents.
<unk> continues to maintain a considerable surplus of unencumbered assets over the amount required by our covenant currently totaling over $1 billion.
This cushion provides us with a great deal of flexibility and enhances our liquidity profile as the majority of our unencumbered assets are readily financeable.
As of June 30th Ladders balance sheet portfolio totaled $3 $5 billion with a weighted average coupon of 9.15%.
We continue to have modest future funding commitments of $272 million with more than half of his commitment being contingent upon accretive good news leasing.
Repayments in the second quarter totaled $309 million, both exceeding the amount of quarterly repayments, we received in any quarter over the last year and more than doubling the amount of loan payoffs. We received in the first quarter.
During the second quarter, we added $35 million alone on a mixed use property to nonaccrual.
The borrow only after that the basis of $55 million.
Which is comprised of 174 newly constructed multifamily units and three floors of office and commercial space in Pittsburgh, Pennsylvania.
We're pursuing our remedies for the asset which included a recent change in management at the property that has already led to an improvement in occupancy and net cash flow.
Over 80% of the property's revenue is generated from the multifamily units current occupancy supports an in place debt yield of six 2%, which is forecasted to increase to 7% before we anticipate taking title to the asset later this year as the multifamily units are leased to stabilization.
We did not take any specific impairments in the quarter and Paul will cover the increase in our general seasonal reserve, which reflects our current view of evolving macro market conditions.
We are continuing to proactively monitor our loan portfolio, including our office loans, which comprised 16% of total assets.
As previously disclosed over one third of our office loans are concentrated in two assets in South, Florida, which continue to perform well.
With robust liquidity and a highly experienced origination team in place.
We're well positioned to transact when activity resumes in the market.
In the meantime, we've begun to take advantage of opportunities to add to our securities portfolio by acquiring additional AAA CLO securities that are currently offering highly attractive returns.
Our real estate portfolio also continues to contribute nicely to distributable earnings by generating $16 million of net rental income this quarter.
Over 70% or $653 million of the larger portfolio is comprised of 156 net lease properties.
These properties are leased to strong necessity based tenants.
69% of which are investment grade with a weighted average lease term of over nine years.
The upcoming mortgage maturities on the properties have over three years remaining on average and are very manageable with no debt coming due in 2023, and only approximately 35% of the portfolio, having mortgage maturities before 2026.
The financing on our net lease portfolio has a weighted average in place coupon of 554%, which compares favorably to the current 10 year. So for swap rate of 360, implying a spread of 190 <unk>.
Ultimately, giving us comfort on the feasibility of refinancing.
We continue to like the stable long term cash flows that this long term lease segment provides the ladder.
And we view it as a favorable complement to our short term bridge lending business.
We also think theres upside that can be achieved through extensions at lease maturity by achieving higher lease rates for longer terms.
Which we have already had prior success with including as recently as December of 2022 when ladder executed early five year renewal options for three dollar general stores with less than five years of lease term remaining.
Our corporate credit rating was reaffirmed during the quarter by two of the three rating agencies.
At one notch below investment grade.
We believe our large unencumbered asset pool stable use of modest leverage.
And diverse liability structure comprised of 78% unsecured and nonrecourse non mark to market that allowed us to maintain our rating the highest in the space. Despite the disrupted commercial real estate market.
In conclusion, our dividend is well covered as we await the opportunities we expect the market to present.
We benefit from strong asset diversity and conservative advance rates on our loans and believe we are well positioned to take advantage of the dislocation in our sector with meaningful liquidity and modest leverage.
With that I'll turn the call over to Paul.
Thank you Pavel in the second quarter ladders, a diverse business model performed well generating distributable earnings of $41 5 million or 33 cents per share.
By strong net interest margin and net operating income that benefits from our liability structure of which.
Approximately 50% of surgeries.
Are primarily floating rate $3 $5 billion balance sheet loan portfolio decreased in the second quarter.
$2 million to $309 million of proceeds received from loan paydown offset by $13 million of funding on existing commitments.
