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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to Ladder Capital Corp’s Earnings Call for the First Quarter of 2021. [Operator Instructions] As a reminder, today’s call is being recorded.
Good afternoon. This afternoon, Ladder released its financial results for the quarter ended March 31, 2020. 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, Ladder 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.
At this time, I would like to turn the call over to Ladder’s President, Pamela McCormack.
Good evening, everyone. With 2020 behind us, we are at a pivotal turning point and are actively focused on rebuilding our investment portfolio and earnings in the first quarter. We started the process with our first loan originations in a year and we expect new originations to outpace loan payoffs over the coming quarters.
For the first quarter, Ladder produced distributable earnings of $3.2 million, or $0.04 per share. Since March 31, 2020, we converted over $3 billion of investments into cash, including payoffs for 79 loans, totaling $1.5 billion, or 45% of our balance sheet loan portfolio. As of March 31, 2021, we had $1.3 billion of unrestricted cash after reducing our overall leverage by $1.9 billion, with 34% of our total debt. Associated therewith, we also reduced our mark-to-market debt by $1.9 billion, or 68% since March 31, 2020. Consequently, as of March 31, 2021, our adjusted leverage stood at 2.3x, 1.4x net of cash and only 0.9x net of cash in our principally AAA rated securities.
We are pleased with the credit quality and performance of the assets on our balance sheet. We enjoyed an unparalleled level of loan repayments over the past year, reflecting the strength of our underwritten portfolio and the wide array of refinancing options available to our middle-market borrowers. Going forward, our shareholders can expect to see us remain committed to being basis lenders, with disciplined in-house credit underwriting and hands-on asset management. As we grow back into our capital structure, our shareholders can also expect us to see us increase our use of unsecured and non-recourse funding that is not subject to mark-to-market provisions.
During the first quarter, we started redeploying cash and replacing loans that paid off as Ladder originated $155 million of new loans, including a $41 million conduit loan and $114 million of balance sheet loans that feature a weighted average interest rate of approximately 7.3%, inclusive of LIBOR floors. In the second quarter through May 5, we closed an additional $93 million of loans, including $87 million of balance sheet loans that feature a weighted average interest rate of 5.02%, inclusive of LIBOR floors. 40% of these loans, which are repeat Ladder sponsors, while the other 60% were closed with new sponsors who entrusted the expertise and flexibility of Ladder’s lending platforms to execute their transactions in this unique environment.
Our deep and experienced in-house origination team continues to expand Ladder’s bars universe by highlighting our product differentiation and flexibility. In recent weeks, transaction volumes in the broader commercial real estate market increased meaningfully as buyers and sellers benefited from both greater transparency into underwriting fundamentals and the value of properties as the country reopened. With the benefit of transparency, we currently have a pipeline of more than $900 million of additional new loans under application and in the closing process. In connection with our growth, we hired 9 additional professionals across the organization. With ample cash on hand, we expect to continue to benefit from the unique environment before us as we pursue new opportunities to further expand our robust pipeline.
In conclusion, we are proud of the progress we made on behalf of shareholders as we move into the next phase of a recovery at very low leverage and flush with liquidity to invest. Our business model, the same model we opened the doors of Ladder Capital with 12 years ago, proved durable during these most unprecedented and volatile times. We are now moving forward in a position of strength as we put Ladder’s balance sheet to work by investing shareholder capital at attractive, risk adjusted returns in this new and dynamic environment.
With that, I will turn the call over to Paul.
Thank you, Pamela. As discussed in the first quarter, Ladder produced distributable earnings of $3.2 million or $0.04 per share. We originated $155 million of new loans in the first quarter, $150 million of which were funded at closing and we funded $9 million of advances on existing loans. This was offset by loan repayments of $375 million and a $46 million loan sale. In addition, we completed the foreclosure and the sale of a hotel property in Miami reducing our balance of non-accrual loans by 25%. No new loans were added to non-accrual status in the first quarter.
Also, during the first quarter, we sold $329 million of securities generating $0.4 million in gains and the value of our securities portfolio overall increased by $6.8 million. Our CECL reserve decreased overall by $5.4 million to $36 million in the first quarter as a result of loan payoffs and sales executed during the quarter and a moderately improved macroeconomic outlook. Overall, we reduced debt by $442 million, including the redemption of $147 million of our 5 7/8s corporate bonds scheduled to mature in August. We declared a $0.20 per share dividend in the first quarter, which was paid on April 15 and repurchased 20,000 shares of stock at an average price of $10.71. We expect our dividends to remain unchanged in the second quarter of 2021. Un-depreciated book value per share was $13.88 at quarter end, or GAAP book value per share was $12.08 based on 126.3 million shares outstanding as of March 31.
Looking ahead, we have significant liquidity and a strong and diverse capital structure with corporate leverage at historically low levels. Our three segments reflect the same strong credit metrics, to which Ladder shareholders have grown accustomed to over the years. Our $2 billion balance sheet loan portfolio is primarily first mortgage loans, diverse in terms of collateral, with a 69% LTV, an average loan size of $19 million, and a short 1.6-year weighted average remaining duration. We have $141 million of future funding commitments.
Our balance sheet loan portfolio continues to perform well as we received 99% of interest collections during the quarter. Going forward, we have a healthy pipeline of originations under application and expect our balance sheet loan portfolio and net interest margin from carry income to continue to strengthen as the year progresses. Our $1.2 billion real estate portfolio is diverse and granular and includes 164 net lease properties with strong tenants that include major drugstore chains, warehouse clubs, dollar stores and supermarket chains. The portfolio is the result of Ladder’s longstanding strategy of focusing net lease real estate investments on necessity based retail properties occupied by solid credit tenants under long-term leases. The portfolio continued to perform well during the quarter, with 100% collections on our net lease portfolio.
