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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Ladder Capital Corporation Third Quarter 2018 Earnings Conference Call. 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, this conference is being recorded.
I would now like to turn the conference over to your host, Michelle Wallach, Chief Compliance Officer and Senior Regulatory Counsel.
Thank you and good afternoon everyone. I'd like to welcome you to Ladder Capital Corp.'s earnings call for the third 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 September 30, 2018. The earnings release is available in the Investor Relations section of the company's Web site 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. Reconciliation 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, Michelle. Ladder had a very strong third quarter with core earnings, a non-GAAP measure, of $63.4 million or $0.59 per share. Core earnings after the first three quarters is now $177.6 million or $1.59 per share. It's noteworthy that we have paid out cash dividends of $0.965 per share over that same period, covering our dividend at 1.6 times. Our annualized after-tax return on average equity for the third quarter was 17.1% and 15.6% year-to-date. Because of our continued strength in earnings, I'm pleased to report that our Board of Directors has approved a 4.6% increase to our quarterly cash dividend payment to $0.34 per share, starting with our fourth quarter dividend.
This is the sixth time we have increased our dividend over the last four year. Our run rate cash dividend is now $1.36 per share annually. Our total fourth dividend of $0.57 will be paid of January 24, 2019 to shareholders of record on December 10, 2018, and is subject to a cash stock election. Shareholders will be able to elect all cash or all stock. The cash portion will be pro rated if oversubscribed subject to a minimum cash amount of $0.34 per share. Presuming our Board of Directors maintains our current quarterly cash dividend per share, the first cash dividend on these new shares will be paid in April, 2019.
During the third quarter, our GAAP book value per share increased by $0.39 per share to $13.82, and our un-depreciated book value per share increased by $0.28 per share to $15.25 per share. The products that are driving our earnings surge in 2018 continue to be our balance sheet loan portfolio and our real estate holdings. I'll cover real estate first. During the quarter, we sold a four-building office campus in Minnesota. The sale contributed $29.1 million to core earnings during the third quarter. We owned the buildings for four years, during which time we acquired additional land for parking, extended 100% of the leases, and lowered expenses.
Over those four years, these assets contributed a total of $49 million to core earnings, resulting in an annualized ROE of 40.4%. With the sale of the Minnesota assets, combined with earlier sales of a mobile home park in California, and an office building in Virginia, and ongoing sales of condominiums in Nevada and Florida, real estate sales have accounted for almost $49 million of core earnings in the first nine months of 2018. The gains from the sale of these assets are impressive. And please note, that we still own $670 million of net leased assets, along with office buildings and warehouses in Michigan and Georgia, student housing in California, apartments in Florida, and other office buildings in Virginia.
Moving over to our balance sheet loan category, we originated $326.4 million of new bridge loans, and we received payoffs in the quarter of $290 million. At the end of the third quarter, we owned a total of $3.8 billion of balance sheet loans, $3 billion of which earn interest on a floating rate basis at an average interest rate of LIBOR plus 561. A portion of the increase in core earnings from the sale of the office buildings in Minnesota was offset by a $10 million impairment charge we took in connection with the restructuring and extension of a $45 million secured by an approximately 500,000 square foot office building in Wilmington, Delaware, known as the Nemours [ph] Building.
In the restructuring, we extended the loan for up to one year, and we split the $45 million loan into a $36 million senior loan and a $10 million B note, and took a 19% equity interest in the property. Although the loan was performing, as of September 30th, the sponsor failed to pay off the loan on October 6, 2018 maturity date due primarily to the addition of a few large blocks of office space becoming available in the Wilmington, Delaware office market concurrently with lease maturities at the building and resulting vacancies. The occupancy rate at the building is expected to go from 92% this August, to about 64% in the first quarter of 2019. To provide capital needed to re-lease available space, the sponsor agreed to fund additional equity of $1.5 million, and Ladder agreed to increase its senior loan an additional $500,000.
While it will take some time for the Wilmington office market to absorb recently vacated space, we believe that this asset which is located in one of the recently designated opportunity zones that came out of recent changes to the tax code can produce good value for us at our reduced basis.
Turning now to the conduit business, we originated $350.3 million of loans targeted for securitization in the third quarter. We contributed $102 million of loans into one securitization in the third quarter with a profit margin of 2.53% for a core earnings contribution of $2.6 million. Looking into October, we also contributed $196 million of loans into one securitization and in that fourth quarter transaction. Profit margins were approximately 2.20%.
On market observations, what we are seeing is a generally positive story in the U.S. economy however we believe that Fed Chairman Powell's recent description of the economy seemed overly optimistic. His recent comments coupled with his thoughts about how he sees the future path of Fed tightening certainly gave us reason to pause and recheck our own data. While we certainly agree that the economy in the U.S. is doing well, we were concerned as to what a Fed tightening cycle described by the Fed Chairman himself after eight rate hikes over two years as, "A long way from neutral at this point probably," might actually mean.
We've clearly seen a slowdown in the housing market and with its multiplier effect on the rest of the economy from grouping in Plywood, televisions and carpets we believe that the Fed may have already gone too far in their desire to normalize interest rates. We see yields on junk bonds at recent highs and lots of volatility in global equity markets and with the prospect of higher rates ahead in the United States while the deficit looms. We can't help but feel that market forces or tightening credit conditions without needing any further help from the Fed.
