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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 Second Quarter 2018. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, today's conference is being recorded.
At this time, I would now like to turn the conference over to Ladder's General Counsel, Ms. Kelly Porcella. Please go ahead Ms. Porcella.
Thank you and good afternoon everyone. I'd like to welcome you to Ladder Capital Corp.'s earnings call for the second quarter of 2018. With me this afternoon are Brian Harris, the company’s Chief Executive Officer; and Marc Fox, the company’s Chief Financial Officer.
This afternoon, we released our financial results for the quarter ended June30, 2018. The earnings release is available in the Investor Relations section of the company’s website and our quarterly report on Form 10-Q will be filed with the SEC this week.
Before the call begins, I'd like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.
I refer you to Ladder Capital Corp.'s 2017 Form 10-K for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.
Accordingly, you're cautioned not to place undue reliance on these forward-looking statements. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call.
Additionally, certain non-GAAP financial measures will be discussed on this conference call. 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, are contained in our earnings release.
With that, I'll turn the call over to our Chief Executive Officer, Brian Harris.
Thank you, Kelly. I'm pleased to report another strong quarter at Ladder Capital. In the second quarter, we had core earnings, a non-GAAP measure of $50.4 million or $0.45 per share. For the first half of 2018, we've made $114.2 million in core earnings and our trailing 12 months, we've reported core earnings of $210.2 million.
Our annualized after-tax core return on average equity in the second quarter was 13.3% and our underappreciated book value per share ended the quarter at $14.97 per share. We continue spec-up quarter-after-quarter of robust earnings supported by our growing stream of recurring earnings.
Our asset base has been carefully positioned to benefit from rising short-term interest rates. With LIBOR now almost five times higher than it was just two and a half years ago, these positive results are not surprising and if short-term interest rates continue to rise, we would expect our earnings to rise right along with them.
We have been emphasizing our focus on originating balance sheet loans for the last couple of years and at the end of the quarter, we owned an inventory of $3.764 billion at an average end of quarter interest rate of 7.42%. 79% of this loan inventory is comprised of LIBOR-based mortgage loans. Because roughly 55% of our funding costs are tied to fixed interest rates as LIBOR increases, the cash flow and earnings from our bridge loan portfolio increases substantially more than the cost we pay for the financing of those loans.
Evidence of this favorable dynamic can be seen in our second quarter revenues as our bridge loan portfolio contributed $54.5 million in revenues in the quarter, up from $46.2 million in the first quarter.
Please note that approximately 96% of our balance sheet loans are first mortgages and this inventory has grown 46% over the last 12 months. During the quarter, we funded $479.8 million of balance sheet loans. The average spread for LIBOR on new floating rate loans was 584 basis points.
The third quarter is also off to a good start. As we have originated a total of $179.6 million in balance sheet loans at an average interest rate of 8.149%, resulting from a spread to LIBOR of 602.4 basis points. Of the total commitment, we have funded $140.93 million to-date.
While we expect our balance sheet lending business to be the primary driver of core earnings for us into year end, we also expect our securitization activities along with rents from and sales of select real estate assets to supplement our quarterly earnings.
Our gain on sale securitization business was also a contributor to core earnings in the second quarter. We contributed a total of $400.8 million of loans into three securitizations earning an average net profit margin of 2.1% from the sale of these loans. During the month of July, we have originated $65.75 million of loans intended for securitization with a weighted average fixed interest rate of 5.24%.
On the real estate investment front, we made $89.7 million of new investments in the second quarter including some student housing assets in Southern California. Overall, we continue to perform well as we continue to increase our balance sheet inventory, while maintaining our vigilant credit culture along with an acceptable interest rate on new loans.
Our focus on middle markets causes us to make smaller loans on average than many of our competitors. But the larger loan count keeps us well-diversified and more able to maintain acceptable pricing levels.
Our solid quarterly results are supported by a growing stream of recurring earnings and we are realizing the benefits of rising short-term interest rates. In short, earnings are up, our dividend has gone up with earnings, profit margins are strong and stable, and given a robust U.S. economy with Federal Reserve seemingly determined to continue hiking short-term rates, there is plenty of room for optimism and thinking that our earnings can continue to grow for the foreseeable future.