Proceeds from the Paydowns and heated 13th full loan pay offs with a $25 million average loan size. The payoffs were generated from property sales and refinancings through agencies regional banks credit unions and insurance companies, demonstrating liquidity and ladders origination strategy with a middle market focused on smaller average loan.
Yes.
In the second quarter, we increased our Stifel reserved to $32 million driven by the current market outlook. We continue to believe the credit of our loan portfolio benefits from overall diversity and collateral type.
Thiago fee and granularity.
With an average loan size of $26 million and limited exposure to any single sponsor or a market.
As Tom will discuss we added one new loan to non accrual of $35 million loan on a mixed use assets for which we are pursuing remedies via foreclosure.
Our $900 million real estate segment continues to perform well and as Tom will discuss to provide stable net operating income for them.
As of June 30th the carrying value of our securities portfolio was $458 million and was comprised of 82% AAA rated and 99% investment grade rated securities.
In the second quarter, we received $75 million of pay downs on these positions.
Their seniority and short dated maturity continues to demonstrate steady amortization.
Furthermore, we paid down $150 million of securities related debt during the quarter saving on interest expense and Delevering the company.
As of June 30, we had $1 1 billion of same day liquidity, our adjusted leverage ratio was one seven times.
This liquidity represents cash and cash equivalents of $777 million, plus our undrawn undrawn corporate revolver capacity of $324 million with a maturity in 2027.
Our secured corporate bonds remain an anchor to our capital structure with $1 6 billion outstanding for 40% of our debt with a weighted average maturity of four three years at an attractive fixed rate cost of capital of four 7% average coupon.
In the second quarter, we repurchased $3 1 million in principal of our unsecured bonds at 84, 3% of par.
Generating $5 million of gains from the retirement of debt.
And in 2023 through June 30, we have repurchased $62 million in principle of unsecured bonds at a three 6% of par generating $9 7 million of gains from you were talking about.
As of June 30, as our unencumbered asset pool stood at $2 9 billion or over 52% of our balance sheet.
75% of the southern comfort I suppose comprises the first marshalls and cash and cash equivalents.
We believe our liquidity position and large pool of high quality unencumbered assets continues to provide a lot of with strong financial flexibility and as probably most of the stuff is reflected in our corporate credit rating one notch from from investment grade from two or three rating agencies.
Year to date, we've repurchased $2 $3 million of our common stock at a weighted average price of $9.14.
We did not purchase any shares in the second quarter of 2023.
Share buyback authorization of $50 million up $44 million of remaining capacity as of June 32023.
Ladders underappreciated book value per share was $13.72 a quarter end based on $126 9 million shares outstanding as of June 30.
Finally.
Our dividend remains well covered and in the second quarter latter declared 23 per share dividend, which was paid on July 17 2023.
For more details on our second quarter operating results.
Please refer to our earnings supplement, which was which is available on our website as well as our 10-Q.
With that I will turn the call over to Brian .
Thanks, Paul.
Given the market turbulence experienced since a few banks failed in March I can't help but admire ladders performance over the first half of the year.
Reported double digit returns on equity in both quarters of 2023, using modest leverage and maintaining high levels of short term liquidity.
It appears that the fed is nearing the end of their aggressive hiking cycle and they may even pull off the sought after soft landing in the U S economy.
As a result of this fresh optimism the capital markets do seem to be slowing a bit, albeit rather slowly.
At the end of May latter began investing in AAA rated securities from new issue CLO that were offered in the market with very little supply.
We began investing small amounts this quarter and expect our investments in this segment to pick up quite a bit over the rest of 2023.
These investments in high quality AAA securities are delivering some of the highest returns in decades, sometimes yielding unlevered returns over 8% and levered returns in excess of 20%.
As we assess the impact of the regional banks contracted in size and how higher rates might impact refinancing of loans. We were pleased to see over $440 million of loan payoffs in the first half of the year.
These payoffs really enhanced our liquidity since we are so modestly levered.