Chairman Powell is new, and he probably wishes he could take some of his comments back, so maybe he'll rethink those words after December and replace them with some version of, "We'll see, we hope so." We see many business plans unfolding each quarter in our balance sheet book and while we do see business plans generally executing on time and on plan. It's also clear that eight rate hikes by the Fed over the last two years has caused some stress primarily to equity models for ROE as input costs have risen, meaning, the amount of interest now paid to lenders at the expense of equity holders has increased. While latter with its high concentration of fixed rate liabilities and floating rate assets has been a direct beneficiary of increasing LIBOR rates, we believe additional hikes over the next year may have a negative impact on the value of commercial real estate in general. We believe that we are at near at or near neutral today and we hope the Chairman allows the impact of the first eight rate hikes to flow through the economy and then decide on the need for further rate hikes.
Let me be clear about what we are not saying, we are not saying we see widespread problems on the horizon in fact quite the opposite. We see the economy is doing well with more room to grow, we just aren't as confident as Chairman Powell is about what impact the first eight rate hikes may have on that picture.
So with that, I will now turn you over to Marc Fox, our CFO.
Thank you, Brian. We will now review Ladder Capital's financial results for the quarter and nine months ended September 30, 2018. In the third quarter, Ladder generated core earnings of $63.4 million resulting in an after-tax return on average equity of 17.1%, core EPS for the third quarter was $0.59 per share, these performance measures compared to core earnings of $35.7 million, core EPS of $0.35 per share and a 10.3% after-tax ROAE in the same quarter in 2017.
Core earnings in the third quarter of 2018 exceeded core earnings in the comparable quarter in 2017 primarily due to the net gain realized in Q3 2018 on the sale of the Minnesota office property that Brian referenced earlier.
During the third quarter of 2018, Ladder's recurring income which is primarily comprised of net interest income from balance sheet own investments and net rental income from real estate investments was $56.8 million. This amount exceeded the $45.3 million of net interest income and net rental income earned in the third quarter last year by more than 25%. This increasing trend in recurring sources of income year-over-year has been ongoing since Ladder's IPO in 2014 and has allowed us to increase our quarterly cash dividend rate six times over the past four years including the 4.6% increase announced today moving the rate from $0.325 a share to $0.34 per share.
For the nine months, first nine months of 2018 core earnings were $177.6 million almost 50% higher than the core earnings of the first nine months of the prior year which totaled $118.4 million. Likewise core EPS through September 30, 2018 was $1.59 compared to a $1.8 per share earned during the comparable period last year. After tax return on average equity for the first nine months of 2018 was 15.6% and exceeded the first nine months of 2017 performance which was 10.6%. On a GAAP basis Ladder generated net income before taxes up $84.7 million in the third quarter and $200.5 million for the first nine months of 2018.
This compares favorably to net income before tax of $29.2 million and $85.2 million reported in the third quarter and the first nine months of the previous year respectively. The largest GAAP to core earnings adjustment in the third quarter related to depreciation and amortization of real estate investments. During the third quarter Ladder originated a total of $677.7 million of Lott's. Ladder's portfolio of balance sheet loans increased to $3.8 billion up almost $1 billion over the past four quarters.
Ladder's balance sheet loan portfolios financed by a combination of CLO debt, FHLB advances and committed loan repurchase facilities. Ladder's conduit loan balance increased to $375.2 million as Ladder originated almost $150 million more new conduit loans than what contributed to the securitization transaction during the quarter.
During the quarter Ladder sale of its 97% equity interest in an office complex in St. Paul Minnesota had a $29.1 million favorable impact on quarter earnings. Ladder acquired the property in September 2014 for $69.5 million and received gross proceeds by $113.5 million in September. During that four year period Ladder earned a 40.4% annual return on its equity investment.
Our 3Q income statement reflects a GAAP gain on sale of $62.9 million on this transaction. Since Ladder deducts all of the accumulated depreciation and amortization on real estate investments from core earnings at the time of sale. 3Q results reflect a $29.1 million contribution to core earnings. This investment has been held as a read asset so there is no tax expense associated with this sale transaction. There were no real estate acquisitions during the third quarter of 2018. As Brian noted the provision for loan losses income statement line item reflects a $10 million impairment of a single balance sheet loan recorded in Q3.
Since quarter end the loan has been restructured into a joint venture with the borrower, Ladder and the joint venture partner are taking the necessary actions to preserve the value of the real estate and implement the plan to enhance that value over time. The net impact of the Q3 core earnings was $8.7 million as the Q3 bonus compensation expense accrual was also reduced, reflecting the direct relationship between earnings and compensation at Ladder.
Turning to key balance sheet and investment activity metrics, as of September 30, 2018, 96.7% of our debt investment assets were senior secured, including first mortgage loans and commercial mortgage backed securities secured by first mortgage launch which is consistent with the senior secured focus of the company. Senior secured assets plus cash comprise 78.96% of our total asset base.
Total assets stood at $6.43 billion slightly higher than at the end of Q2, 2018 and 6.6% higher than at the end of 2017. Quarter end total equity was $1.55 billion resulting in an adjusted debt to equity ratio of 2.6301. Total unencumbered investments including cash $1.7 billion at quarter end an unsecured debt stood at $1.2 billion reflecting unencumbered assets to unsecured debt ratio of 1.44 times.
