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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 of 2023. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended June 30, 2023.
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. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call.
At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.
Good afternoon. We are pleased to report that the second quarter of 2023, Ladder generated distributable earnings of $41.5 million or $0.33 per share, reflecting an after-tax return on equity of 10.8%. Our dividend remains well covered from net interest margin and net rental income.
As of June 30, Ladder remains flush with liquidity and modestly levered with an adjusted leverage ratio of 1.7 times. As of quarter end, Ladder had $777 million or 14% of our assets in cash and cash equivalents with $1.1 billion of same-day liquidity, including our undrawn unsecured revolver.
In addition, over 50% of our assets are unencumbered and 84% of these unencumbered assets are comprised of first mortgage loans, investment-grade securities and cash and cash equivalents. Ladder continues to maintain a considerable surplus of unencumbered assets over the amount required by our covenants, currently totaling over $1 billion. This cushion provides us with a great deal of flexibility and enhances our liquidity profile as the majority of our uncumbered assets are readily financeable.
As of June 30, Ladder's balance sheet portfolio totaled $3.5 billion with a weighted average coupon of 9.15%. We continue to have modest future funding commitments of $272 million, with more than half of this commitment being contingent upon accretive, good news leasing.
Repayments in the second quarter totaled $309 million, both exceeding the amount of quarterly repayments we received in any quarter over the last year and more than doubling the amount of loan payoffs we received in the first quarter.
During the second quarter, we added $35 million loan on a mixed-use property to nonaccruals. The borrow-only asset at a basis of $55 million, which is comprised of 174 newly constructed multifamily units and 3 floors of office and commercial space in Pittsburgh, Pennsylvania.
We're pursuing our remedies for the asset, which included a recent change in management at the property that has already led to an improvement in occupancy and net cash flow. Over 80% of the property's revenue is generated from the multifamily units. Current occupancy supports an in-place debt yield of 6.2%, which is forecasted to increase to 7% before we anticipate taking title to the asset later this year as the multifamily units are leased to stabilization. We did not take any specific impairments in the quarter, and Paul will cover the increase in our general CECL reserve, which reflects our current view of evolving macro market conditions.
We are continuing to proactively monitor our loan portfolio, including our office loans, which comprise 16% of Ladder's total assets. As previously disclosed, over one-third of our office loans are concentrated in two assets in South Florida, which continue to perform well. With robust liquidity and a highly experienced origination team in place, we're well positioned to transact when activity resumes in the market. In the meantime, we've begun to take advantage of opportunities to add to our securities portfolio by acquiring additional AAA CLO securities that are currently offering highly attractive returns.
Our real estate portfolio also continued to contribute nicely to distributable earnings by generating $16 million of net rental income this quarter. Over 70%, or $653 million of the larger portfolio is comprised of 156 net lease properties. These properties are leased to strong necessity-based tenants, 69% of which are investment grade with a weighted average lease term of over 9 years.
The upcoming mortgage maturities on the properties have over 3 years remaining on average and are very manageable with no debt coming due in 2023 and only approximately 35% of the portfolio having mortgage maturities before 2026.
The financing on our net lease portfolio has a weighted average in-place coupon of 5.54%, which compares favorably to the current 10-year SOFR swap rate of 360, implying a spread of 190, ultimately giving us comfort on the feasibility of refinancing.
We continue to like the stable long-term cash flows that this long-term lease segment provides to Ladder, and we view it as a favorable complement to our shorter-term bridge lending business. We also think there is upside that can be achieved through extensions at lease maturity by achieving higher lease rates for longer terms, which we have already had prior success with, including as recently as December of 2022 when Ladder executed early 5-year renewal options for 3 Dollar General stores with less than 5 years of lease term remaining.
Our corporate credit rating was reaffirmed during the quarter by 2 of the 3 rating agencies at one notch below investment grade. We believe our large unencumbered asset pool, stable use of modest leverage and diverse liability structure comprised of 78% unsecured and nonrecourse, non-mark-to-market debt allowed us to maintain our rating, the highest in the space despite the disruptive commercial real estate market.