Because he builds maturing in under 90 days are now providing yields in excess of five 3%, which ladder has taken advantage of with portions of our ample liquidity.
We can afford to be selective when pricing new loan opportunities or investing in securities.
We believe our crossover understanding of relative value in the CRE markets will enable ladder to continue delivering attractive returns without sacrificing safety or using too much leverage.
Because we have so much liquidity in markets that are paying up for liquidity, we like our prospects going forward.
Recall that last quarter, we repurchased $59 million of our corporate unsecured debt across three outstanding issues.
Over the last 90 days each of those corporate unsecured issuance have appreciated in price by five to nine points. We believe our use of this financing structure has served our shareholders well during the fed hiking cycle.
No earnings call in 2023 would be complete if you didn't mention the office market. So far returns on equity are being negatively impacted by higher short term rates, but most sponsors if they have capital available to them are trying to protect their investments by contributing additional capital required by lenders to extend maturity.
Good.
We anticipate challenges in the syndicated equity structure, where the promote to the GP has become negligible and also getting loan secured by large buildings and cities with high crime rates in other social problems I would note. However that we do see improvements in some of the more difficult markets like San Francisco, where it seems like.
Our latest AI Tech brands is centered in the Hayes Valley neighborhood away from the downtown market.
It is a start but they have a long way to go still.
As for other property types. It seems hotels are doing well in drive to markets in multifamily asset values are leveling off in some southeast markets, but we don't anticipate rents falling instead, we're seeing operating costs rising, particularly taxes and insurance and this is impacting ROE is in the space.
As cap rates have widened with higher rates.
Wrapping up we believe there will be an increase in foreclosures in the industry as higher rates and operating costs are biting into ROE is in commercial real estate, but we believe in many cases lenders or note buyers will take titled two properties at a basis that is far lower than the basis of the original sponsors investment.
We also believe there may be some surprising gains down the road for those who are patient, especially if interest rates fall in the years ahead and capital markets continue to recover after the regional banking issue settled down.
We look forward to the second half of the year entering with low leverage and robust liquidity now.
Now, let's take some questions.
Thank you.
And gentlemen at this time, we will be conducting a question and answer session.
Anyone who wishes to ask a question.
Star and one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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One moment, please while we poll for questions.
Our first question comes from the line of Sada Broadcom, but BD Inc. Please go ahead.
Hey, everyone. Thanks for taking the question. So in the prepared remarks, you spoke to the refi sources for your repayments you mentioned property sales and even regional banks and credit unions and but I was also.
Hoping just given ladders depth and breadth in the securities market.
If you were seeing signs of the conduit market and the FASB market opening up like we've been starting to hear from some of your peers and has that been supporting your borrowers and their ability to refinance.
And do you think you could speak to whether.
They are willing to lock in a higher fixed rate now versus dealing with our current floating rate debt or even handing the keys back in some cases I'm, just hoping you could kind of speak to that.
Sure. Thanks for the question Sarah This is Brian .
The conduit business is doing better there have been a few deals it's still largely confined to five year loans and I think that's largely because the five year.
Index, where youre trading off of the five years is higher in rates in the tenure so.
That business is picking up I think you saw.
Reds tightened quite a bit in the last couple of months really after the after the banking issues as of March April was a bit of a mess, but may and June things were tightening and that's really evidenced if you remember our high yield purchases of our own bonds. They came in five to nine points.
About 90 days.
We also began investing in CLO AAA has recently starting at $2 90 over which levered into a mid twenties return in a matter of two weeks. They are down to $2 35 now in the marketplace and this is all.
Beneficial for refinance.
I think that we are seeing I think I said in my prepared remarks slow slow start with a ways to go but.
So as we think is trade by appointment I don't really think the loans rates are coming to market with the right I think the market is setting the rate wherever they can sell triple A's and double as in single aisle and that's probably another healthy sign so.
The regional bank, so called crisis, I think we all found out it was a little more contained than it's been it seems possibly might be going forward, but a lot of the regional banks were making loans and in fact, we were refinanced by <unk>.