The weighted average loan to value ratio of the commercial real estate loans on our balance sheet at September 30, 2018 was approximately 67.6% in line with prior quarters. On the financing side as of 9/30/18 we had $4.1 billion of adjusted debt outstanding and committed financing availability of $2.2 billion for additional investments. As discussed on previous calls, Ladder successfully access the corporate bond market on four separate occasions, including twice in 2017 leaving the company with $1.17 billion of unsecured bond debt outstanding maturing in 2021, 2022 and 2025.
When combined with a $743.2 million of long-term non-recourse, mortgage debt financing of our real estate holds, $672 million of non-recourse CLO debt, $1.55 billion of permanent equity and $114.5 million of other liabilities, $4.2 billion or 66% percent of Ladder's capital base is comprised of equity, unsecured debt and non-recourse non-mark-to-market debt. Since June 30 we have extended the final maturities of two of our bank financing facilities. The final maturities of those facilities are in 2022 and 2023 respectively.
In addition, we increased the capacity of our syndicated unsecured revolving credit facility by $25 million bringing a new lender into the syndicate. Since our IPO in 2014, we've expanded the unsecured revolving credit facility from five bank lenders to nine and from $75 million of capacity to $266.4 million as of September 30, 2018. At quarter end we had $1.2 billion of FHLB borrowings with 2.34 a year weighted average maturity and an average cost of 2.22%.
In the third quarter we paid a $0.325 per share cash dividend on a rolling fourth quarter basis through 09/30/18 Ladder paid $1.28 per share of dividend while earning core EPS of $2.06 a share reflecting a 62% dividend payout ratio.
So summing up, in the third quarter of 2018, Ladder generated $63.4 million of core earnings, $0.59 per share of core EPS, resulting in a core after-tax return on average equity of 17.1% bringing year-to-date core earnings to $177.6 million which is within 1% of the core earnings achieved for the full 2017 calendar year.
Ladder originated $676.7 million and securitized a $102 million of loans resulting in $2.6 million of net securitization gains reflecting a 2.53% profit margin. Ladder realized a $29.1 million contribution of core earnings from the sale of the Minnesota office property.
In total, Ladder has realized $46.3 million of gains on the sales of three non-condominium real estate assets in 2018. Ladder paid a $0.325 per share cash dividend in a quarter in which core EPS was $0.59 per share and finally, Ladder increased the quarterly dividend rate by $0.015 a share to $0.34 starting in the fourth quarter and announced a $0.23 per share stock dividend that'd be distributed in conjunction with our higher fourth quarter cash dividend.
At this point it's time to open the line for questions and answers.
Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Steve Delaney, JMP Securities. Please proceed with your question.
Good evening everyone, and congrats on the quarter, but maybe more importantly the fact that you've been able to get your stock up 24% year-to-date and we all are happy to see that. I guess, Brian, where I'd like to start is if we look at the balance sheet September versus December, you have grown the loan book, the held for investment loan book by half a billion dollars, and real estate is flat. I guess, should we read anything into that as far as the real estate cycle and where you see the cycle and if we look out 12 months, should we expect Ladder to be a net seller of real estate and reallocate that capital to the balance sheet loan book? Thanks.
Sure, Steve. Thanks for the question. I wouldn't read too much into it, other than some general commentary around I think we are a little bit deep in the cycle, and when you talk about acquiring real estate, we're rather opportunistic in how we acquire real estate, so it isn't what we come in and try to do every day. But I think we're at that point where because interest rates have moved rather dramatically to the upside, you've got sellers of properties who want yesterday's price, but because the financing costs today are much higher than they were a year ago, the buyer wants the new price which is a higher cap rate so you tend to have this standoff where there's virtually no activity and I think you're seeing that everywhere that real estate sales are just generally down.
It's been my experience that when a seller and a buyer have a standoff, it's the buyer who usually wins that argument eventually, because there are oftentimes sellers will insist that real estate values don't go down because interest rates are going higher, and I think we all know that's ultimately not true. It may be not true for a few months, but generally higher interest rates cause higher input costs, and when financing costs go up, returns go down, so you have to lower the price. And so, I don't think that we're saying anything about how we feel about real estate or a turn in the cycle, I do think this is -- so far the causation of it is the cost of funds that has risen rather dramatically. I mean, if you take a look at what the tenure has done, and I think that hasn't really set in yet, but eventually it settles in and the right cap rate comes out. As far as…
So thanks -- yes, go ahead…
-- the balance sheet side is -- oh, that's a business that we're generally comfortable with. We are a little bit deep in the cycle. However, when LIBOR is at 20 basis points, adding an extra year onto a transaction is not that difficult. But when LIBOR goes up 225 basis points in a very short period of time, there is a cost associated with -- and it's not so much the guy who is running his business plan and he's on schedule. Where, I think, the real impact is felt is the property, let's say it's a construction loan or let's say it's a property that doesn't have income and if a permit takes a little bit longer or the leasing is slowed down, if the borrower wants an extension he has to pose to full-year of interest for that extension. And that is a much bigger number today than it used to be with when LIBOR was lower. So I think it's the non-cash flowing properties that are just a little bit behind schedule that are really feeling the pinch.
The other scenario is a borrower who is executing his business plan on time and everything is going right, but at this point because LIBOR has moved so much, the success in leasing and cash flow development is largely being sent to the lender, because rates are rising on them.
