Ladder Capital Corp
NYSE:LADR
Earnings Call Analysis
Q3-2023 Analysis
Ladder Capital Corp
The company highlighted its stable performance with distributable earnings reported at $39 million or $0.31 per share, achieving an after-tax return on equity (ROE) of 10.1%. They emphasized this as a notable result that investors should consider.
Maintaining a modest adjusted leverage ratio of just 1.6x and prioritizing safety and prudence in its capital strategy, the company's liquidity position is robust with approximately $800 million in cash and equivalents. This prudent approach, including a leverage ratio of less than 1.0x when excluding investment-grade securities and unrestricted cash, reinforces the company's commitment to financial stability.
The company has strategically positioned its asset base with 55% of assets being unencumbered, and a significant portion comprising of first mortgage loans, investment-grade securities, and cash equivalents. This configuration is intended to bolster the financial robustness of the company.
A balance sheet loan portfolio standing at $3.4 billion garners a weighted average yield of 9.77%. Smaller average loan sizes have amplified the resilience of the credit portfolio, with total loan repayments reaching $560 million year-to-date through September.
Foreclosure activities have been fruitful, with activities in Hartland, New York, and San Diego, California resulting in gains and an impressive 18% ROE from initial investments. These strategic real estate maneuvers demonstrate the company's adept asset management capabilities.
The company continues to exhibit proactive asset management, optimizing asset value without any significant impairments identified this quarter. This approach is indicative of a disciplined strategy that concentrates on pivotal milestones and capital optimization.
All three major rating agencies reaffirmed the company's credit ratings; two maintained a rating one notch below investment grade. The company's distributable earnings and real estate portfolio, which generated $16 million in net rental income this quarter, secure the dividend coverage. This reaffirmation speaks to the company's standing and prospects in the commercial real estate market.
The company has repurchased $67 million in principal of unsecured bonds, realizing $10.6 million in gains. Additionally, a share buyback program with $44 million of remaining capacity showcases a dedication to enhancing shareholder value.
Given the rise in interest rates and changes in lending behaviors, Ladder plans to maintain high net interest margins with a high liquidity level and leverage below the industry average. The company's distribution earnings have increased by 17% over the same period last year, and they're continuing to reallocate capital in anticipation of favorable opportunities.
Credit has remained generally stable, with the company noting a slowdown in the pace of property value depreciation which could indicate nearing the end of the current credit cycle. The company is well-positioned to take advantage of the transitioning credit markets, with a flexible capital structure that allows for strategic movements.
Striving for an investment-grade status remains an objective, with a plan to increase the portion of unsecured debt to 50% from 41% to achieve this goal. This strategic priority underscores the company's long-term commitment to strengthening its credit profile and differentiating itself in the market. As they operate with considerable operational flexibility, there's an emphasis on patience, despite the option for a $324 million unsecured line of credit to facilitate movements if necessary.
The company does not anticipate a special dividend in the near term but will continue to evaluate its dividend policy regularly. For now, the expectation is that strong earnings and favourable liquidity will support the current dividend levels, with the Board considering any adjustments on a quarterly basis.
Ladder has maintained a consistent un-depreciated book value per share at $13.77 as of the end of the quarter. A well-covered dividend evidences the company's financial health, with a $0.23 per share dividend paid in October.
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Good morning, and welcome to the Ladder Capital Corp's Earnings Call for the Third Quarter 2023. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended September 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 earnings supplement 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. Please go ahead.