In conclusion, our dividend is well covered as we await the opportunities we expect the market to present. We benefit from strong asset diversity and conservative advance rates on our loans and believe we are well positioned to take advantage of the dislocation in our sector with meaningful liquidity and modest leverage.
With that, I'll turn the call over to Paul.
Thank you, Pamela. In the second quarter, Ladder's diverse business model performed well, generating distributable earnings of $41.5 million or $0.33 per share, driven by strong net interest margin and net operating income that benefits from our liability structure, of which approximately 50% of fixed rate.
Our primarily floating rate $3.5 billion balance sheet loan portfolio decreased in the second quarter due to $309 million of proceeds received from loan paydowns, offset by $13 million of funding on existing commitments. The proceeds from paydowns included 13 full loan payoffs with a $25 million average loan size. The payoffs were generated from property sales and refinancing through agencies, regional banks, credit unions and insurance companies, demonstrating liquidity in Ladder's origination strategy with a middle market focus and smaller average loan size.
In the second quarter, we increased our CECL reserve to $32 million, driven by the current market outlook. We continue to believe the credit of our loan portfolio benefits from overall diversity in collateral type, geography and granularity with an average loan size of $26 million and limited exposure to any single sponsor or market.
As Pamela discussed, we added one new loan to nonaccrual, a $35 million loan on a mixed-use asset for which we are pursuing remedies via foreclosure. Our $900 million real estate segment continues to perform well. And as Pamela discussed, provides stable net operating income to our earnings.
As of June 30, the carrying value of our securities portfolio was $458 million and was comprised of 82% AAA rated and 99% investment-grade rated securities. In the second quarter, we received $75 million of paydowns on these positions and their seniority and short-dated maturity continues to demonstrate steady amortization.
Furthermore, we paid down $150 million of securities related debt during the quarter, saving on interest expense and delevering the company. As of June 30, we had $1.1 billion of same-day liquidity, and our adjusted leverage ratio was 1.7 times. This liquidity represents cash and cash equivalents of $777 million, plus our undrawn corporate revolver capacity of $324 million with a maturity in 2027.
Unsecured corporate bonds remain an anchor to our capital structure with $1.6 billion outstanding or 40% of our debt with a weighted average maturity of 4.3 years at an attractive fixed rate cost of capital of 4.7% average coupon.
In the second quarter, we repurchased $3.1 million in principal of unsecured bonds at 84.3% of par, generating $0.5 million of gains from the retirement of debt. And in 2023, through June 30, we have repurchased $62 million in principal of unsecured bonds at 83.6% of par, generating $9.7 million of gains through [indiscernible] debt.
As of June 30, our unencumbered asset pool stood at $2.9 billion or over 52% of our balance sheet. 75% of this unencumbered asset toll is comprised the first mortgage loans and cash and cash equivalents. We believe our liquidity position and large pool of high-quality unencumbered assets continues to provide Ladder with strong financial flexibility. As Pamela discussed, is reflected in our corporate credit rating as one notch from investment grade from 2 of 3 rating agencies.
Year-to-date, we've repurchased $2.3 million of our common stock at a weighted average price of $9.14. We did not purchase any shares in the second quarter of 2023. Our share buyback authorization of $50 million had $44 million of remaining capacity as of June 30, 2023.
Ladder's loan depreciated book value per share was $13.72 at quarter end based on 126.9 million shares outstanding as of June 30. Finally, our dividend remains well covered. And in the second quarter, Ladder declared a $0.23 per share dividend, which was paid on July 17, 2023. For more details on our second quarter operating results, please refer to our earnings supplement, which is available on our website as well as our 10-Q.
With that, I will turn the call over to Brian.
Thanks, Paul. If in the market turbulence experienced since a few banks failed in March, I can't help but admire Ladder's performance over the first half of the year. We reported double-digit returns on equity in both quarters of 2023, using modest leverage and maintaining high levels of short-term liquidity.