Our team of experienced loan originators, underwriters, and attorneys are certainly up to the task of growing safely in a rising interest rate environment. We look forward to a strong second half 2018.
And I'll now turn you over to Marc Fox.
Thank you, Brian. I will now review Ladder Capital's financial results for the quarter ended June 30, 2018. In the second quarter, Ladder generated core EPS of $0.45 per share and core earnings of $50.4 million, resulting in an after-tax return on average equity of 13.3%. These performance measures compared to core EPS of $0.42 per share, core earnings of $51.2 million, and a 12.6% after-tax ROAE in the comparable period in 2017.
For Q2 2018, results are reflective of the ongoing growth trends in recurring requalified income that allowed the company to achieve an increase in core EPS on a year-over-year basis even though the prior year second quarter results included $12.3 million more of securitization gains than were realized this quarter.
More specifically, during the second quarter of 2018, the sum of net interest income and net rental income was $55.1 million, 20.9% more recurring income than the $45.6 million earned in Q2 2017, reflecting the benefit of capital reallocations from CMBS investments to more profitable balance sheet loan and real estate investments.
The growth and sustainability of this earnings screen provided much of the impetus behind decisions to increase the quarterly dividend rate four times in the past three and a half years and twice in the past three quarters.
For the first six months of 2018, Ladder exceeded the prior year results by earning $114.2 million of core earnings, 38.1% more than the $82.7 million earned in the first six months of the prior year.
Likewise, first half 2018 core EPS of $1 per share compares favorably to the $0.73 per share earned last year as does the first half after-tax ROAE of 14.8% which exceeded the first six months of 2017 performance by four full percentage points.
On a GAAP basis, Ladder generated net income before taxes of $44.1 million in the second quarter and $115.8 million for the first six months of 2018. This compares favorably to net income before taxes of $37.7 million and $55.9 million reported in Q2 and the first six months of the previous year respectively. A largest GAAP to core earnings adjustment in the second quarter related to the depreciation and amortization of real estate investments.
During this past quarter, Ladder originated a total of $711.9 million of loans. Ladder's portfolio of balance sheet loans increased over $3.76 billion, up from $3.53 billion at March 31. There are three components of this portfolio. The quarterly growth was in the floating rate first mortgage component of the portfolio, which stood at $2.98 billion at June 30 and represented 79.2% of the total balance sheet loan portfolio with an average mortgage loan interest rate of LIBOR plus 5.59%.
The fixed rate first mortgage component of the balance sheet loan portfolio decreased by $22.8 million to $623.3 million at June 30 and is earning a weighted average coupon of 5.21% with a weighted average remaining term to maturity of 1.92 years.
The final major component of the balance sheet loan portfolio is $157.9 million of mezzanine loans, which was almost unchanged during Q2 and had a weighted average coupon of 10.82% at quarter end. This portfolio is financed by a combination of CLO debt, FHLB advances, and committed loan repurchase facilities.
Ladder's conduit loan balance was $107.7 million at the end of the quarter during which Ladder originated $232.1 million of new conduit loans, while contributing $400.8 million principal balance of loans to three securitization transactions. Those securitizations generate $8.5 million of core gains.
As a result of a steady and methodical reallocation of capital for our investments in CMBS and into balance sheet loans and real estate investments in recent quarters, approximately 76% of net revenues over the past four quarters have been derived from recurring sources of earnings. This increasing trend in recurring net revenues has been ongoing since Ladder's IPO in 2014.
Finally, we do not sell any non-condominium real estate during the quarter. We expect to sell the remaining seven condominium units at Veer tower by year end. We have sold 420 units at Veer Tower through June 30. We also expect the sellout of the Terrazas condominiums within the next 18 months or so as we have 36 units remaining from an original inventory of 324 units. During Q2, core gains from the sales of condominium units totaled $1.4 million.
In Q2, Ladder acquired five net least assets, while remaining -- with remaining lease terms averaging 14.5 years for a total of $6 million -- total price of $6 million in addition to a 75% equity interest in a 40 property 641-bed portfolio student housing units in Southern California.