That's…
Does that help?
Appreciate it, that's great, I appreciate all of that color on the market and I know there are a lot of other analysts on the call that would like to talk to you, so I'll say thank you and drop off, appreciate it.
Okay.
Our next question comes from Stephen Laws, Raymond James. Please proceed with your question.
Hi, good afternoon, and echoing Steve's comments, congratulations on dividend increase and the special stock dividend. I wanted to just dive into the numbers a little bit on asset sale. Marc, do you have a number of how much rental income or lease income, the asset that was sold contributed to the third quarter so we can think about that line item as we look forward in our model?
Yes, it's about $2 million in net carry per quarter.
$2 million, fantastic, thank you for that. Brian, can you maybe talk about -- I may have missed a number, but I think you said roughly $206 million of loans contributed to securitizations in October at 2.2% margin I believe, but could you correct me if I'm wrong there and then just talk a little bit about the conditions you're seeing, have the move higher in rates changed, how the demand is going on securitization, or maybe update us with the market on what you're seeing here today heading into the end of the year?
Sure, Steve. And this is an interesting question, because the answer may not be quite intuitive. First of all, in October -- I'd just like to give you a look into the fourth quarter because we're not going to be talking again for a little while because of the audit after yearend. So I'd like to give you some idea if I have available information. And so we did contribute $196 million into a fourth quarter securitization that has now been completed and the profit margin was 2.2%. Prior to that in the third quarter we securitized the $102 million in one securitization and we made 2.53%.
So those are sort of the minimums that we get comfortable with on profit margins in the conduit business. But what's interesting, I think, because of interest rates having risen, you would naturally think that because pension funds and insurance companies haven't seen AAA investable amounts of that that you can get a 4% yield on, you would think that there would be a tremendous amount of demand and actually, there's not.
Spreads have been widening. So those 2.53% and 2.20% profit margins were both transactions widened in the market so we did not do as well as we would. There is a little bit of a lack of demand on the investor side. And you would think with the volatility you're seeing in the stock market perhaps that would increase, but the volatility has been so strong that it's definitely a watch TV kind of investor base right now. And they're kind of watching the Dow swing 800 points a day, and it's scaring the hell out of them. And the other thing I think that maybe a lot of people don't think about is with the two-year now approaching 3%, it's a viable investment.
And you've got a good part of the yield curve right now, two, three, four, five-year treasures that now sits above the S&P 500 dividend rate. If you remember, there were years where treasuries were below the S&P 500 dividends, so why would you ever own treasures. That was the general thesis. So I think when you see the equity flows coming out, and you see high yield also coming out you are seeing some flows into fixed income. But I think some of that fixed income dollars, those dollars are being diverted into treasuries because it's a very viable alternative right now, and what is perceived to be a low inflation environment, two and three-year treasures are fine investments. So the demand side - and I think there's another reason too.
Whenever you have the stock market moving like that liquidity tends to dry up. Throw in the macro events that, in my opinion, the world is being a little complacent about. But you've got midterm elections, you've got a situation going on in Germany where Merkel is stepping down, you've got Brazil swimming hard right, you've got tremendous amounts of trade discussions going on. Italy is rearing its head. If you thought Greece was a problem, wait till you get Italy. So I think that this is causing a lack of liquidity. So as a result of that, yes, I think that spreads are probably a little wider than they should be on a risk-adjusted basis. But I think they could drift a little bit wider. I do think, at the end of the year, when the reallocations take place and the rebalancings go on I think there'll be a better big for fixed income products.
Great. Appreciate that color. I guess one last follow-up. It looks like the CMBS position declined a little bit sequentially. Is that related to what you just said about expecting spreads to maybe widen out a little bit more from here or is there something else going on with the slight decline sequentially with the CMBS position?
Yes, I took a look at this before the call. And we've been generally selling down securities, I think, since 2016. And I think we had a $3 billion -- maybe $3.5 billion book at one point. And I haven't really felt like there was a lot of great value there. I would say that in the month of October, which is now over, this is the first month I've seen in a while where we've required more security than we have sold. Now, if you look back in our history, and you've known us for a while, you'll see during period of high volatility, we tend to be acquirers of safer more liquid products. And I think that we are seeing the beginning of that leg in at this point. So we have been focusing a little bit more on bond yields and fixed income products in CMBS.
The other thing as a result which we try to take advantage of crises, when you see interest rates move up a couple of hundred basis points there's a lot of bonds at discounts right now. And so you can acquire CMBS packages and CUSIPs from 2012 and '13 that are now six years old. So with only four years to go and you're buying them at a $94 price those AA securities in there, they have a 6% cushion against default because of the purchase price. And in addition to that, the subordination level in the transaction itself has usually increased quite a bit because there's been payoffs over the last few years.
So I think if I step ahead here and tell you where the next call we're on what we're going to be talking about, I wouldn't be at all surprised if this volatility continues if we actually own a lot more securities. So we haven't been an aggressive purchaser of those, but I do think we will be near-term here, especially around midterm elections.
Great, thanks for the color on that. And definitely have seen a lot of success from you guys shifting your capital allocation and identify opportunities. So look forward to hearing from you again after the next quarter, and thanks for your time.
Sure.