It appears that the Fed is nearing the end of their aggressive hacking cycle, and they may even pull off the so-after soft landing in the U.S. economy. As a result of this fresh optimism, the capital markets do seem to be falling a bit, albeit rather slowly.
At the end of May, Ladder began investing in AAA-rated securities from new issue CLOs that were offered in the market with very little supply. We began investing small amounts this quarter and expect our investments in this segment to pick up quite a bit over the rest of 2023. These investments in high-quality AAA securities are delivering some of the highest returns in decades, sometimes yielding unlevered returns over 8% and levered returns in excess of 20%.
As we assess the impact of the regional banks contracting in size and how higher rates might impact refinancing of loans, we're pleased to see over $440 million of loan payoffs in the first half of the year. These payoffs really enhanced our liquidity since we are so modestly levered.
Because T-Bill is maturing in under 90 days are now providing yields in excess of 5.3%, which Ladder has taken advantage of with portions of our ample liquidity, we can afford to be selective when pricing new loan opportunities or investing in security. We believe our crossover understanding of relative value in the CRE markets will enable Ladder to continue delivering attractive returns without sacrificing safety or using too much leverage.
Because we have so much liquidity in markets that are paying off for liquidity, we like our prospects going forward. You might recall that last quarter, we repurchased $59 million of our corporate unsecured debt across three outstanding issuance [ph] Over the last 90 days, each of those corporate unsecured issuance have appreciated in price by 5 to 9 points. We believe our use of this financing structure has served our shareholders well during the Fed hiking cycle.
No earnings call in 2023 would be complete if we didn't mention the office market. So far, returns on equity are being negatively impacted by higher short-term rates, but most sponsors, if they have capital available to them - they are trying to protect their investments by contributing additional capital required by lenders to extend maturity dates.
We anticipate challenges in the syndicated equity structure where the promote to the GP has become negligible and also in loans secured by large buildings and cities with high crime rates and other social problems. I would note, however, that we do see improvements in some of the more difficult markets like San Francisco, where it seems like the latest AI tech brand is centered in the Hayes Valley neighborhood awakening downtown market. It's a start, but they have a long way to go still.
As for other property types, it seems hotels are doing well in drive to markets and multifamily asset values are leveling off in some Southeast markets, but we don't anticipate rents falling. Instead, we are seeing operating costs rising, particularly taxes and insurance, and this is impacting ROEs in the space, as cap rates have widened with higher rates.
Wrapping up, we believe there will be an increase in foreclose in the industry as higher rates and operating costs are bidding into ROEs and commercial real estate, but we believe, in many cases, lenders or note [ph] buyers will take title to properties at a basis that is far lower than the basis of the original sponsors investment.
We also believe there may be some surprising gains down the road for those who are patient, especially if interest rates fall in the years ahead, and capital markets continue to recover after the regional banking issue settled down. We look forward to the second half of the year entering with low leverage and robust liquidity.
Now let's take some questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Sarah Barcomb with BTIG. Please go ahead.
Hey, everyone. Thanks for taking the question. So in the prepared remarks, you spoke to the refi sources for your repayments. You mentioned property sales and even regional banks and credit unions and - but I was also hoping just given Ladders, depth and breadth in the securities market. If you were seeing signs of the conduit market and the SASB market opening up, like we've been starting to hear from some of your peers. And has that been supporting your borrowers and their ability to refinance?
And do you think you could speak to whether they're willing to lock in a higher fixed rate now versus dealing with the current floating rate debt or even handing the keys back in some cases. Just hoping you could kind of speak to that.
Sure. Thanks for the question, Sarah. This is Brian. The conduit business is doing better. There have been a few deals. It's still largely confined to 5-year loans. And I think that's largely because the 5-year indexes where you're trading off of the 5 years is higher in rates than the 10-year.
So that business is picking up. I think you saw spreads tighten quite a bit in the last couple of months. Really after the banking issues of March, April was a bit of a mess. But May and June, things were tightening. And that's really evidenced if you remember, our high-yield purchases of our own bonds. They came in 5 to 9 points in about 90 days.