Not a typo here Silicon Valley Bank took us out of one of our loans.
They funded a refi so the regional banks are going to be a little bit challenged on income because theyre going to have to pay for higher deposits because of the deposit flight that was witnessed into treasuries.
They are still in the lending business and in fact several of them I think were pretty aggressive in their lending.
There it is improving.
I hesitate to say it's.
It doesn't have a long way to go still but smaller loans are getting done banks do lend money and when people say, well theyre going to contract and get smaller the earnings model.
It doesn't just entail paying higher rates for deposits it entails making more loans at higher rates also so I think theyre going to get squeezed a little bit on profit, but companies like jpmorgan.
Wells are not really being squeezed nearly as much if that if that answers here.
Yeah, Yeah. That's helpful. Thank you.
And just on the subject of investing in Securities you mentioned that youll be looking to ramp that up in the second half.
But we've also been hearing about high coupon deals that are available in the traditional floating rate senior loan market. So I was just hoping you could speak to the loan origination environment that you've been seeing and why you didn't bite on anything.
During the quarter.
Sure I think.
Similar to what I said last quarter.
Not having necessarily trouble with somebody who wants to borrow money at the rates that we want to charge for it where we're having trouble is the principal column.
A lot of refinances are simply over Levered and if they don't have capital to commit to delever their situation. They are at risk of losing their property.
There is lending is picking up we do have some quotes outstanding we quoted several loans last quarter, but we were missing because our loan amounts were too low and I think I also mentioned that we were being beaten by companies I've never heard of so kind of speaking to the emergence of private credit in the sector.
Today, I think we're going to start writing loans here, how can I can see a sense of siri.
Seriousness.
The in the quotes that are going out in the questions we're getting back.
I don't think we've changed much on the right side, even though spreads have tightened a little bit, but I do sense that people are waking up and realizing they are just not going to be able to borrow as much as they used to given where the 500 plus basis point move in short term rates.
Great. Thanks on the security side by the way I think you mentioned that.
We.
We've been hesitating, there probably for about a year, because we thought that the feds withdrawal from their purchasing program.
Program was going to impact spreads rather dramatically and.
We pulled the trigger for the first time in a while on a new issue.
<unk>.
When the prevailing rate that we walked away with on the AAA CLO paper was over 8%.
And I would just did not think it would go wider and less so we started buying in a week that spread went from $2 90 to $2 50, and the week after that Theyre. Currently there is a new deal in the market right now at $2 35, So again going along with what we saw in high yield what we're seeing in mortgage spreads and securities I think that will follow also into the loan market.
As the year as we get into Europe .
Hello, Thank you.
Our next question comes from the line of Stephen Laws with Raymond James. Please go ahead.
Hi, good afternoon.
Brian I'll, let you follow up really on Sarah's second question just around the loans.
Have you looked or considered doing some mezz loans meso originations kind of taken advantage of what people will pay.
For that capital by some more time, you probably get good assets. Good valuations you know how do you think about that as far as fitting into ladder.
Along the same lines is there anything interesting on the real estate front.
Consider growing that piece of the portfolio.
Sure.
Almost in opposite to.
What we said years ago, when I think I mentioned that when interest revenue borrowing money at 3% if you need to get a mezzanine loan you probably over leveraged so we pretty much stop writing mezzanine loans. The opposite is true today. This is a market that is ripe for mezzanine lending.
Obviously in special situations. So we are actually toying around with the possibility of refinancing floating rate loans with a fixed rate component.
Because of how much lower the tenure is now the conduit market is not in the tenure business just yet, but I think it will be.
And if we can get a sponsor into a 10 year loan on a pretty safe credit then that frees up a lot of cash flow and the rate for the higher rate mezzanine. So I think we are kind of looking to parse that.
It's a staple those two together and I don't know that its necessarily refinancing our positions as opposed to others that might be we've historically not really written mezzanine loans over the top of somebody else's senior. So my guess is if we were to refinance somebody else's loan.