Our next question comes from Jade Rahmani, KBW. Please proceed with your question.
Thanks. What was the net impact to core EPS of the St. Paul gain and the impairment, if you could cover each of those on a per share basis distinctly?
Sure. With regard to the St. Paul gain, that was in the REIT, and so you're really just taking that $29.1 million and it works out to about $0.26 a share, okay. With respect to the $10 million impairment, the net impact because it will be net of the compensation reduction that we had, pictured in $8.7 million number, okay. And that $8.7 million number is also going to be in the REIT, you're talking about a $0.08 a share impact.
Okay. I appreciate that. I guess thinking about the dividend increase at the same time as there's a reduction in run rate core earnings excluding gains, and then you also talked about a stock component of the full-year dividend in the fourth quarter. Could you give some color into what went into the management and the Board's thinking regarding dividend policy, why do a stock dividend at all, and so forth?
Well, yes, of course we always think about the right way to distribute income to our shareholders. Running at a mid-to-high teens ROE at this point in one quarter admittedly with the sale impacting it mostly, with the dividend rate where we are, we, as you know, are internally managed. And a hell of a lot of our stock is owned internally also. So we try not to issue shares. And we have never issued additional shares since going public. And so what that stock divided does, it allows us to conserve cash at the parent level. And however, it is a bit of a backdoor dividend increase, because of course we'll be paying dividends on those share when they get out into the market. But the cash flow going out on to those shares is only about $1.3 million per year, but it allows us to conserve close to $23 million or $24 million a year. So that's the purpose for it.
The other thing we could have done was made a special dividend for $0.23 a share or we could have hiked the dividend further. But given the amount of volatility right now I think that we're being a little bit cautiously optimistic. And I said, I think we're going to get some opportunities here to invest in more liquid and safe instruments at reasonably high yields that we haven't seen in years.
So the stock dividend was a true-up to REIT taxable income and as a function of projected requirements under the REIT rules?
That's correct.
Okay, great. That's helpful. I mean I would have thought that with depreciation there would've been more ability to shelter that.
There is. But when we went through the computations about what our expectations are for the year in terms of REIT taxable income this is the right price to come out.
We had three or four paths which we could've gone down, but this one seemed to be the most effective from the standpoint of book value and cash position.
Yes, we've been growing our recurring income all throughout the year. We've had some substantial gains from these real estate sales. And a couple of them have been in the REIT as a matter of that, adding to that REIT taxable income line. So, yes, we've had a lot of REIT taxable income this particular year. And the computations drove us in this direction, yes.
Okay. In the commercial mortgage REIT space and a couple of instances in the bank space, we're starting to see a pickup in one-off instances of credit issues, maturity defaults, increased risk ratings, occasional impairments, and such. I guess just Ladder's portfolio specifically, what do you anticipate for 2019, has your [technical difficulty] increased, have your internal risk ratings increased, how's the credit migration trend been sequentially?
I think from what we're seeing so far -- first of all, I do think we're getting a little deeper in this cycle, and with higher interest rates I think vulnerable situations become more apparent. So as I mentioned on, I think with Steven's question, was the trouble seems to be bubbling up in situations where a borrower is behind. And when I say behind I don't mean in lease, I mean behind in calendar. And he hits an extension period, and he doesn't qualify for the extension. And so the alternative is he has to post the interest for the next year, which is a much higher number than last time. He's got to buy a new cap, which these caps are quite expensive now because when they were written two years ago they were rather inexpensive.
So I think right now the damage seems to be limited to situations where timing. If they need more time to execute their business plan. And if you have no cash flow and you add 8% on a loan amount to qualify for a one-year extension, that certainly crushes the ROE model in many cases. The more responsible and better managers who are well capitalized, they're right on schedule. They're coming out into a higher interest rate environment than perhaps they thought they were coming out when they stabilized their properties. So they're not happy because they're spending more money on interest, but they're not in default.
And the other thing I'd just throw in there which should mute most of those items will be interest rates are rising theoretically because the economy is very strong. I think the economy is very strong too. I just didn't like when Powell said we're nowhere near neutral at this point because I don't know what that means. That was an odd comment I thought, and admittedly he's new, so we'll see what it means. But I would just say, if we're not even close mean we're not even halfway and he's planning to raise interest rates eight more times in the next two years, there's going to be a slowdown in commercial real estate and a lowering of commercial real estate values, and residential. The adjustable rate portfolios in the residential sector, you see what's going on there.
So I actually do think he has put a stop on the housing market for a little while. And I think that these eight hikes are not fully felt yet. And I think he probably ought to slow down, personally. But the impairments, I think, that you will see more not less -- you move interest rates up 200 basis points, of course that's going to happen. If you lower interest rates 200 basis points you'll see less. But generally things are pretty healthy. It's really the execution that is delayed that's causing the problem. The guy who is on plan and on time in a rather healthy economy, he's fine. He's going to be able to refinance his property. He's just not -- it's mostly impacting the ROE calculation on the equity side not the debt.
Take a $3 billion, like ours, and you raise interest rates 200 basis points, $60 million a year is going to the lender that used to go either into the building or into the equity pocket. And we've been the beneficiary of earnings as a result of that. And so in theory we would like interest rates to continue rising, but I guess I'm just sounding the caution that too much of a good thing might not be a good thing. And right now, I feel like we're pretty comfortable.