Turning to key balance sheet and investment activity metrics. As of June 30, 2018, 96.8% of our debt and investment assets were senior secured including first mortgage loans and commercial mortgage-backed securities secured by first mortgage loans, which is consistent with the senior secured focus of the company.
Senior secured assets plus cash comprise 76.9% of our total asset base. Total assets stood at $6.39 billion, 2.5% higher than at the end of Q1. Quarter end total equity was $1.5 billion, resulting in an adjusted debt-to-equity ratio of 2.66 to 1.
Total unencumbered investments including cash were $1.7 billion at quarter end and unsecured debt stood -- outstanding stood at $1.2 billion, reflecting an unencumbered assets to unsecured debt ratio of 1.46 times.
The weighted average loan-to-value ratio of the commercial real estate loans on our balance sheet at June 30, 2018, is approximately 67%, in line with prior quarters. On the financing side, as of June 30, 2018, we had $4 billion of core debt outstanding and committed financing availability of $2.3 billion for additional investments.
Over the past four quarters, we have further enhanced the diversity of our funding base through the issuances of unsecured corporate bonds, non-recourse CLO debt, and the addition of long-term non-recourse mortgage debt to finance real estate. When combined with the $1.5 billion of permanent equity and $174.5 million of other liabilities, $4.3 billion or $0.67 percent of Ladder's capital base is comprised of equity unsecured debt and non-recourse non-mark-to-market debt.
In addition at 6/30, we had the full $241.43 million capacity of our syndicated unsecured revolving credit facility available to be drawn upon as needed.
Since March 31, we've extended the maturities of two of our existing bank financing facilities. The final maturity of those facilities are in 2022 and 2023 respectively. As was the case in Q1, we continued to benefit from notable spread reductions in our cost of balance sheet loan funding and that favorable trend seems to be continuing.
At quarter end, we had $1.3 billion of FHLB borrowings with 2.43 year weighted average maturity and an average cost of 2.07%. Finally, we paid a $0.325 per share cash dividend in the second quarter, reflecting a $0.01 per share increase in our quarterly dividend rate and marking the fourth dividend increase during the 14 quarters since we initiated dividend payments.
Ladder's annual cash dividend rate is now 30% higher than it was at the start of 2015. On a rolling four quarter basis, Ladder paid $1.255 per share of dividends, while earning core EPS of a $1.82 per share, resulting in a solid 69% dividend payout ratio.
So, summing up, in the 2018 second quarter, Ladder generated $50.4 million of core earnings, $0.45 a share of core EPS, resulting in a core after-tax return on average equity 13.3%, originated total of $711.9 million and securitized $400.8 million of loans, resulting in $8.5 million of net securitization gains.
We paid a $0.325 per share cash dividend in a quarter on which core EPS $0.45 per share and we continue to apply a disciplined approach to use of leverage, the allocation of capital in the face of the risk we encounter, and to the selection of longer term investments in loans and real estate.
At this point, it's time to open the line for questions and answers.
[Operator Instructions]
Our first question comes from the line of Stephen [Indiscernible] from Raymond James. Please proceed with your question.
Hi, good afternoon. Congratulations on a nice quarter and strong first half of the year.
Thank you.
I guess wanted to talk about the origination environment, what you're seeing out there? I know a lot of peers are seeing some spread compression and I'll have to transcripts, you went through the numbers a little quickly, but it sounds like the loan portfolio actually has a higher spread to LIBOR today than last quarter. Again, I need to double check that. But could you talk about the market competition and what you're seeing as far as new originations?
Sure. There's two parts to that question. So, the balance sheet business, which I'll call the bridge loan portfolio, we are probably a little bit different than some of the other rates that you cover and that our target market is the middle market and our average loan balance is only about $20 million. So, as a result of that we don't feel quite as much pressure at all on the competitive side.
I think the second item that causes us to feel less compression on price is that we are not targeting the CLO execution that I think a lot of balance sheet lenders are targeting. We do some and we don't avoid them by any means, but we don't chase them specifically.
And given the resurrection of the CLO market, we've seen compression in those types of assets. However, I would tell you probably 70% of the assets that we originate on our balance sheet don't conform to that model. We are really a true disciplined credit-based balance sheet underwriter and originators.