Finally, as of March 31, Ladder’s $764 million securities portfolio remained 85% AAA rated, almost entirely investment grade, with a weighted average duration of less than 2 years. Financing term and cost associated with this portfolio have now recovered and surpassed pre-pandemic levels. Overall, our investments in balance sheet loans and securities portfolio have decreased in size due to strong levels of natural amortization and robust levels of payoffs. Our strengthened capital base and solid liquidity position provide a strong foundation for Ladder as we ramp up investing activity in this new post-pandemic commercial real estate environment. For more details on our first quarter 2021 operating results, please refer to our quarterly earnings supplements, which is available on our website as well as our 10-Q, which we expect to file this week.
I will now turn the call over to Brian.
Thanks, Paul. When we look back in the last year, I think we may very well have witnessed how our credit models hold up under extremely sudden and negative downturns in the economy. Every credit cycle has its own unique lessons and this one was no different. There is always a few things we might do differently if we had another chance. But the one thing you can never change are your actions and decisions leading up to the event.
At Ladder, we have always felt that our strength is in our underwriting and our real estate valuation. And after having now lived for four full quarters in a pandemic, I am very pleased with how our approach towards credit held up. As Pamela mentioned, we had 79 loans paid off of total principal balance of just over $1.5 billion during a nearly complete shutdown of the U.S. economy. With stated goals to lower our leverage and raise liquidity as we entered into a very uncertain market back in March of 2020 to say on this call that we have $1.3 billion in unrestricted cash after paying down nearly $2 billion of debt, including over $1.2 billion of repo debt and $426 million of unsecured corporate bonds, before any of it matured, gives me a strong sense of accomplishment.
Our goals on leverage and liquidity have been met. Our new goals are now being worked on tirelessly. One is to restore our earnings back to a level that comfortably covers our cash dividends. While loan payoffs provide a degree of confirmation of our credit skills, they unfortunately take a bite out of our quarterly earnings unless those payoffs are replaced with new investments. I am happy to note that in April, our net monthly loan inventory increased for the first time in the year, as we originated $93.7 million in new loans and took in $44.96 million in payoffs. We think this trend will continue going forward as we deploy our ample capital position into attractive investment opportunities that are presenting themselves in the aftermath of the pandemic.
While April’s net loan growth is encouraging, having over $900 million in loans presently in-house and under applications, we think April is just the beginning of a bigger trend. Pulling over $1 billion in cash may be a fine idea when stock price is well below book value, but now we are working to rebuild our earnings stream and drive our share price back to where it reflects the earnings power of our company. Thankfully, the commercial real estate sector, despite receiving no support from the government programs, never felt the full brunt of what many thought possible as a result of the government mandated shutdown of the largest economy in the world. While the credit cycle is not yet complete, there is plenty of reason for optimism going forward and we think the next couple of years will provide excellent growth opportunities for Ladder.
As the year ahead unfolds, we expect our loan inventory to swell, with only minor increases in leverage as the recovery of our earnings gets into full gear. We also expect some of our higher cost of debt to amortize down as the year progresses and to be completely behind us by this time next year, adding a further tailwind to our earnings growth story. If interest rates rise, one might think this could slow transaction volume and new loan originations, but we believe this will be a positive development for us as we deploy capital into higher rate loans. We also think that current tax changes being proposed by the Biden administration will create additional volume in loan origination driven by tax planning in reaction to those proposed changes. The investment picture was very attractive at this point of recovery and we are planning to take full advantage of it.
Operator, with that, we can open up the call for questions.
Thank you. [Operator Instructions] Our first question comes from Tim Hayes with BTIG. Please go ahead.
Hey, good evening, guys. Hope you are doing well. The first question just kind of around capital allocation and the pipeline and Brian, where are you seeing the best risk adjusted returns? I know the pipeline looks pretty strong here for the second quarter and I am curious, if you could give me a little bit of a breakout is that mostly first mortgage? Is it certain asset types you are focusing on and are you willing to do mezz or some construction lending at this point as kind of the world continues to recover or be focusing more on senior defensive asset types, just again looking for color on the best risk adjusted returns? Thanks.
Thanks, Tim. I thought on the last earnings call, I probably said that about three quarters of our loan production would be in bridge loans, with transitional loans booked and I thought 25% would be in the conduit business. What we are witnessing is 90% in the bridge loan portfolio and 10% in the conduit book. We are really not acquiring a lot of real estate, it’s – everything is pretty expensive, we haven’t seen anything too cheap and obviously haven’t been buying a lot of securities either, although the financing and those yields interestingly are pretty attractive, but I still think the best pound for pound investment we can make is the transitional bridge loan portfolio and that’s where literally the whole company is focused. Unfortunately, we have been experiencing more payoffs than originations, but I do think this is the last quarter we’ll be saying that. In April, as I indicated, we had about a 2-to-1 ratio of origination to payoffs. I think that alternates to something that sounds more like 4-to-1 or 5-to-1 in the quarters ahead. So, given our large amount of cash and our lack of leverage, I suspect that we will probably be able to get a lot to the bottom line on the revenue side, because we are not picking up any expenses. So, I think your question adds several points to it, but so first of all, we are not writing mezzanine loans – we are not I guess writing a mezzanine loan, but we are not targeting them. It’s fair to say with interest rates as low as they are right now, if you need a mezzanine loan, it’s probably an over-leveraged asset. And I guess the other question was, are there any assets that were defensive around? Not really. We wrote one very small hotel loan for about $5 million to a repeat borrower and very low leverage, we are very comfortable with it and the rest of it is bridge loans. And I think I indicated in our last call, I thought it would be a 6% yield un-levered. I think I had been a little bit timid on that number. I think it’s higher than that. But I hesitate to indicate that we are going to write $2 billion of loans at that level. So far, so good, we are very optimistic. Volume has picked up. Demand has picked up.