We also began investing in CLO AAAs recently, starting at 290 over, which levered into a mid-20s return. In a matter of two weeks, they're down to 235 now in the marketplace. And this is all beneficial for refinance. And I think that we are seeing - I think I said in my prepared remarks, slow start with the ways to go.
But SASB, I think, is traded by appointment, I don't really think the loans rates are coming to market with the rate. I think the market is setting the rate wherever they can sell AAAs and AAs and single As. And that's probably another healthy sign.
So - and the regional bank so-called crisis, I think we all found out it was a little more contained than it seems possibly might be going forward. But a lot of the regional banks were making loans. And in fact, we were refinanced by not a typo here, Silicon Valley Bank took us out of one of our loans, and they funded a refi.
So the regional banks are going to be a little bit challenged on income because they're going to have to pay for higher deposits because of the deposit flight that was witnessed into treasuries. But they're still in the lending business. And in fact, several of them, I think, were pretty aggressive in their lending.
So there - it is improving. I hesitate to say it's - it doesn't have a long way to go still, but smaller loans are getting done. Banks do lend money. And when people say, well, they're going to contract and get smaller, the earnings model, it doesn't just entail paying higher rates for deposits. It entails making more loans at higher rates also. So I think they're going to get squeezed a little bit on profits, but companies like JPMorgan and Wells are not really being squeezed nearly as much. If that answers you.
Yes. Yes, that's helpful. Thank you. And just on the subject of investing in securities, you mentioned that you'll be looking to ramp that up in the second half. But we've also been hearing about high coupon deals that are available in the traditional floating rate senior loan market. So I was just hoping you could speak to the loan origination environment that you've been seeing and why you didn't bite on anything during the quarter.
Sure. I think similar to what I said last quarter, the - we're not having necessarily trouble with somebody who wants to borrow money yet at the rates that we want to charge for it. Where we're having trouble is the principal come. A lot of refinances are simply over levered. And if they don't have capital to commit to delever their situation, they're at risk of losing their property.
So there is - lending is picking up. We do have some quotes outstanding. We quoted several loans last quarter, but we were missing because our loan amounts were too low. And I think I also mentioned that we were being beaten by companies I've never heard of. So kind of speaking to the emergence of private credit in the sector.
Today, I think we're going to start writing loans here. I can see a sense of seriousness in the quotes that are going out and the questions we're getting back. And I don't think we've changed much on the rate side, even though spreads have tightened a little bit, but I do sense that people are waking up and realizing they're just not going to be able to borrow as much as they used to, given where the 500-plus basis point move in short-term rates.
Great. Thank you...
On the security side, by the way, I think you mentioned that. We've been hesitating there probably for about a year because we thought that the Fed's withdrawal from their purchasing program was going to impact spreads rather dramatically. And we pulled the trigger for the first time in a while on a new issue where when the prevailing rate that we walked away with on the AAA CLO paper was over 8%. And we just didn't – I think it would go wider than that. So we started buying in a week, that spread went from 290 to 250. And the week after that, they're currently --there's a new deal in the market right now at 235.
So again, going along with what we saw in high yield, what we're seeing in mortgage spreads and securities, I think that will follow also into the loan market as the year - as we get into year-end.
Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please go ahead.
Hi, good afternoon. Brian, I want to follow up really on Sarah's second question just around the loans. Have you looked or considered doing some mezz loans, mezz originations kind of taking advantage of what people will pay for that capital buy some more time, you probably get good assets at good valuations. How do you think about that as far as fitting into latter? And along the same lines, is there anything interesting on the real estate front that you might consider growing that piece of the portfolio?
Sure. Almost in opposite to what we said years ago when I think I mentioned that when interest ran you're borrowing money at 3% if you need to get a mezzanine loan, you're probably overleveraged. So we pretty much stopped writing mezzanine loans. The opposite is true today. This is a market that is ripe for mezzanine lending, obviously, in special situations.
So we are actually touring around with the possibility of refinancing, floating rate loans with a fixed rate component because of how much lower the tenure is. Now the conduit market is not in the 10-year business just yet, but I think it will be. And if we can get a sponsor into a 10-year loan on a pretty safe credit, then that frees up a lot of cash flow and rate for the higher rate mezzanine.