On the conduit side of the business, the securitizable assets, that is competitive. We have -- it kind of felt like we had a pretty slow quarter to me because we have not really been focusing on that business because it was quite competitive.
As it turned out though, as non-banks go, I think we were one of the largest originators in the space or contributors to securitizations, which frankly surprised me. However, this -- and despite the fact that in the second quarter, credit spreads widened out continuously in the second quarter. They didn't move dramatically, but from the beginning to the end of the quarter, they went wider and wider and wider. And that's why you saw we contributed $400 million in loans into three different deals and we made 2.1%. That's a little bit low on the average for us, but the result of that is because of that widening of credit spreads during the quarter.
So, our approach towards bridge lending, our rates really haven't changed -- our spreads. We're benefiting on the earnings side. I think we mentioned that we made $54 million in revenue in this quarter versus $46 million in revenue in the last quarter.
On net fundings, we're going up $200 million to $300 million per quarter over the last four quarters. So, we're not being paid off at nearly the rate at which we're originating loans.
And in addition to that, we have not really felt a lot of spread compression. And again I think it's because we're not targeting the CLO business.
Great. I guess a follow-up on each of that. You mentioned that originations seem to be outpacing repayments here for the own balance sheet portfolio, adjusted leverage at 2.7%. Where do you see that trending? Or is there a target -- kind of, how do you think about the size of the balance sheet portfolio and where we're going?
Stephen hang on one second, we're going to switch to a different phone because we're having a little bit of trouble hearing you there. So, we're going to make that switch and tell us if you can hear me. Can you hear now?
[Technical Difficulty]
Okay. Would you mind repeating your question Stephen?
Sure, it was just a follow-up on the own balance sheet portfolio, given originations seem to be outpacing repayments. Where do you see leverage headed? I think adjusted leverage was 2.7% for the quarter. Is there a target in mind or how do you see the balance sheet growing from here?
Our leverage we target two to three times generally. We probably are on the upper bands of that right now, but it's mainly because of our -- we've actually been picking up more securities also. We have been purchasing some of those LIBOR-based CLO AAAs. But we're within the bands of our targets, but towards three. Marc, I don't know if you want to add?
2.66 times on the adjusted leverage ratio. He said 2.7 which is fine.
Yes. And then a follow-up on the conduit business. You mentioned trends in the quarter. Have those continued through July or have you seeing anything new this month? Or any update on that environment?
Sure. We have seen -- I'm going to avoid too much conversation around spreads because we are presently in the market with a transaction, but we do feel like things have stabilized.
Great. And one last question. $90 million of new real estate investments, I think you said Brian in your prepared remarks, that was on a student housing asset in Southern California. Can you provide any more color there, kind of, how you source that investment? Expected returns there or maybe in the additional details on those new CRE investments?
We felt that it was a special situation that came through the door with a partner. So, it's a JV transaction and it's somebody that we've known for 25 years and it's a bit of a specialized asset set and student housing has changed a lot since I was a student. It is beautiful and it pretty much is the student housing along the southern coast of UC Santa Barbara is the school that the students go to and we were able to pick it up.
There was an owner who was moving out of town and we were able to do a bulk purchase all at one time. And it felt like there was a moat around it because you've got that targeted concentrated demand right there with waiting lists. So, we felt it was pretty safe asset pool to hold onto. We thought if we sold them individually, possibly low cap rates might prevail because it literally overlooks the Pacific Ocean.
Sounds like a better than my student housing as well, Brian so. Thanks a lot for taking my questions and look forward to speaking to you later.
Sure.
Our next question comes from the line of Steve Delaney from JMP Securities. Please proceed with your question.
Hey, good evening everybody. I'd like Steve's comments on congrats on the strong quarter. I just have one thing. The home loan bank advances year-to-date have come down $100 million to $1.27 billion. Marc, it's a two-part question. Can you tell us what the average remaining balance of your advances are? And are we -- am I correct in assuming that as your balance comes down from 1.37 at December 31st to 1.27 at June 30 that under the new rules that are in place, you cannot increase your bout -- your advances back to a higher level.
Sure. Let me start with that last question first. No, we can't. We can pay down and then borrow back up. We're permitted to do that.
You can?