And I think what’s really going on is you are seeing people going outside now, because after the vaccination rollout. So, pretty optimistic as to how things look going forward certainly in the next couple of quarters. I do not think we have been seeing a series of lower earnings as we have been taking on payoffs. Payoffs are a good thing, because as I said in my discussion there, they take a bite out of earnings too, but I think we have reversed that at this point. And I expect that the worst is over as far as any credit situations, doesn’t mean it is. I tend to think that we are talking about a pandemic that’s coming to an end. I sure do hope so. But given what we see right now, we expect the volume is picking up. It’s a little bigger than we are used to. We are writing slightly larger loans, but very strong returns and pretty comfortable, lots of equity in the transaction. People naturally understand that you have to have a little more equity in deals these days to get a loan. So, all looks good and Pamela, I don’t know if you want to add anything to the pipeline there, but feel free.
I would just say I think it’s our regular way business. We are just seeing more attractive opportunities we think in part due to some liquidity in the market. But that’s as you hear from others, we are definitely I think we will see a little spread compression over time, especially as our loans pay off, but we feel very strong about the pipeline and the returns we are seeing. We have held up just by way of back when I think we said it on the call we did $250 million of loans through May 5 and of that, over $200 million was balance sheet at a weighted average floor of 6.32%. So, I think that’s really indicative of the pipeline ahead.
Sorry, Pamela, did you say weighted average floor of what was that number?
It was – the weighted average floor, I am sorry on the – for all of the $200 million of balance sheet was 6.32%.
Okay, so the all-in coupon, including the floor, sorry if I just wasn’t following that.
Yes.
Okay, got it. Got it, okay. No, that’s good color. So, it sounds like just to recap all that, you are primarily focusing on your balance sheet bridge lending business, mostly while loans, but senior whole loans, but not afraid to maybe step outside of that if a good deal comes, but – and not concentrating on any specific asset class, just kind of what makes sense? Is that a decent recap of…
Yes. I would just circle back, I think I didn’t say anything about one of the things you said construction loans. So, that was just not a subset of us and I really do shy away from those and we tend to avoid them. So, that isn’t because we are afraid of them, we just think that there is a lot of dynamics in a construction loan that we don’t really care for, such as the early pay-off when you take all the risk and somebody signs a big lease and you get paid off. And if no one signs a lease, you have the full loan outstanding for the full term. So, we have never really been comfortable with that business and nor are we now. So, I would exclude that from our thinking going forward.
And just to add, with everything close to-date and everything in the pipeline is a senior secured first mortgage loan.
Got it. Got it. That’s helpful. Okay. And then just on credit, I know Paul mentioned that there was no new non-accruals and you resolved one loan that was on non-accrual which brought down the balance. I don’t know the queue in front of me, but were there any new other material upgrades or downgrades in the portfolio worth mentioning? And I think I saw the CECL reserve and there was a bit of a relief this quarter as the portfolio contracted, but I think the CECL reserve as a percentage of the balance might have gone up a little bit. So just curious, if you can provide any color on kind of the movements there?
I can start with that one and then have Paul chime in. But first of all, the CECL reserve will decrease not increase, and he can give you the specifics. But we do not have any impairments this quarter. I think one of the things that I think you are going to see about Ladder, because our loans turn over so quickly, and we tried to make the point, one-third of our balance sheet paid off on the balance sheet loan portfolio. We have had, like, really, I think, unparalleled levels of payoff due in part to our short dated loans, but also just strong, really very strong underlying credit performance. And I think we feel like at this point, we expect nothing but positive trend going forward. And Paul can give you the specifics on Cecil.
Yes. And to be clear, no new loans were added to non-accrual status during the quarter. They decreased as I mentioned in the prepared remarks regarding the hotel we resolved in Miami. And yes, we released those CECL reserved and from a basis point standpoint, the reserve went down from 92 basis points to 85 basis points during the quarter.
Okay. I must have did some bad back of the math there. Thanks for clarifying.
I think that’s the result of the portfolio is getting a little smaller. And that’s usually what drives that.
Right. Okay, and then just, in terms of cash interest collection on the loan portfolio, and then rents in the real estate portfolio, any major change quarter-over-quarter?
We are still at, from the beginning of COVID, 99% collection rate across our entire loan and equity portfolio with 100% collection rate in our triple net lease portfolio.
Got it.
I think that safe to hand – Tim with the payoffs that we have witnessed, $1.5 million write-off. We had, I don’t remember exactly what day it was. But we generally had a floor in our portfolio of 6.2%. And if you have got strong cash flows and stabilized properties that are coming out of that transition period, then obviously, there is plenty of cash available to lend on those assets today below the level of our floor. So, I think that’s why we are experiencing a higher prepayment frequency than a lot of our competitors.
It makes sense? Thanks for the comments.
Next question, Charlie Arestia with JPMorgan. Please go ahead.
Hi. Good afternoon, everybody. Thanks for taking the questions. First, a quick follow-up on the CECL discussion, I appreciate all the color on the previous answer there. But as you guys kind of hit this, inflection point this quarter and really start to go back on offense here. Should we expect that reserves to really start to kind of grow from these levels in line with new originations, maybe offset by a lower overall reserve rate on the existing book as sort of the macro picture improves?
Yes. I think what you will see is as our post-COVID loan book growth, our reserve level should go up. However, with the accounting rules, every new loan has actually a piece of the general reserve. But as pre-COVID loans continue to pay-off, the loan book, the reserve should shrink, because those remain a different basis. So, really will depend. Our view on the economy, moderately improved quarter-over-quarter will depend on how fast the economy opens up our macroeconomic view. So yes, and all else equal, as our loan book grows, the reserve should grow with it, but it shouldn’t grow. It shouldn’t go by a large number. It doesn’t make sense, Charlie, though, because for a while now, as our portfolio has been shrinking, you have been seeing a lot of these givebacks out of the CECL reserve. We expect our portfolio to grow quite a bit in the next 12 months. So yes, if that’s the item that drives us, then yes, I would expect it to grow.