So I think we are kind of looking to parse that to get - to staple those two together. And I don't know that it's necessarily refinancing our positions as opposed to others. It might be. We've historically not really written mezzanine loans over the top of somebody else's senior. So my guess is if we were to refinance somebody else's loan, it would come with a complete refi, where we would break the refi into a senior 10-year fixed rate and a mezzanine loan that we would hold behind it.
The second question, I think you said was real estate. It's a very good time, I think, to purchase certain types of real estate. In particular, I think we're looking at multifamily because what a multifamily was purchased in 2021 and '22. And because of the rate movement and cap movement that went with it, they probably have too much - too high of a basis. So that creates capital tension within the structure.
We - you might remember, we started writing 2-year fixed rate loans to avoid the cap cost of floating rate loans. And almost all of those loans are now fixed rate coming up for refinance, but they're mostly on brand-new properties, pretty comfortable owning apartments in a housing shortage. And being in a REIT vehicle as opposed to a bank where we spent the rest of my career, it's a good vehicle to own them in.
So I think that we will be - interesting question. I think both of those topics will both be relevant going forward. I would like to acquire some more real estate. But right now, there's just a lack of transactions. But because of the little hidden poison pill, I think, in the market right now is taxes and insurance. So operating expenses are rapidly accelerating higher.
And you throw on extra interest rates too high of a basis and high operating expenses. And you've got a situation as Pamela described, the Pittsburgh property that we're going to take title to, it has a bunch of brand new apartments. And in a matter of a month, we think that the debt yield will approach 7%. And I don't know if we're going to be able to take that to an agency for financing, but we might.
And I don't think we're necessarily in a hurry to sell anything like that. I think those are good REIT assets going forward and being purchased at the right cap rate. So I think your question is prescient [ph] I think we'll be adding both of those, and I would probably throw a triple net lease in on top of that. I can tell you this is probably a better time to be buying triple net than I've seen in a long time.
Great. It sounds like a lot in your origination pipeline for consideration. A quick question on the dividend. You've significantly over-earned it year-to-date. I imagine very little earnings, if any, are in a TRS given the conduit business is slow, non-existent right now. So can you talk about your flexibility to manage the dividend? How do you think about that to the end of the year as far as what you can spill forward and the rules there? Or do you have any losses you think you may materialize prior to year-end that would reduce that REIT distribution requirement?
Paul, I don't know if you want to answer that. I know we went through this a little while ago. But as far - let me answer the back-end questions first. Do - I think there could be a couple of small losses here and there, but nothing that I can even tell you the name of right now and just with rates where they are and the temperature of some of the discussions at extension, you can sense that there's a little bit of tension in the room. I suspect that's going on everywhere.
But I don't think that we have a problem complying with REIT rules, which is what I think your question was considering how much we're out earning the dividend by. And Paul, if you want to talk through that a little bit regarding next year.
Yes, I'll just say, Steve, in high level, we have the ability to carry forward a dividend from last year, some excess that we could use for this year. And bottom line is our REIT taxable income is different than our distributable earnings because we have the ability to deduct depreciation. So it's not an issue for this year generally.
Great. Appreciate the comment. Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of Steve DeLaney with JMP Securities. Please go ahead.
Thanks. Hello, everyone. Gosh, good questions from Sarah and Stephen. So a lot of the obvious things have been taken. I'm going to kind of pick up on the last point that Stephen mentioned. I think third quarter - you've kind of locked your dividend in into 23% in 3Q of last year and totally understandable, given where rates were going and all the uncertainties.
I'm just - I'm looking at the balance sheet and year-to-date, your two main categories. Cash has obviously gone up, but loans and securities have come down by over $500 million, and that has caused net interest income to decline in the second quarter, about $2.5 million relative to the first quarter.