Yes, we can. There are other members who are not in position to do that. But the way we financed ourselves over the years, allow -- has allowed us that flexibility all the way through to the end.
So, what your -- let me -- not to -- I apologize, you go ahead and finish, I'll jump again.
Yes. There's a formula that the math, but it's approaching about $2 billion. Okay -- is what we can borrow.
Okay. That's very helpful.
Yes. And so when you see us at 1.27, I think today, we're at 1.34. So, it goes up and down and our average cost of funds today is approximately 2.09% on that money rate.
Great. Well, that is unique I think -- and different from what we're seeing with some of the residential companies that once your advance matures, you've lost it if you will. And I guess Brian, couple things in the news this week. We heard that the Federal Home Loan Bank of Chicago is actively lobbying other flub banks to try to get them behind the legislation that's in the Senate and the House with respect to changing the rule. And then, of course, whether it's real news or fake news or whatever, we had the information come out about Mel Watt. So, whether that leads to a change in leadership.
I'm just curious your view given how important that funding source is to all non-bank lenders. If you have any updated view on how that might all play out over the next year or two?
As far as I know we are in for another 2.4 years and anything further than that would be straight speculation. There are two sides of the fence there. Some people think that these captives may very well be extended or allowed to stay in. Others think not. As far as the regulator, itself, I have no comment on that at all. I don't know anything about it.
Okay. Thanks for the comments guys.
Our next question comes from the line of Tim Hayes from B. Riley FBR. Please proceed with your question.
Hey, good evening everyone. Just following-up on Stephen's first question, the way the average portfolio yield has increased significantly and the yield on 3Q originations so far is also well above the portfolio average, seemingly more than LIBOR has moved kind of over that timeframe and just wondering if you could help us understand how much of the increase in yield is due to higher rates versus any spread widening you may be seeing or the characteristics of the loans that you're originating?
I would hesitate to draw too many conclusions from one quarter where the net effect of the addition was $200 million or $300 million because some of these loans are $80 million or $90 million, so they can swing that number on a quarterly basis.
I think that our overall portfolio has been fairly consistent and it seems -- I feel like I keep saying the number 5.80 over LIBOR and then keep in mind, that doesn't include fees -- origination fees or exit fees or expansion fees. So, the number that ultimately translates into in the earnings sometimes is quite a bit higher than just the number that the yield would indicate.
I wouldn't say that we're making any targeted effort to remain at that spread or higher. We pretty much look at conditions of the assets that we're lending under and we make a loan in that direction. And there are arguably certain loans we wouldn't do under any circumstances at any price. But we feel like our credit quality is very strong and our ability to understand these assets is very good also.
But I would hesitate to draw too many conclusions about higher rates. I think with the optical thing you may be noticing is that our rates are not falling, whereas I think almost everybody else you talk to they are. In our case, they're not. We are not feeling the competitive pressures that and I've said this quarter-after-quarter at this point and I believe it's because our average loan size is much smaller than some of our competitors.
Okay. Thanks for the color there. And then can you give us a little bit more detail around the 3Q balance sheet origination so far, the first mortgage, or the floater is just the property types geographies, stuff like that.
I believe they were almost all floaters, I think was $179 million, but we only funded $142 million of it. The difference there would be that there's a lot of TI in some of these numbers. I know we did a couple of loans where it was refinance from an asset done 10 years ago. And there was a requirement on our part for TIs and leasing commissions to be prefunded.
So, when you see that short funding, I don't want you to think really construction loans. I'd rather have you think it's reserved for TIs and leasing commissions to lease up the office buildings.
Okay, got it. And then do you -- on the financing side, do you think that there's obviously the FHLB advances, you got a little bit more time to keep those on the balance sheet and those are very attractive from a cost to funds standpoint, but do you think there's more work to be done to further improve the right side of the balance sheet? Are you actively in talks with your counterparties about amending terms on credit facilities?
We're generally always in the talks with our counterparties to enhance our funding. know we'd like to have more diversity. We're talking to a couple of banks about -- that aren't part of our syndicate or part of our group of secured funding parties to join to add some diversity. We're seeing compression in the cost of the funds, almost across the Board and it's slow but sure and it's constant and that's good.