And just generally, what's your feeling for how the debt funds and transitional lenders, how diligent are they with respect to, for example, what you mentioned about borrower having to post additional interest in terms of receiving a modification -- a maturity extension. Do you think that's a universal practice in the transitional lending space, or are people already just kind of lending and pretending?
Yes, I think the CLO market kind of encourages a little bit of the aggressive lending that -- and ultimately the risk does reside with the person who owns the first lawsuit, which is usually the originator. So I don't tell people what to do with their money, but I can tell you that in the beginning of the year, January 1st, we open the front door; we had $3 billion worth of loans on our balance sheet. Over $1 billion have paid off in the first 10 months of this year. So that's an interesting uptick, but probably more interesting is we are seeing loans on our balance sheet being refied into CLO-style transactions at massively higher proceeds than the loan amounts we've got on our books. And in addition to that rates are much lower.
So I don't understand one phenomenon that is taking place at this point in the cycle which I have never seen before. We have borrowers with an extension or a maturity date coming to us -- or not just us but to others, and when I say us I mean lenders, and saying they want to extend their loan. But the property is not for sale, nor do they think they're going to put any money into the property or post an interest reserve. They think they're just going to get the extension. And I'm a little perplexed by that. And the other thing that surprises me is that we have loans that are usually pre-payable at par for open for a year at an interest rate, call it, LIBOR plus 550, and they're financing these away with other competitors at higher proceeds and lower rates, but they're paying us off on the last day possible.
And so I don't really understand that lack of fiscal management. And I've never seen it before. But when a borrower comes to us and wants an extension, if he doesn't qualify it, there's two ways to do that. One is you can write a check and post the interest, and possibly a principal payment. Or you can give us part of the property. And then we'll become your partner and help you get through that. But I think that some of the CLO lending practices are a little bit undisciplined right now.
And can you just -- I think this highlights a key difference between Ladder and other players in the space, and the benefits of a multi-cylinder approach versus external management focused on one business line. Do you want to comment on your approach to asset management, how many people are in the group, what's the level of surveillance, how often are you talking to borrowers, how on top of properties and the business plans are you, reappraisals, anything of that nature that would provide a better sense of asset management through people?
Yes, sure, Jade. You know what; I'm going to let Pamela answer that, our President, because she handles that on a day-to-day basis. But before I turn it to her I do want to just say that we have a lot of people in that area. And we have underwritten every single loan in the entire company in the last 120 days just to make sure in this rising interest rate environment that we see problems early. And she's been spearheading that effort, so I'll let her discuss that with you.
Thanks, Brian. And hi, Jade. So, I think as some of you know, we're extremely proactive in our asset management business. We don't -- fortunately we don't have any legacy assets. So right now we have a pretty robust team. It's led by a team of four people dedicated directly to asset management, and support by a team of underwriters. And we have about 10 lawyers in-house that support that business as well. So I think what differentiates us a lot is we really maintain control over servicing. And not just servicing because we hold the loans on balance sheet. We are in touch on a daily basis. Our services facilitate questions and answers, but we approve everything, every lease.
We get a real look why that how assets are performing. And because we own nine million square feet, both -- it informs our decisions on future, both loan originations, or equity investments, and it allows us to really leverage the information in identifying new opportunities. But on a day-to-day basis we have what everyone should have, right. We have a regular asset monitoring report, we have someone go visit the property at least once a year. We have onsite dedicated asset managers for each asset. And we have regular management meetings to overview all of the high-level information on the asset. So for us, we take it really seriously, our core competency in real estate.
And the big differentiator I think is that because we're so comfortable owning real estate we will take a hard line, unless someone who's really, as Brian alluded to earlier, willing to defend their asset with equity we're very comfortable in an ownership position.
And then I would just add just one thing to that in that our asset -- most asset management departments usually report information, be it good or bad. Our asset management department actually views it as an offensive position where we can create revenues. So what might -- as you know, our maturity dates tend to be shorter than a lot of the CLO five years, we like the two-year and the three-year model. Because if there's going to be a problem we want to know early. And so as a result of that we get right in front of maturity dates when they're coming. And we just see more or less the attitude of the borrower and how he's handling it.
And unfortunately we're dealing with a bit of a hangover from the financial crisis in that, in the financial crisis very few people lost their properties. And the reason why is because most of the lenders weren't in a position to take it from them. But if you've seen all the capital raised inside of the Starwood Capital, and Blackstone, and all the other hedge funds out there, there's a lot of money that's been raised in anticipation of real estate transferring hands this time around in a downturn. So I think -- and as I said, when I see borrowers coming to us for an extension with no plan B at all. And we actually had one borrower who scheduled the sale of an asset after our maturity data. And I just looked at him; I said what are you doing. Do you really think you can do that?
And that is the level of complacency that's been bred, I think, when no one lost their assets. And when LIBOR is about 20 basis points, like it was not too long ago, there's not a high cost to not making a decision. But when LIBOR goes to 225 in a matter of 24 months, now there's a cost involved. So no decisions were tolerated for a while, but decisions at this point that are poor will result in the loss of assets. And it's been probably 20 years since property owners have lost assets because the lenders have taken them. And as I said, we'll just have to work through that and as I think that that'll be characterized by this cycle. But I do think there's a lot of liquidity around.