It would come with a complete refi, where we would part we would break the refi into a senior 10 year fixed rate and a mezzanine loan that we would hope behind it.
Second question I think you said was a real estate, it's a very good times I think too.
Purchased certain types of real estate.
In particular, I think we're looking at multifamily because.
A lot of multifamily was purchased in 2021, and 'twenty, two and because of the rate movement in cap rate movement that went with it.
They probably have too much too high of a basis, so that creates capital tension within the structure.
<unk>.
Yes.
Remember, we started writing two year fixed rate loans to avoid the cap cost of floating rate loans.
And almost all of those loans are now fixed rate coming up for refinance, but they're mostly on brand new properties.
Comfortable.
Owning apartments.
In a housing shortage.
And.
Being in a REIT vehicle as opposed to a bank, where we spent the rest of my career.
It's a good vehicle to own them and so I think that we will be interesting question I think both of those topics will both be relevant going forward.
Would like to acquire some more real estate, but right now there's just a lack of transactions, but because of.
The little hidden poison pill, I think in the market right now is taxes and insurance. So operating expenses are rapidly accelerating higher and you throw on extra interest rates too high of a basis and high operating expenses and you've got a situation as Pamela describe.
Pittsburgh property that we're going to take title to.
It has a bunch of brand new apartments and.
In a matter of a month, we think that the debt yield will approach, 7% and I don't know if were going to be able to take that to an agency for financing, but we might.
I don't think we're necessarily in a hurry to sell anything like that I think those are good REIT assets going forward and being purchased at the right cap rate. So I think your question is prescient I think we will be adding both of those and I would probably throw a triple net lease and on top of that I can tell you. This is probably a better time to be buying triple net than I've seen in a long time.
Great It sounds like a lot and your origination pipeline or for consideration.
Quick question on the dividend.
Significantly over earned at year to date.
I imagine very little earnings if any you're in a trs given the conduit.
<unk> business is.
Slower.
Non existent right now so can you talk about your flexibility to manage the dividend. How do you think about that till the end of the year as far as what you can pull forward and the rules there or do you have any losses do you think you may materialize prior to year end that would reduce that REIT distribution requirement.
Paul I don't know if you want to answer that I know, we went through this a little while ago, but as far as let me answer the backend questions first.
I think there could be a couple of small losses here and there, but nothing that I can even tell you. The name of right now with rates, where they are and the temperature of some of the discussions had extension you can sense that there is a little bit of attention in the room I suspect thats going on everywhere, but.
I don't think that we have a problem complying with REIT rules, which was on what I think your question was considering how much were out earning the dividend by and.
And Paul if you want to talk through that a little bit regarding next year, yes ill just say Steven high level, we have the ability to carry forward a dividend from last year. Some excess that we could use for this year and bottom line as our REIT taxable income is different than our distributable earnings because we have the ability to deduct depreciation.
So it is not an issue for this year generally.
Great appreciate the comments thank you.
Thank you.
Ladies and gentlemen, a reminder, if you wish to ask a question. Please press star and one.
Our next question comes from the line of Steve Delaney with JMP Securities. Please go ahead. Thanks.
Hello, everyone.
Got it good questions from Sharon Stephen So a lot of the obvious things have been taken I'm going to kind of pick up on the last point.
As Steven mentioned.
I think third quarter of <unk>.
Kind of locked your dividend to 23, and <unk> of last year totally understandable given.
Where rates were going and all of the uncertainties I'm just I'm looking at the balance sheet and year to date your two main categories.
Cash has obviously gone up but loans and securities have come down by over $500 million.
That has caused.
Net interest income to decline in the second quarter about $2 5 million relative to the first quarter.
I am Paul and I'm, Brian Pamela and I'm looking at that and I'm on the board I'm, saying.
We know why we're doing this but this is not the time to raise our dividend. So now what I'm hearing today is obviously you've been patient you've taken advantage of the debt repurchases.
Maybe more capital being deployed over the second half of the year.
I would here just to kind of like.
I applaud everything you're buying CLO.