Good morning. We are pleased to provide an overview of Ladder's financial performance for the third quarter of 2023. During the quarter, Ladder generated distributable earnings of $39 million or $0.31 per share. It is worth emphasizing that these results, which yielded an after-tax return on equity of 10.1% were achieved while maintaining a modest adjusted leverage ratio of just 1.6x.Our book value has remained steady even as we continue to add to our CECL reserves to align with the current market environment. Our dividend also remains well supported by net interest margin and net rental income. And we will endeavor to prioritize credit optimization in the upcoming quarters in order to continue to deliver these results.We have consistently maintained robust liquidity with approximately $800 million in cash and cash equivalents. This amount represents more than 14% of our total assets. With our fully undrawn unsecured revolver, our same-day liquidity stands at $1.1 billion. It's worth mentioning that our leverage ratio stands at less than 1.0x when excluding investment-grade securities and unrestricted cash, underscoring our commitment to prioritizing safety and prudence in the face of ongoing market uncertainties and the prevailing geopolitical landscape.Over 40% of our debt is comprised of unsecured corporate bonds, 55% of our assets are unencumbered, and 82% of these assets consist of first mortgage loans, investment-grade securities and cash and cash equivalents. This composition significantly enhances the flexibility and liquidity of our balance sheet in comparison to traditional secured funding sources.Turning to our balance sheet loan portfolio. It stands at $3.4 billion as of September 30 and features a weighted average yield of 9.77% and an average loan size of $27 million. In addition, we maintained limited future funding commitments amounting to only $258 million, with more than half of this commitment being contingent upon favorable leasing activities at the underlying properties.In the third quarter, we received loan repayments totaling $119 million. When combined with the year-to-date repayments for 2023 through September 30, our total loan repayments reached $560 million. Our strategic emphasis on originating loans within the middle market with a smaller average loan size remains a key factor enhancing credit quality. As demonstrated in the past, these smaller loan sizes allow borrowers to access a broader array of capital sources for repayments, fees through refinancing or asset sales and contributed to the resilience of our credit portfolio.During the quarter, we foreclosed on a mixed-use loan secured by 4 properties in Hartland, New York with a combined carrying value of $31 million. The property is 89% occupied and our plan moving forward is to actively work on stabilizing the multifamily and retail component of these assets. This action resolved alone on nonaccrual, reducing the balance from $88 million to $58 million.In the same quarter, we sold a hotel in San Diego, California that we previously foreclosed on, resulting in $800,000 gain. This gain was in addition to a $2 million gain we recorded at the time of foreclosure in 2019 and resulted in an 18% return on equity from the time of initial investment to the point of sale.Subsequent to quarter end, we concluded foreclosure proceedings on a $35 million multifamily loan located in Pittsburgh, Pennsylvania. The loan had previously been classified as nonaccrual in the second quarter of 2023. The property primarily consists of 174 newly constructed multifamily units that are 98% occupied.In addition to these units, there are some office and commercial space and the property currently generates a solid in-place capitalization rate of 7% at our basis. Further, as Paul will cover in more detail, we increased our CECL reserve to align with our assessment of current market conditions, but we did not identify any specific impairments during the quarter.Regarding our proactive asset management approach, we maintain ongoing communication with borrowers and closely monitor their business plans well ahead of any maturity date. We are paying special attention to pivotal milestones where capital infusion may be needed and our ability to optimize asset value is bolstered by our expertise in real estate ownership and operations.Turning to our securities portfolio, we have begun capitalizing on opportunities to expand this portfolio by acquiring additional $58 million of AAA CLO securities, which are presently offering highly attractive returns and a compelling, unlevered yield of approximately 7.68%. Our real estate portfolio remains substantial, contributed to distributable earnings, generating $16 million in net rental income this quarter.In 2023, all 3 major rating agencies reaffirmed our credit ratings and 2 of these agencies maintained our rating at 1 notch below investment grade. This is a noteworthy achievement, especially in light of the disruptions in the commercial real estate market.In conclusion, we are continuing to maintain a patient stance assured by the secure coverage of our dividends. Through the resilience of our credit portfolio, we also continue to maintain a high bar when it comes to reinvestment. However, we are well prepared to seize new investment opportunities that offer attractive risk-adjusted returns once that transaction activity rebounds. This readiness is supported by robust liquidity, prudent leverage and the expertise of our seasoned originations team.With that, I'll turn the call over to Paul.