We have a syndicate of eight banks on our unsecured revolving credit facility and had a very good relationship with them. As you know that facility has expanded from $75 million in capacity, now $241 million. So, if you hear about activity with us talking to banks, that's usually the norm.
I'd also add to, I think that the repo facilities that the banks provide lending to REIT like us, those rates have been compressed, but not necessarily because of strong competition from other banks. I think they really compressed a little bit because of the CLO alternative, which has now gotten into -- or fairly like-minded cost of funds there. And also of the convertible bond market has also driven down some cost too. So, a lot of those lines that were fully used in years past are not really used anymore, because frankly, they're too expensive. So, in order to get the utilization up and get their fees up, the banks have been lowering some. It hasn't been dramatic, but there has been a downward pressure on cost of funds.
Got it. Thanks. That's helpful and that's all for me for now. Thank you.
Sure.
Our next question comes from the line of Jade Rahmani from KBW. Please proceed with your question.
Thanks very much. Could you just repeat the post 2Q originations and also repeat the 2Q spread?
All right. Let me go back in my notes. I'll find them, that's okay. All right in July, we originated $65.75 million of loans for securitization and that was at a fixed average coupon of 5.24%.
The floating rate side was $179 million in July, these are closed by the way. This isn't just -- when I say originated, I mean close, so $479.8 million of balance sheet loans with an average spread to LIBOR of 584 basis points.
Of the -- average interest rate is 8.149%, but -- hang on a second, yes, and we funded a $140.93 million of those commitments.
Okay. So, the $479 million, was that the 2Q number or the July number?
I'm sorry, $179 million, $179.6 million.
Was the number in terms of commitment.
All right.
Got it. I guess your positive commentary around earnings and dividends, do you anticipate being able to grow earnings relative to this quarter's 45% core number? Or should we think about it relative to a different number maybe exclude the condo sales or something else?
I think that our run rate has gone up, just our net interest margin has increased and I think the reason for that then. Let me take a minute to get this across because I think it's important.
We have about over 50% of our cost of funds involved with financing loans is fixed rate because of our large borrowings in the corporate unsecured bond market and also the Federal Home Loan Bank.
So, when LIBOR does go up and I pointed out it while I was talking there that it has actually increased almost fivefold in the last two and a half years. So, when LIBOR goes up, we like any other LIBOR-based lender have more interest coming in at the higher rate. But unlike a lot of other parties I think we don't incur as much of an increase in our cost of funds because we're only partially LIBOR based.
Our fixed rate bonds have really been timed well and so our cost of funds stayed quite low and we get a probably unamplified income stream as a result with a differential of net interest margins.
So, I would say if the Fed continues to raise rates and they're indicating for all that they're going to go again in September even though it's in front of the midterm elections what I would think any time LIBOR goes up, you would see a corresponding increase in earnings from us.
Okay, that's helpful. Just thinking about credit risk, I wanted to ask how you see it differences between the bridge loan book and the CMBS loans you originate. Because on the one hand, the bridge loan properties are not yet stabilized, but on the other hand, duration is much shorter as those properties do benefit from fresh round of CapEx as a result of the business plan. So, do you think the credit risk in the different loan types is comparable in aggregate. Or should we think of the bridge loan book as having higher credit risk.
I think they're comparable. I don't. We don't and we don't have two different underwriting cross procedures here. So, I -- and again, most of the conduit loans, they don't really feel like they're highly leveraged. Some of them I don't particularly like the 10 year I/Os. I think that's a little bit much from the risk taking standpoint. Whereas the transitional loan book, here you can really see 24 months in and what we liked about that business had a lot of those funds don't even go out the door unless it's good news on the leasing front.
So, especially, when you're doing transactions that were originally done 10 years ago, a lot of these buildings if there's been a deterioration in value from the original loan amount that will cause a lack of CapEx and reserves really from the from the borrower.
When it gets recapped then then those reserves do come in and the building then enters the marketplace for tenants in a very well-capitalized form which oftentimes it hasn't been in for the last five years or so.
And just in terms of the market, it's obviously been a benign credit environment but what people don't talk about is that in 2008 through 2010, they were practically no originations. So, we haven't yet hit the 10-year typical balloon maturity that most commercial mortgages involves structurally.