Buying back your debt et cetera, I would just say my messages.
Youre down to an 8% yield the stock's done great.
Theres, certainly some upside, but I do think the upside in the stock will be tethered.
Two what you are able to demonstrate in the next two quarters as far as <unk>.
Some boost to the dividend and I guess, that's more of a comment than a question, but as I said all my my questions were covered but happy to.
If you have any thoughts on that Brian you'd like to share or.
No pushback on that at all I'd love to hear it.
Yes, I'm happy to give you some inside baseball view as to how we look at these things.
Sure.
With the fed moving 11 times higher in a row, obviously, we're positioned pretty well with our corporate debt theyre in that.
That will carry us for years to come at this point with those fixed rates. So we have plenty of room as you know and we were pretty active when we came out of the pandemic. We started writing a lot of loans at the end of 'twenty one.
And so those end of 'twenty, one loans are really coming up on their first extension now too.
<unk> second quarter actually had quite a few of them anytime.
Anytime we did extend somebody.
Paydowns involved in those.
But I would expect that as we get towards year end, we're going to have a better sense as to I believe we were at a $1 billion worth of loans in the fourth quarter of 2021, and so we're going to make sure that we have enough capital around for those two to refi and make sure. If there were a default in our system. We don't have the same pressures that are <unk>.
Lot of competitors have because of the corporate debt structure and the unencumbered assets that we carry sure. So even that's not terribly problematic, but it is something it's a conservative flexible balance sheet, we are a little bit defensive but we keep flexibility in the in the portfolio. So that we can take advantage and as we said as we took in $300 million.
Payoffs this quarter.
We can see that net interest margin now if you have 10% loans that pay off beyond $30 million in interest. Unlike when interest rates were at zero, though we now have T bills at $5 30.
So at 10% you lose 10%, but you get five three back right away. So it's not as hard of a drag as it may have seen.
And given where securities are trading right now largely as a result of the fed stepping away they are quite attractive.
And more attractive than license situations right now so and the good part about securities as they settle three days later, so you don't have to sign an application and then close in 90 days. So I would imagine I think I've said this before that we would probably start adding securities. We thought that was the best value in the space and.
And we also mentioned we liked our own corporate debt, which was trading pretty wide. After the March regional banking issues. So the bonds have traded back they're in good shape now.
And we began buying securities and we can buy quite a few of those pretty quickly.
The natural next step will be lending and the dividend I think we have plenty of room on right. Now we are big shareholders internally. So we would look to raise it.
It's an annuity certainly don't want to raise it and then cut it. So you want to make sure youre clear of all the problems that could or may or may not exist, but in addition to that the returns we're generating right now are well in excess of our dividend. So we like having a lot of cash around even the end, but keep in mind, having almost $800 million in cash we probably have another 100.
Million coming out of <unk> in the next couple of weeks to so thats going up even higher.
We don't want to carry too much cash even though it is easy to get lazy of five 3%. So we began investing in I think will be a little more aggressive than people think.
In acquiring new loans and securities in the next second half of the year Tethered you mentioned the stock price where can it go the earnings power of the company at one seven times leverage with that much cash in the system is quite high.
In Egypt, we see how we can drive this these earnings much much higher, but obviously want to operate safely and I think youre going to start to see us do that in the second half of the year.
You're in a great position there'll be exciting to watch what you do in the next six months. So thank you I appreciate the comments Brian .
Sure.
Thank you.
Ladies and gentlemen has there are no further questions I will now hand, the conference over to Brian Harris for closing comments.
I'll, just close by saying I know it's a.
It's a summer week with 100 degrees here in Manhattan or 90. So thank you for jumping on the call with US. We are available if you werent on the call here and needed to talk to us feel free to give us a call and thank you for your attention on this one look forward to the second half.
And doing good things thanks.
Thanks.
Thank you the conference of ladder capital crop has now concluded. Thank you for your participation you may now disconnect your lines.
Thank you.
Conference of ladder capital crop has now concluded thank you for your <unk>.