Okay, yes, that makes sense. And then if I could ask one more, just wondering if you guys have any appetite for looking at deals overseas, your peers have been pretty active in Europe over the past quarter or two quarters. And just curious to get your view on the competitive dynamic there on both the financing side and also kind of the regional disparities on lockdowns and the COVID impact there.
Yes, that’s an area, interesting enough. I ran global commercial real estate for 2 European banks and one Japanese bank. Yes, we think that there was a company our size. And with the opportunity set in front of us, we feel very comfortable here. There is nothing against at us doing something in Europe or in the Caribbean or anywhere else for that matter. But it’s not a business that we are focused on. So, I would anticipate U.S. growth at Ladder.
I just want to add. Sorry, I just want to add one thing that’s really the hallmark of Ladder, right. We are diverse granular loans. I think it’s why you saw so much pay-off were essentially basis lenders. And just going back to the early question on sort of the pipeline of loans, we are focused on, domestic, strong basis opportunities, and I think we have this opportunity to reset our basis. And that’s one of the things I think that we are most excited about when we look out of the pipeline. All the loans that we are originating now, we have the benefit of the reset in basis. And since we do focus very much on basis, it’s been a great opportunity for us to make some of the better risk adjusted returns that we have seen in a long time.
Got it. Thanks, Pamela. I appreciate that extra color.
Next question Stephen Laws with Raymond James, please go ahead.
Hi, good afternoon. First, you touched on those the pipeline of the very strong and the things have picked up since considering 93 originations, so if I missed this point, but can you update us on where the balance is on the CMBS assets, today, and how that’s changed since quarter end? I know that the overall picture is about suppose you may have the numbers, but I think it’s about $700 million, but it didn’t, if you can give the increase or decrease on the securities portfolio.
Yes, as of quarter end, it was $764 million. And we have seen some amortization since quarter end. So, I think it’s around $740 million or $750 million. I don’t have the exact number, but it’s decreased by at least this quarter. And I think – it was in the fourth quarter, I think we sold over $400 million in security. So, it’s going at a point now where what we own is pretty high yielding in that space, and it’s very safely levered. And so we are pretty comfortable with that. That portfolio, it’s also as paying off very quickly. We took $50 million in amortization and pay-off this month. And we have taken $200 million in the last year. So that portfolio will take care of itself, it doesn’t really need to be sold, it will just continue to wind down. And we don’t see too many reasons to leave the bridge loan portfolio to add securities right now.
And on the loans side, I know you covered the pipeline, covered near-term repayments for the next three months to six months, kind of what are our expectations. And I am kind of trying to get to, at what point this year is does net interest income talk? Is that in the rearview mirror, do we have maybe one more quarter where, before the loans really settle in and contribute for a full quarter in 3Q. So, trying to kind of get an idea of when the trough and NII will take place?
Yes. I think you are going to start seeing that in the upcoming quarter. I think probably set that’s what a real inflection point at Ladder, I think we just – we went to work on the balance sheet, raised liquidity and de-leverage intentionally. We now are sitting with a lot of cash, seeing great risk adjusted returns. And we feel very confident. I think just by the nature of our portfolio and the seasoning, we have on average had about 29 months, 30 months of seasoning on loans at any given time. And we are seeing just by natural normal duration of our pipeline. We don’t have a lot maturing through year end. We have some initial maturities. They either look like they qualified for extensions, and the ones that don’t will pay-off. So, I think you will see actually lower levels of pay-offs, just based on our natural timeline over coming quarters. And you will see loans repayment, and just that without huge pipeline ahead of us, you are going to see very quickly our pipeline, outpacing loan repayments, I think starting with the next quarter.
Stephen I would add, I think you are seeing the trough this quarter, the one that we are reporting on right now. Frankly, we are not very happy with this earnings number. However, the reason the earnings number is not where we want it to be because of our preference for liquidity and lower leverage. It’s not because, we are taking write-downs all over the place. So, as we are going to be – we have been asked for several quarters we are going to start deploying all that cash. Well, that started last quarter. And while April is really the first month where we saw originations, not originations, but closings outpaced pay-offs on a two to one factor. I think that will become four to one, possibly six to one on the months going ahead. So, I think the portfolio will swell pretty quickly. And I think a lot of the net interest income that we are going to be generating here has going to go right to the bottom line.
Great. And that may make this next question less valid, but can talk about given the liquidity, anything in the capital stack, equity or debt that looks attractive, you might look to retire earlier or repurchase. I am sure you guys are doing those type of comparisons versus new investments all the time. So, any thoughts on that?
Sure. We do it all the time. We look at it constantly. We do have a $450 million-ish due in September of ‘22, more than a year from now so and that is pre-payable at par and 0.31 in September. And I am sorry, that’s pre-payable at par in September. The 25s, which is our next maturity date in the corporate side, those are pre-payable at par spots, 31 in October. So, we look at them. And if we can borrow money in the corporate space below 5.25, yes we might very well do something earlier rather than later. But we have more than enough ability to handle it regardless of whether or not we do another corporate bond issuance. We would like to. We prefer the unsecured bond market to secure markets. However, creeping up lately, you have been seeing quite a bit of activity in the CLO market. We have more than enough inventory. And we are closing at a pace that’s comfortable enough that we could issue a CLO also. And that actually has very attractive cost of funds associated with it. The leverage on those was probably between 80% and 85%. And the all in without fees, cost of funds is probably LIBOR plus 160. So when we think about corporate bond issuance, we actually look at it versus that CLO scenario. And in addition to that we are looking at against normal repo, which we all have to be a little careful with as we now. So, the CLO is probably the second favorite to the corporate bond issuer and repos that’s all are available, all are attractive, but we do enjoy somewhat of a low cost of funds right now. Anyway, in the corporate bond market, we have the facility which we will be paying off, as soon as possible. But we are not going to incur any unnatural friction costs there. So, again I think our interest cost year-over-year will be falling quite a bit.