So, would you anticipate by the end of this year with additional Fed rate hikes for next year, a notable pickup in delinquency rates for the market overall.
Notable is the question I'm not sure because that would be a guess. But obviously, if interest rates are going higher on paper looked great, because if you have LIBOR floaters, you get more income, but refinancing has become more difficult.
Now, I think most of the underwriting that takes place anticipates some normalization of interest rates. What if the Fed gets a little excited and goes much higher than I think. Yes, surely you would wanted and you would have some difficulty in refinancing because current rates -- prevailing rates are too high relative to the cash flows.
And do you think the biggest factor is the rate hikes or the hitting that 10-year anniversary of save it, of the 10-year ago production?
I would think it would be the rate hikes because it's basically a cost of doing business. The interest component is a big part of running a building. And I but I don't unless it's much higher than it is right now. I wouldn't anticipate it being a problem.
But if you shocked LIBOR 300 basis points, sure, that's going to start causing some problems.
Wanted to ask you guys about how you think about capital availability, your comfort with the current size of the balance sheet, and if you have any appetite for say equity issuance, one of your peers is issuing equity and many of the commercial mortgage REITs are up quite notably over the last few months. So, could you make any comment on that.
I think that we have plenty of capital for where we're accomplishing. We are very happy to be a low teens ROE and running at the pace we're at. Our book is in very good credit shape. We're not having difficulty there. I don't see an opportunity set that is so extraordinary at this point in the cycle that we would need large amounts of capital to continue.
But given our holding still, securities and some short-term fixed rate loans even, we have a lot of maturities coming up in the next one to two years. And some of those rates are quite low. So, we'll get a bump from that as we pay off-a lower rate and lower yielding instruments.
Now, they're okay on our balance sheet for now because they're financed set fixed rate with the Federal Home Loan Bank. But when that financing rolls with that asset then we'll be lending into a much higher rate environment. So, we feel pretty comfortable from an earnings supplement standpoint that that will take place. But I also think it's important to point out that we're an internally managed company and so we will be very hesitant to raise capital unless we see tremendous opportunities.
Whereas, I think you'd lose a little bit of that discipline with externally managed [Indiscernible].
So, I'm going to say more than a little? But thanks for the comments. Really appreciate it.
Okay.
Our next question comes from the line of Ben Zucker from BTIG. Please proceed with your question.
Good evening everyone and thanks for taking my questions. I know you guys are opportunistic acquirers of real estate, but is there any sort of targeted level or amount of equity capital that you want to eventually allocate to that strategy.
I can see it's been holding at around a billion dollars plus or minus for the last few quarters and just trying to gauge how high you would be comfortable taking that part of your book. I don't -- we don't have anything written down as a targeted amount. And we are opportunistic in that regard.
As we said you know these transactions usually come through somebody looking for debt and we wind up as their partner. So, I wouldn't say that we have. But we do run a REIT and it is recurring income and we certainly understand the value of real estate. So, if we're willing to lend and we ought to be willing to purchase it also if it looks attractive enough. But we really do look at it from the standpoint of dollar replacement value. Could this get into trouble? How can we finance it? Because we finance our real estate holdings typically with non-recourse debt that we securitized through other banks or through our own securitization group and we generally try to generate a rate of cash on cash return in excess of 10% and that that combined with our large book a floating rate loans really just generate an enormous amount of cash flow and very REIT -- its REIT eligible. So, from a tax perspective it's excellent.
So, I would say we certainly don't have any intention of getting out of the real estate business, but we're not targeting it with a certain amount of capital.
That makes sense Brian and as a quick follow-up, could you provide an update on that condo project. I think on second half of New York City, just a quick reminder of how many units there are there and when those should be coming online.
Sure. There's 31 units and to be sold. They are small. And when I say small meaning there's no penthouses, there are all kind of about the same size and it's actually located right near NYU, it's about eight-minute walk from there around the lower east side of the 31 units, I think 10 of them are spoken for at this point. And we would expect closings to take place and we're getting a little bit out of my expertise here. But I'm expecting closings to start taking place in the fourth quarter.