Frankly, I'm a little surprised. I don't appreciate it when a borrower wants to extend a loan and hasn't even tried to refinance it yet, because there's a lot of capital out there right now, and I don't think it's very hard to refinance properties. And we've seen many loans refinanced at proceeds that shock us in many ways. But when a borrower comes in on a maturity data and he hasn't even attempted to refinance the property, we don't have a lot of tolerance for that.
Great, that's helpful color. And thanks. Look forward to speaking with you guys soon.
All right, thanks, Jade.
[Operator Instructions] Our next question comes from Tim Hayes, FBR. Please proceed with your question.
Hey, good evening everyone. My first question just on the St. Paul portfolio sale, obviously consistent with your strategy to harvest gains, and it generated a nice gain for you. But could you just remind us maybe why you had targeted that asset and why was it a good asset to divest of other than price? Does that reflect your view of that specific market or the asset type or was it just not maybe a good fit with what you want your real estate portfolio to look like a year or two from now? Or did it really all just come down to this could generate a nice gain for us?
Sure. For the most part we have a top-down approach towards real estate investing, and that usually starts with dollar per foot. And so if the dollars per foot, meaning we look at that versus replacement cost. And we'll take a look at it in that regard as to whether or not. Now, for the most part we're lenders, as you know. But because we lend on diversified property types, of course we see equity opportunities in exactly the same. So as I said, we've made money this year in a mobile home park in California, a building in Virginia that we bought vacant and sold when it was leased. This was a fully lease complex when we bought it, and it had three years left to the State Government of Minnesota which is a AA credit.
It is a giant property where -- and they've been in it for many, many years, numerous departments. And so we didn't think they were going to leave, but any time you have three years left on a lease you have to be a little concerned about that that the guy selling it to you knows more than you do. But we got pretty comfortable that -- and we do know a lot about Minnesota. We own a lot of properties up there actually. And we actually own the Canadian Pacific headquarters which we sold a while back too up in Minneapolis. So the Twin Cities are actually doing pretty well. And we were also attracted to the fact that they're building a giant soccer stadium nearby and they extended the green line. I'm giving you way too much information here, I understand, but.
I appreciate it.
But the extended the green line to St. Paul so you can now get in to Minnesota -- I'm sorry, into Minneapolis. Minneapolis has converted a lot of their old office buildings into apartments. So there's a little bit of growth going out towards St. Paul. So it's a city that's doing well. It was a little bit slow for a while, but the dollars per foot transaction was relatively low. And we did not think that the state government was going to up and move the entire -- we would've known three years in advance that there was a big complex being built somewhere. So we went in, made some improvements, approached the state tenants and extended leases. And we had a business plan when we went in, and we knew what we were trying to accomplish, and we did accomplish it. And then it's time for us to go.
We did enjoy the $5 million or $6 million a year in income that was coming in. I think Marc said it was $8 million when we left, rents had gone up. But I think that's from our perspective, owning real estate is more than just clipping coupons. I think that we would rather go out and buy another situation like that. So we took about, I guess, six years of cash flow on one day, which was a nice -- and have the ability now to distribute to our shareholders. And so I think it's an easier way to live by just extending the lease and keeping the income and it's attractive. And we've even heard some of our shareholders say they wish we would not sell properties like that. But when properties get a little bit older, you do have to understand you have to put money into them. And so we always measure it against the capital expense required to maintain the property as well as the probability of it extending and having those cash flows in place. So we felt comfortable that we had met or exceeded our original goals, and we're pretty disciplined about exiting.
Got it, that's really helpful. And it's not an unsignificant amount of NOI, I guess, that you're losing just from this property. And is there a certain level of NOI that you target that you'd like to maintain where that maybe you'd pump the breaks a little bit on the asset sales, and then try to grow the portfolio at some point. And I know that right now you're doing a little bit of both, but just wondering if there's kind of a target in mind where you're like, well, we definitely want some income -- some rental income from these properties and we're going to pump the brakes on selling assets.
We've gone to great lengths to build a portfolio of durable income in leases and loans with our bridge loan portfolio and our real estate portfolio. And so, we're always mindful of that. However, we also believe with higher interest rates and a dividend rate that's been rising, as I said, we've raised it six times in four years, but our dividend is very easily covered. And so, we're able to get a 9% or 10% ROE really would AAAs and AA bonds, if we want to, that's probably the easiest way to go about it. We're not having any trouble finding borrowers who will borrow at rates that make sense to us. We're a little concerned this deep in the cycle that maybe you forget finding borrowers who want to borrow money, we're talent scouts, we're trying to find borrowers who know how to manage money in an upgrade market and a possible downturn.
So I think the list of qualified borrowers in our mind got a little bit shorter, 200 basis points up in LIBOR with the Fed Chairman saying again in December as well as four times in 2019. So I think that you have to -- we're now underwriting most of our incomes at these buildings to be flat to down over the next few years. What does that mean? It doesn't mean 2007 by any stretch of the imagination, but we do believe that the pricing power of the market, it's not terribly aggressive. So I told all of my people, "If you're underwriting a hotel, please don't think that the hotel rates are going up." I think I said on a call recently, I don't think hotels could be doing better. And they're doing very well in most cases, but there's a lot of supply coming on the market, and while I don't think that you'll see widespread defaults, I do think you're going to see some mezzanine opportunities where borrowers can't refinance their full amount.