Yes. It’s all helpful. Thanks very much, Brian, Pamela. I appreciate it.
Next question, Steve Delaney with JMP Securities, please go ahead.
Hello, everyone. Nice to be on the call with you this evening. Just one from me, we noticed an article in a New York City real estate publication where Ladder had provided some rescue capital to the owner of a couple of office buildings. Just curious whether you are seeing additional opportunities like that is I noticed Pamela mentioned that I think the first quarter loan yield was 7.3%. So, assuming that closed in the first quarter, we assumed that the loan particular probably had a lot to do with that attractive weighted average yield.
Hi Steve, it’s Brian. I will answer quickly, and then I will send you over our Head of Originations, Adam Siper. There is something going on in the background. But I don’t know that a lot of people are fully aware of. And I didn’t know exactly what caused it, I wonder if it might have been that [indiscernible] situation that took place where the banks that are a little blindsided. But the regulators are on top of the banks pretty seriously right now. And the banks are occasionally doing some unusual things with their loan portfolios that as we wouldn’t expect them to do. So I know that, for instance, in that scenario, I would not normally talk about those, but the borrower himself actually gave the interview, so I feel like we can say a few things. But it was a very low leverage loan in New York City. And it’s funny when we finance a lot of these loans coming out of the banks, we are writing loans at around 5% or even 6%. They are coming up with loans at LIBOR plus 175. So, those are very high quality loans. But for whatever reason, banks are getting a little jumpy around concentrations. I know apartments in New York City are making people a little scared. But that just happened to be a couple garment district office buildings. And the leverage on them was, frankly, well, I think well below where I think those buildings would sell if they were vacant. And what really happened is some of the garment district tenants they couldn’t make their rent payments. So of course, you had the same thing that happened in the rest of the country. And the banks that held that note handled it a little differently and sold it to a real estate who wind down the building. So, we were able to call it a rescue out. It was like we rescued it. I think he could have sold the building too. But it was not a very courageous loan. It was something that we closed quickly. But before I take up too much airtime, I am going to give you Adam Siper, who handles a lot of these interactions with the banks and…
Great color. Thanks, Brian. Hi, Adam.
Adam, I think you are on mute.
No.
I just wanted to add one thing. Well, hopefully Adam fix the technical issue. But what I wanted to say is, I think one of the things that really talk about Ladder being basis lenders, and we will and we can and we write a lot of the heavy cash flowing loans like everyone else. We don’t price loans, I think a lot of our peers price loans to a CLO which requires a lot of cash flow to make it work in that model. We look at replacement costs, dot value. And we have the opportunity, I think to do a lot of strong loans at great bases where we as Brian just that, we think that loan with – I mean just I think one of the things that you didn’t mention on that Brian is based on signed two leases, with very strong tenants. And we feel comfortable at a dot value. So, I feel like the opportunities we are seeing right now, are just upsized. Because I do think a lot of people are forcing their loans into a CLO model that some works and some don’t. And that’s the benefit of our hybrid financing and diverse capital structure.
And interestingly I will add one thing there because I take an example of that, so the cash flow got interrupted in the building, but the actual loan owns the building was pretty low, it was about $300 a foot. And obviously, well below replacement costs, which is usually anybody who is going to lending for a very long time. If you are below replacement costs, you hardly ever get hurt. But that will not do well in a CLO because the rating agencies will look at the cash flow as if there is a problem. Now that capital is ramping up quickly as people return to work. And if you have been in New York City, you can certainly see that picking up. But that’s one of those examples where if that was a cash flow issued in the CLO market, LIBOR plus 300. That’s where everybody would bid. And because I mean, it’s not even that, in brief, it’s just tenants not making payments, because the garment district and other tenants, aren’t there, that’s why they are factors in that business. They are not steady cash flow businesses. They are perpetually late on bills, but there it keeps moving. So yes, we love situations like that. We love when there is some level of stress somewhere. We don’t like it when it’s at the building. And in this case, we think backup jumpy, and we think the regulatory environment may create great opportunities. And when we don’t have a lot of cash flow, the CLO lenders are not there.
Great, but if you find some more, any – I know you have got a half of your bidding closing, I just want to if Marc Fox is on the call, I just want to – I want to wish him all the best for the future. It’s been a pleasure to know you and work with you and all the best Marc.
He said he wasn’t going to be on the mic at this time. Marc, if you’re on. We will call this driving around in the dark in Yankee Stadium.
You can pass my regards. Thank you, everybody. Thank you. Stay well.
Sure.
Our next question comes from Jade Rahmani with KBW. Please go ahead.
Thanks very much. I also have never said anything positive about anyone in management. But I also recommend Marc Fox, he has been really great to work with.
We love him too.
Thank you. Well, I have to ask this because I have asked it first for several different teams and I was getting very colorful answers. So Brian, this is for you. What do you think about the ground lease business and the uptick in entities focused on that space is that something that Ladder could prove, given its high liquidity and past position and perhaps near-term more – greater flexibility on the hurdle rates, that Ladder is willing to pursue?