So if I'm - I'm Paul, and I'm Brian and Pamela and I'm looking at that and I'm on the Board, I'm saying, we know why we're doing this, but this is not the time to raise our dividend. So now what I'm hearing today is obviously, you've been patient, you've taken advantage of the debt repurchases, maybe more capital being deployed over the second half of the year.
And I just - I would - I'm here just to kind of like - I applaud everything you're buying, CLOs, buying back your debt, et cetera. I would just say my message is you're down to an 8% yield. The stock's done great. There's certainly some upside. But I do think the upside in the stock will be tethered to what you're able to demonstrate in the next two quarters as far as some boost to the dividend.
And I guess that's more of a comment than a question. But as I said, all my questions were covered, happy to - if you have any thoughts on that, Brian, you'd like to share or push back on that at all? I'd love to hear it.
Yes. I mean, I'm happy to give you some inside baseball view as to how we look at these things...
Sure. I'd love that...
With the Fed moving 11 times higher in a row, obviously, we're positioned pretty well with our corporate debt there, and that will carry us for years to come at this point with those fixed rates. So we have plenty of room, as you know, and we were pretty active when we came out of the pandemic. We started writing a lot of loans at the end of '21. And so those end of '21 loans are really coming up on their first extension now. So second quarter actually had quite a few of them. And any time we did extend somebody there were pay downs involved in those.
But I would expect that as we get towards year-end, we're going to have a better sense as to - I believe we wrote $1 billion worth of loans in the fourth quarter of 2021. And so we're going to make sure that we have enough capital around for those to refi and make sure now if there are more a default in our system, we don't have the same pressures that a lot of competitors have because of the corporate debt structure and the unencumbered assets that we carry.
So even that's not terribly problematic, but it is something - it's a conservative, flexible balance sheet. We are a little bit defensive, but we keep flexibility in the portfolio so that we can take advantage. And as we said, as we took in $300 million in payoffs this quarter, we can see that net interest margin. Now if you have 10% loans that pay off, it's $30 million in interest.
Unlike when interest rates were at zero, though, we now have T-bills at 530. So it's 10% - you lose 10% when you get 5.3 back right away. So it's not as hard of a drag as it may have seen. And given where securities are trading right now, largely as a result of the Fed stepping away, they're quite attractive and more attractive than situations right now.
So - and the good part about securities as they settle three days later. So you don't have to sign an application and then close in 90 days. So I would imagine - I think I've said this before, that we would probably start adding securities. We thought that was the best value in the space. And we also mentioned we liked our own corporate debt, which was trading pretty wide after the March regional banking issues.
So the bonds have traded back, they're in good shape now, and we began buying securities, and we can buy quite a few of those pretty quickly. And the natural next step will be lending. And the dividend, I think we have plenty of room on right now. We are big shareholders internally, so we would like to raise it. It's an annuity. I certainly don't want to raise it then cut it. So you want to make sure you're clear of all the problems that could or may or may not exist.
But in addition to that, the returns we're generating right now are well in excess of our dividend. So we like having a lot of cash around even - and - but keep in mind, having almost $800 million in cash, we probably have another $100 million coming out of CLOs in the next couple of weeks, too. So that's going up even higher.
We don't want to carry too much cash even though it is easy to get lazy at 5.3%. So we began investing. I think we'll be a little more aggressive than people think in acquiring new loans and securities in the next second half of the year. Tethered, you mentioned the stock price where can it go? The earnings power of the company at 1.7 times leverage with that much cash in the system is quite high, equally see how we can drive these earnings much, much higher, but obviously, we want to operate safely. And I think you're going to start to see us do that in the second half of the year.
Well, you're in a great position. It will be exciting to watch what you do in the next 6 months. So thank you. Appreciate the comments, Brian.
Sure.
Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Brian Harris for closing comments.
I'll just close by saying I know it's a summer week with 100 degrees here in Manhattan or 90. So thank you for jumping on the call with us. We're available if you're weren’t on the call here and needed to talk to us, feel free to give us a call. And thank you for your attention on this one. We look forward to the second half and doing good things. Thanks.
Thank you. The conference of Ladder Capital Corp has now concluded. Thank you for your participation. You may now disconnect your lines.