So there is no minimum amount. We try to make a 9% to 10% rate of return on an after-tax basis on everything we do. The only time we violate that is when we have a lot of cash, and we might buy a one or two-year AAA rather than sit at zero inside the bank. But that to us is cash. We'll just sell that AAA, if we need the money. And so, we have a lot of assets that QC book that we're talking about earlier that seems to be keeping going down. That's a rather low-yielding book because it's older and a lot of it is paying off and that's what we wanted to do, and we want those loans -- those securities to pay off while we go out and lend into a higher rate environment. So, covering a 7.5% dividend or an 8% dividend is not hard at all.
Got it. Well, I appreciate your comments, Brian.
Sure, thanks.
Our next question comes from Jade Rahmani, KBW. Please proceed with your question. Jade, your line is now live.
Sorry. The debt extinguishment charge of $4.3 million; was that included in core earnings, and was that related to the Wilmington asset or anything else specific?
That was related to the transaction in Minnesota. It's the seasons charge related to the debt that was on that particular facility. It is netted out of our core earnings. Yes, it is.
Okay. So the $0.59 includes that as an expense?
Yes.
Okay.
The party that bought the property did not assume our mortgage. They borrowed a different loan. So, we absorb the cost of the papers.
Okay. So the $29.1 million $0.26 per share impact that you gave, was that net of the extinguishment charge?
Yes.
Got it. Okay, that's a perfect. Just the Wilmington asset, since it wasn't on our watch list, and I'm not sure investors were aware of this potential issue, but can you give any color there in terms of the history, you know, how long was this potential vacancy issue on the radar screen, and are there other office exposures in the portfolio where there's similar potential shortfall in occupancy?
Our office portfolio looks fine. We think this was -- actually we think this is one of those assets that probably could've been refinanced, to tell you the truth. But as I said, it was 92% occupied in August, and while we did have some near-term rollover, there were a couple of things that may have caused us to be a little too optimistic regarding this loan. The loan actually had a $75 million balance in 2007, and was deeply owed; it was paid off at a discount by the sponsor in 2013 for a loan I think in the $42 million or $43 million area. And they put a few million dollars into the property establishing their -- improving their lobby, their outdoor plaza, and I think they've brought in a Starbucks, and they also run an office company there that has sort of like we work where they have temporary space.
And so, it was a rather full building coming into a maturity date. And the other thing that maybe gave us a little bit of comfort there was that it is right in the middle of Wellington and Rodney strong Park, and it's next to the Hotel Du Pont as well as a building that's going to be the headquarters of the Commerce corporation, symbol CC on the New York Stock Exchange, and they have signed a 15-year lease and we think there's $100 million is going into that building which is next door to us. So we got a little caught off guard, and I think that we probably would have been in a discussion about straight extension or pay down. However, several other buildings were sold at very low prices by institutional owners, mostly because large blocks of space had come on the market. It seems to us that -- again I get a little wonky on these things with real estate, but if you go from Rodney strong Park down to the river in Wilmington, that area does seem to be doing well. The city of Wilmington is a little bit like the City of Rochester when it lost Kodak or almost like Detroit in many ways when the car companies got into trouble. So it's a small city. So it doesn't take a lot to turn it around or get it in trouble for that matter. And a lot of space has been delivered.
What we feel good about though is that it is very close to that Philadelphia International Airport. And the dollars per foot on the new loan that we've got where we own 19% of it is about $66 a foot, so well below replacement cost next to a corporate headquarters, next to the Hotel Du Pont. It's in an opportunity zone, which I think you'll hear more about, maybe not on this asset, but across the board in real estate the United States. I think it's a great idea that they put into the tax code. And so we, were a little surprised at the -- Wilmington seemed to be a market that was not doing well despite the rest of the country doing well, but there is a formula for fixing it, and I think they know it. And so I think we're a little bit behind, they're probably trailing, and I think the city bottomed out in the sale of those empty buildings recently. And it'll take a little while, but there's not -- it's not a big city. So it shouldn't be too hard to fix, but it is going to take -- and the other thing that gives us a lot of comfort is the fact that the suburbs of Wilmington are doing very well. Lots and lots of people in them and a lot of tech and a lot of new companies starting, and the City of Wilmington actually has a city tax for some reason unbeknownst to me that if you live or work there, you get to pay 1.5% more tax, as a result, everybody lives in the suburbs. So I don't know how they're going to work that one off, but I suspect they will because of Darwinian times tell me that they're going to have to figure it out. But the building at $66 a foot, it'll be 65% occupied, and I think it was more of a timing issue, because as I said going from 92% to 65% in a short period of time while other space was delivered on the market of course caused the problem, but it's not a bad building.
Okay, thanks very much for taking the follow-up.
Yes.
Ladies and gentlemen, we have now reached the end of the question-and-answer session, and I would like to turn the call back to Brian Harris for closing remarks.
Okay. Well, thanks everybody for listening, I appreciate it, and those you dial in and listen to it later, thank you. Good quarter here. Good four quarters in a row actually. I think we've now produced three or four quarters that began with a 60 something in core earnings. So I'm very pleased with the way things are going. We won't be talking to you for a while because of the year-end and the audit, but yes, we look forward to seeing you again and hearing from you, and we're optimistic about things going forward. So, thanks everybody for listening.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.