The ground lease business has got little more institutionalized here, but it’s been around for a very long time. They don’t have anything to do with interest rates. They don’t have anything to do with interest rate movements. They are very safe assets. And I think there is nothing wrong with investing in them. However, I would say, the returns to be generated. If they are going to look great, and they are going to look like a tremendous value, they are going look that way, in a market fraught with danger, like in a pandemic with low interest rates. That will be their best day on the ground lease. So, I don’t really have a lot of interest in ground leases, and I do think because I don’t like them, I am happy to do them if somebody wants to please call. But I think for the most part, they are very safe, very low return businesses. And I suspect they will gravitate back to where they generally have been over the last 50 years, 60 years. Yes, they are going to be very much terrific. I think so you won’t hear anything from me about them not being safe. They are, but I think we would probably rather and we think if you move out a little further on the spectrum, you can invest safely with higher returns. And what are you also think about all the debt funds that survived COVID that now have chosen multifamily and industrial as their favorite asset classes, because I have been thinking a lot about this. And I think that hospitality is such an interesting asset class right now because people are going to stay 50% longer than they ever would before because they are going to work hybrid from drive to hotel, which boosts the occupancy and then you can have a virtual check in. So, all the operating expenses are going to go down, turnover is going to go down. So, hospitality and line margins are going to increase with drive to markets are going to have higher occupancy than before and people are scared to lend on them. They want to only lend on multifamily and industrial. I think what you are seeing there, first of all, separate multifamily from everything else, because multifamily is not the only sector in commercial real estate business that’s really supported by the U.S. government. And so as a result of that, there is a constant buyer for it, interest rates are low. A lot of people are selling their homes, because they have gone up so much in value. That’s one of the salient differences of this turnaround as opposed to 2008-2009. You don’t have people losing their homes here. People are selling their homes and moving into apartments. You also have a graduating class of kids who wound up living with their parents an extra year. And so there is plenty of reasons why the fundamentals of an apartment are fine, because there is plenty of demand people – I think it’s like 5 or 6 million kids living with their parents that want to live in an apartment, but then you have to take the backdrop around it like so for instance, I think it’s very different in San Francisco apartments relative to Manhattan apartments. Brooklyn is not having a problem, Manhattan is having a problem and is that simply because you press a button and go up more than 5 floors, I think it’s a little more complicated than that. I think if the Manhattan rents were so high and it was a reasonable value with the finest restaurants in the world, museums and Broadway and bars open all night long with Uber driving. But when you take the value away and you just leave the high rent, you can’t even use the gym or the pool. Of course, there is a problem. To back up what you just said there, if you take a look at the drive-thru hotels in and around San Francisco, it is amazing what is going on, because San Francisco office buildings, many of the big tech tenants have already said you never have to come back to the office. So, as a result, a lot of our executives are in Lake Tahoe snowboarding for a few hours a day and then heading to the office, which is their hotel room. We are seeing this also in Wine Country in Napa Valley. And I suspect it’s happening in other coastal regions. But you are right there is really no reason to rush off the beach in the Hamptons on Sunday afternoon anymore to beat the traffic.
So I sort of set up some interesting dynamics in the hospitality business. I tend to agree with you. I think people are making a lot of loans in the apartments and industrial for the obvious reasons. One is Uncle Sam and the other one is Uncle Davis. And so those are pretty safe, and again not nothing wrong with those businesses, but they are in my opinion overbid. You have a apartment building coming on construction and it’s leased, there is 20 lenders and with those 20 lenders, you probably don’t want to be one of them. But on the hotel sector, so it is interesting, because can you really hear something about a hotel today that is bad news, that hasn’t come across your plate already. I think you can actually, but it has to do more with AirBnB, it has more to do with people just renting out their rooms not on AirBnB. So there is plenty of competition, but I think the only factor in the unions, the hotel – the hospitality unions in New York City and many of these hotels have changed, have closed permanently. So we will see where that shakes out, but I don’t know that answer. No one does really. Let’s see where it goes. We are looking with plenty of large hotel loans in default right now. Most of the ones that I know and like and they look cheap, they happen to be in large cities. That’s still scaring a little bit not so much from the standpoint of the investment or the people, but from the politics. I think a hotel in Chicago right now causes me some concerns. I don’t know where the taxes are going. I think a hotel in Manhattan and I will feel a lot better about it after November, but these big cities have really taken a turn against landowners, property owners. So, Hilton Garden Inn in Cincinnati, sure, they should be fine. And what we are really seeing is the resort doing very well. So, why are there some articles in the paper? They are doing fine. Miami is you cannot get a room and it is hotter than hell in Florida right now. And Florida, by the way is open, there is nothing – there are no restrictions in Florida whatsoever, not saying that’s a good answer or a good thing to do. I am just telling you that you walk in a hotel, you are right to the bar to stand elbow to elbow with people with that masks on. So we will see if that’s a good idea later, but right now it has returned. And I think a lot of the states that have rushed to reopening if they are going to be right they are going to be really right, because they are experiencing the lower unemployment rates than the states that have really held lockdowns in place.
And Jade, I just wanted to add, I think you have kind of like opened up our conversation on I think there is a ton of opportunity I think right now and the way you are thinking about it is exactly how we are thinking about it. And that’s why we are so excited to be sitting with all of this liquidity right now. We think that you are finally seeing transparency and people are able to make some of the judgment calls like you just made. And I think you are going see us expressing that view in first mortgage loans always focused on basis like we always have.
And there is a lot of capital in the hotel business. I mean, we had to foreclose on a few hotels and we sold them right away and on several of them we made money. I remember saying to the borrowers why given to us, just put them up for sale and they don’t – I don’t know why, but, yes, so we are pretty comfortable. I mean, we have been able to move out of our defaulted loan category. There was a $100 million loan that was attached to some buildings, but also 1 million square foot vacant building and we are able to sell it at our principal balance. That’s pretty amazing. I have never seen that kind of liquidity. And I hate this. I hate the term bank owned property, but that’s what people call us once in a while. But loans in default are routinely trading at par or higher.
Yes. Well, you guys have a great asset management process. And I think that the proactiveness that you have shown is definitely a differentiator. I don’t want to take too much time, I am sure there is more people in the queue, but I think that the two things that investors would like to ask about is number one, when does this inflection point in terms of earnings outlook come, because you are looking at a company with at least as of last quarter $10 a share in cash, so deploying that cash and historical returns would easily cover the dividend. So, when does that come? And then the other thing is just optionality, because Ladder, I know that Brian, you could probably raise a lot of funds, third-party capital. So I guess the two questions, sorry for taking time, but number one inflection point on earnings, number two, just on would you consider raising a fund to be that bridge between when Ladder’s balance sheet gets fully deployed and when earnings start to pick up?