There is one retail component also which is a condominium, which I'm actually trying to get an update on, I haven't heard much about that one in a while. So, well, if you're wondering about how condominiums are doing, we like the fact that we're not around Central Park on that when we're not trying to sell these things that %30 million. These are these are not cheap units, but they're not nearly as expensive as some of the some of the uptown condominiums.
I hear you there; cheap and expensive are all relative when it comes to New York.
And we also think there's a targeted group of students with parents that that may want to buy them from foreign countries to a house in NYU for up to four years.
And real quickly just looking at your income statement and comparing to 2Q 2018 to 2Q 2017, it looks like total revenues were up a little bit year-over-year, while operating expenses as a percent of those revenues dropped a little bit maybe like five points. I'm just curious is that the result of more revenue being generated from your net interest margin and property NOI rather than securitization activity, which carries more variable expenses?
Yes, I think that's fair.
Okay, great. Thanks Marc. That's it for me guys. Thanks for taking my questions and nice quarter.
Thank you.
Our next question comes from the line of Rick Shane from JP Morgan. Please proceed with your question.
Hey guys, one question and one follow-up. Brian, you'd talked about the conduit business and said that competition for our assets is high and that execution spreads are widening a little bit. I'm curious how you're responding to that in the market? You talked about that, but you didn't say what your approach to that is going to be?
Well, yes, the second quarter was characterized by spreads widening throughout. I didn't talk too much about what we're seeing right now. I'm going to duck that question, Rick, because as we said we have a deal in the marketplace. But we are price makers not price takers. So, from our perspective, if we don't feel like it's starting with the right profit margin, we'll just curtail that activity.
Got it. Okay. And that answers my follow-up too. Thank you.
Our next question comes from the line of George Bahamondes from Deutsche Bank. Please proceed with your question.
Hi guys. Just a quick one for you Brian. Curious to know if any markets were you underwriting loans over the last year or two? If there's any signs around credit issues or maybe target loans that you are no longer comfortable underwriting in, just any color around the profit related issue that you might be seeing and targets that you're no longer favoring anymore?
Yes, I mean it's hard to paint them with a broad brush because in theory if you don't like the valuation, you just lower the leverage. And so the question really is are we just missing there because we've lowered leverage and others have not. And I think that we have.
I think that the hotel sector, I don't think it can do any better than it's doing right now. That's a general statement. I think it's generally true. We do have the chance to see dozens and dozens of business plans unfolding in our bridge loan portfolio because we know what happened when we started and we know quarter-by-quarter what's going on and whether or not they're on target for their milestones.
I will tell you there is a perceptible softening in the pace at which people are executing, but I wouldn't call it any anything problematic yet. But in the world of momentum, do I think it's getting better or do I think it's getting a little worse? I think it's getting a little worse as far as execution goes.
All of the problems we're witnessing so far though will result so far in the deterioration of returns to the equity not a default of the debt. So, I think costs are going up. Some of those commodity prices going up and prices are pretty interesting too.
But the hotel sector is just flat out doing -- it's going gangbusters and I can't imagine it gets much better I don't think prices can get up to much higher. There is some supply coming on the market. The condominium market is definitely softening in some cities, New York in particular. I think the tax situation with New York, New Jersey, and Connecticut is absolutely going to have some impact, whereas, I think the beneficiary will be Florida.
So, it's a little bit of market-centric kind of a comment and I don't want to be too wonky on you, but it is driven by some of those things. Industrial is just doing a fabulous. It's performing perfectly. Apartments, I would say rents in the country are falling, not rising, but not to any danger level. I think there's been a little bit too much production there.
And the office market is densification, you have to really figure out how many people are in those spaces. But you can get leases signed if you're well capitalized. Certain secondary cities I think you're really just moving tenants around in a U-Haul and it's all about TIs and leasing commissions. So, it's a little bit harder. But those have correspondingly wider cap rates.
Great. Appreciate the color and I look forward to speaking to you shortly.
That concludes our Q&A session. I'll now return the call to Brian Harris, the company's Chief Executive Officer.
Okay, just want to say thanks to everybody for spending the time with us today. And we hope to be in touch with you again soon and look forward to the next quarter. But optimism reigns here at Ladder.
That concludes today's call. You may disconnect your lines at this time. Thank you for your participation.