Yes, two-part question. The first one is I believe obviously, no guarantees, but I think we are talking about the inflection point. I think it’s in the past that was the first quarter. And that’s – I really frankly, if I had to tell you the biggest problem in the company right now is we are getting too many payoffs and which has a lender, I hesitate to say that, because the opposite can be very, very challenging. So, we are taking a lot of payoffs, $1.5 billion paid off in 12 months without any push from us. So, in the middle of the pandemic for 79 loans to pay off and it’s pretty remarkable. I have not physically been in our office in a year and yet we still took 80 payoffs, 179 payoffs. So, the inflection should be there. I think, as we said earlier, April was the first month, where we had 2x the pay-offs in the loan origination, airy closings, not under app closings. I did really easily put up a $500 million or $600 million loan origination quarter in the next two quarters. We will not receive $600 million in payoffs, so that I am quite certain of. And so I think we have hit that point. And the question is and I think the question you will be asking me in the quarters ahead is, what is the multiple that you are originating is outpacing your pay-offs? And I think it’s going go to 5 or 6 to 1 here pretty soon and then I think it will probably level off to about 4-to-1. So, I think in our last call, I said I thought we were like $300 million in the second quarter, $300 million in the third and $400 million in the fourth. I would double all of this. And so the question is how do we restore the dividend? It’s very easy. You just – you write $2 billion worth of loans, you don’t even need leverage, if you can get season rate at 6% un-leveraged, you are there. The question is though you have to write $2 billion net. So, if you take $1 billion in pay-offs, you are in the wheel, you have only made $1 billion worth of loans net. And unfortunately, no matter how hard we tried, most of the new loans we are writing are at lower rates than the loans we were writing previously. So, it will be a bit of ground there, but everybody else is in it too, but I think our – we are more confident than ever in our ability to understand, what we are underwriting when we said fascinating observations took place in some of our defaulted loans in OREO properties. I hope we are still learning after all this time. I remember turning around and looking at Pamela and Robin saying, I don’t think we are going to want to sell some of these loans, but we are going to read that pays a dividend and everybody wants to talk about hotels and defaulted loans. And frankly, we are not in the vehicle that benefits from that.
Now, a lot of our competitors have another vehicle that kind of does that. And so, we think about it sometimes, but one thing I’ve always told our investors is that I would have one job full-time. And I work here for Ladder Capital and for the shareholders. And so if we were to set up a fund, we probably could have had a whole lot to do there. When we went public, we closed all of our properties. We had a few of them. And but we didn’t want the conflicts associated with it, so – but raising loan unit fund and trying to buy distressed debt while the Fed is putting rates at zero and there is capital everywhere, that’s kind of an exercise in futility. And I think you are going to hear that from a lot of the distressed real estate funds. A lot of money was raised to take advantage of all the distressed, but the distressed didn’t come. And when the Fed started buying junk bonds that took away a couple of punch bowls, also, but the question is what happens at the end? If the interest rates go up, what happens to zombie companies, what happens to people that needed? I have been looking at how many companies got taken off the respirator because of lean stocks and then how many of it will actually issue equity, Hertz was looking to issue equity going into bankruptcy court. So, we want to learn how to manage around some of that stuff, but I don’t anticipate setting up third-party funds, unless we are invested with it, because we think it competes. We don’t want to be viewed as bailing out over any mistakes that we made by putting it in a fund. And frankly, I wish we could buy distressed debt REIT, but if you buy a lot of it with that dividend, you start getting into this dividend coverage conversation that we have been in for a little while. Remember, a year ago, we were in a liquidity conversation we are in a credit conversation, now we are in a dividend conversation and an earnings conversation. So it’s just kind of proposed which one you want to talk about on any given day, but I think we are going be talking about growing earnings next quarter.
I would just add that the focus for us will be restoring earnings that we have the flexible capital here, if we see something really compelling, we have the ability to take advantage of it with our flexible capital keeping in mind the constraints Brian mentioned about covering the dividends, but right now, everybody is 100% focused on Ladder earnings.
I mean we are better when we purchase the distressed asset and borrowed money from someone else.
Well, your current recovery has certainly been very clean and that’s something I admire about you guys. I think Brian you could have gotten probably launched three different funds at this point and dovetailing those against Ladder’s balance sheet and the co-investing and sort of all kinds of co-investment vehicles. So, the fact that you have tested the clean structure definitely, in my view, is a benefit to shareholders. I think right now, the stock is reflecting probably kind of the minimum dividend yield of where peers should trade in anticipation of the future uptick and it’s kind of a waiting game, one of your peers just raised their dividends 40%, that’s up 9%. I am sure Ladder, when it raises its dividend would have a similar rise, but really…
Yes, look in there we released our dividend 5x when rates were going up. Last time we thought rates were going to go up, we loaded up the bridge loan portfolio. We benefited from that. And I think we are kind of seeing history repeat there. So, I don’t think this is going to be terribly difficult. I wish the hell rates would go up. It would be a lot easier.
And I think Dave you hit it earlier, when you said we got in front of issues. I think one of the things you are going to see is there isn’t really any noise coming out of Ladder other than new loan originations for the next foreseeable quarters. And I hope that’s true for the whole industry, but I feel very confident it’s true for Ladder. And I think that’s the loss – that’s the focus.
Okay.
Turning over to balance sheet, the amount of loans that – sorry, just want to set, the amount of loans that repaid combined with the fact that we reduced loans on non-accrual by 25% in the middle of the pandemic it says a lot about the credit quality of the assets on our balance sheet. And that’s the one piece of this and I am not sure we are fully being rewarded for right now is the work that we did. Our capital structure is as clean and strong and our credit is as good as ever, with tons of cash to deploy in this environment. And I think that’s what – I think that’s what you are going to see happening.
Great. Well, thanks so much for the update and I look forward to speaking with you all soon.
Thank you.
Next question, Matthew Howlett with B. Riley, please go ahead.
Hi. Thanks, guys. Thanks for getting me in. I know the call is going on for a while, but I just want to get two questions in. First, when you said the legacy/Koch and the April 20 CLO that will be behind you a year from now, are we to assume that they will be fully called or just amortized down enough where they don’t have an impact on interest expense?
Yes, [indiscernible] that frankly, if they didn’t have them, we pay them off right now, but given the fact that there is no savings by paying them off now we think it will happen, because there is a structure where they get paid down as loans pay off. So, both of them are paying down quickly already and they are not as big as they were when we borrowed them. But I am estimating don’t hold me to it, it’s not a due date. In fact, they are not due dates, but I do believe next year they will be gone at this time.
Okay, remind us again, what the rate on the CLO was?
I am going to guess here, but Paul – I am getting the sign don’t guess.
Yes, 5.5% coupon all-in with cost, it’s about 6.25%, but it’s amortized down, just this quarter alone, it amortized down $30 million and subsequent to quarter end in April it amortized down another $30 million and continues to amortize down.
And the new market rate issue again will be what something in the 2% area?
I am sorry, what was the question?
Where would be the new issue market today if you were to…
On the CLO, LIBOR plus 150 plus days.
Got it. Okay, got it. And then I guess the other question is obviously on the conduit business obviously the resources have been weighted towards the traditional loans, what’s your just give us the overall outlook on the CMBS world? What do you need to see that market rebound? Ladder has been also a huge contributor since the financial crisis. We have heard things like properties in 2 years of stabilized retail properties to get into the CMBS market. What is it going to take to get that market going and how should we think about gain income in the future?
I think the arbitrage associated with anything you can securitize is as attractive as you could possibly imagine it being very attractive. But the problem is at its core is a cash flow based analysis. And when you interrupt cash flow for 12 straight months, there is not a lot of things that fit very easily into it, then you take in a couple of property types like regional malls that are blowing up all over the place and then you take in big box retail with bankruptcies and then you take in names of companies, big names like Saks Fifth Avenue, that are not paying their rent in many buildings. And it is absolutely a moment to stop and stare and see just what should be going into that, because there is – I don’t think the credit cycle has found its end in the CMBS world. Now, you won’t see a hotel until you see 12 months of – of trailing 12 months income, which I don’t think we have gotten month one yet except in the state of Florida. So, I think it will be a good long time management. So, what’s it going to take? It’s going to take volume, it’s going to take eligible collateral, and I suspect we are going to be dealing with higher rates going forward. So, I think the economy will be fine. I think that there is a lot of pent-up spending that will find its way into a lot of these assets. But how is the hybrid work model in office has been at work? I think Jay was right, I think hotels will do very well, especially resort type, but there is a lot of uncertainty there. So, what you are seeing is tremendous demand, because there has been nothing on the production end and it’s a bowl of banks really that stay together and they do very low leverage loans and they do [indiscernible] that don’t borrow that money. And God bless them there is nothing wrong with that. But I don’t believe that writing a 75% loan to value on an office building or a retail center with a shopping – with a grocer is terribly pioneering stuff. So, we will continue to write loans and in fact, we’ve been writing them, but we don’t anticipate being able to contribute meaningfully into a CMBS deal for 6 months and it is because we don’t want to. And we just can’t find the collateral that’s eligible that – you have to remember the rating agencies factor into this also. And the rating agencies have a generally negative opinion of commercial real estate.
Thanks. Of course.
So, I just think it’s a supply problem more than anything else.
Got it. But there are a lot of maturities in next 4, 5 years, so can we think about maybe this being ‘22 in terms of an impact to Ladder’s P&L? I mean, how to just think about it from…
Yes, I think we are good as it gets in the conduit business. And there was I – when we started the company, there was 1 year we made $180 million in the conduit, right, make it 7 or 8 points. Could that happen? Yes, I guess so. But, yes, it’s going to take a real stabilization, not of people going to work, but of people getting out of work, of going to their office when they work for one and also going out of their house to buy things and there is just – we got to figure out how much of this is pandemic related and how much of this is secular. And you build a hybrid work schedule in an office building and everybody is in the office 3 or 4 days a week, well, let’s find from the landlord in the office building, not a big deal. But the guy that sells pizza downstairs or the deli across the street just lost 20% of his income. So, there are knock-on effects that you really have to follow through and try to understand what it’s going to mean, if a lot of this stuff happens. What’s going to happen to the – just look at New York City mass transit, subway ridership in New Jersey and Long Island Railroad, if these guys weren’t being bailed out, they are there. So we will see. But I think the jury is still out as to how the healthy U.S. population is going to interact with commercial real estate going forward.
Got it. Look you got a great on balance sheet traditional loan business, so I guess we will just focus on that and wait for the CMBS market to recover at some point.
Well, that’s the incubator, right. We are kind of making a bet here that the world will find its feet and people will prefer to get out of the house prison they have been in and – but it’s going to take a while, it’s not going to be this summer. It will start falling out certainly. And I remember when 9/11 happened everybody thought no one would ever go in an office building again and we began writing loans on skyscrapers and I had rating agencies trying to tell me how they could hit that building with a plane and I don’t really think you can do it, but it’s an ultimately, memories are rather short.
Absolutely. I appreciate it. Thanks a lot.
Alright.
I will now turn the call to Brian Harris for closing remarks.
Well, thank you. Sorry, the call went a little bit late tonight. Sorry about our technical difficulties here. Unfortunately, that’s living in a pandemic as an end, but I look forward to future quarters. I think we are going to have better news going forward and thanks for hanging with us during these quarters. Alright. Thanks.
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.