Thank you, Pamela. In the third quarter, Ladder generated distributable earnings of $39 million, or $0.31 per share, driven by contributions from strong net interest margin and net operating income, both of which benefit from our primarily fixed rate liability structure. A $3.4 billion balance sheet loan portfolio decreased in the third quarter due to $119 million in proceeds received from loan paydowns, partially offset by $17 million from funding on one new loan and existing commitments.As previously mentioned, we foreclosed on a $30.5 million loan collateralized by 4 mixed-use properties, reducing our nonaccrual loan balance. In addition, we sold the previously foreclosed on hotel properties for a $0.8 million gain. In the third quarter, we increased our CECL reserve by $7.5 million, bringing our general reserve to approximately 110 basis points of our loan portfolio. The increase was driven by the current macro view of the state of the U.S. commercial real estate market and the overall global market conditions, including the increase in long-term interest rates.We continue to believe that the credit quality of our loan portfolio benefits from overall diversity and collateral type and geography and granularity with limited exposure to any single sponsor or market. Our $888 million real estate segment continues to perform well and provides stable net operating income to our earnings. And as of September 30, the carrying value of our securities portfolio was $477 million, comprised of 99% investment-grade rated securities, of which 83% were AAA rated.Worth noting that as of September 30, 2023, 70% of our securities portfolio was unencumbered and readily financeable, which is in addition to the $1.1 billion of same-day liquidity we maintain. Ladder same-day liquidity simply represents cash and cash equivalents of $798 million, plus our undrawn corporate revolver of $324 million with a maturity in 2027.As of September 30, 2023, our adjusted leverage ratio was 1.6 times down from prior quarters. We continued to delever our balance sheet, all the while producing steady earnings. Unsecured corporate bonds remain an anchor to our capital structure with $1.6 billion outstanding or 41% of our debt, with a weighted average maturity of 4 years and attractive fixed rate cost capital at 4.7% average coupon.In the third quarter, we repurchased $5.3 million in principal of our unsecured bonds at 81.6% of par, generating $0.9 million in gains from the retirement debt. Through September 30, in 2023, we repurchased $67 million in principal of unsecured bonds at 83.4% of par, generating $10.6 million of gains. As of September 30, our unencumbered asset pool stood at $3.0 billion, or 55% of our balance sheet. Over 80% of this unencumbered asset pool was comprised of first mortgage loans, securities and cash and cash equivalents.We believe our liquidity position and large pool of high-quality unencumbered assets continue to provide Ladder with strong financial flexibility. As Pamela discussed, it's reflected in our corporate credit rating that is 1 notch from investment grade from 2 of 3 rating agencies, with all 3 rating agencies reaffirming our credit rating in 2023.In the third quarter, Ladder repurchased 19,000 shares of common stock at an average purchase price of $10.33 per share. In year-to-date, we have repurchased 2.5 million of our common stock at a weighted average price of $9.22 per share. Our share buyback program authorization of $50 million has $44 million of remaining capacity as of September 30, 2023.Ladder's un-depreciated book value per share was $13.77 at quarter end based on 126.9 million shares outstanding as of September 30 and as Pamela discussed, remained stable.Finally, our dividend is well covered. And in the third quarter, Ladder declared a $0.23 per share dividend, which was paid on October 16, 2023. For more details on our third quarter operating results, please refer to our earnings supplements, which is available on our website, as well as our 10-Q.With that, I will turn the call over to Brian.
Thanks, Paul. The third quarter saw interest rates generally surge higher to levels not seen in a very long time, but Ladder's performance was impressive, now having delivered double-digit ROEs over each of the last 4 quarters.Our distributable earnings over the first 3 quarters of this year were $128 million, a 17% increase from the $110 million over the same period in 2022. This was accomplished with the modest use of leverage, a smaller asset base and while keeping our liquidity levels quite high. Notably, today we hold over $800 million of T-bills maturing in less than 3 months with an average yield to maturity of 5.45%.During the quarter, we began reallocating capital from cash and T-bills into CLO AAA rated securities acquiring a modest $58 million of them in the quarter, but we expect to grow this position in the quarters ahead. The A classes of new commercial real estate CLOs receive an unlevered 7.75% return in today's market.We're also quite eager to originate new first mortgages on balance sheet loans. However, quality lending opportunities are scarce these days, with current rates over 9%, causing many borrowers to hold off on borrowing. We think this situation will change in the quarters ahead, but we can afford to be patient, as we are well positioned to sustain earnings that comfortably cover our quarterly cash dividend for the foreseeable future.As mentioned earlier, we received $119 million in loan payoffs in the third quarter and in the first few weeks of October, we have received an additional $52 million of payoffs after 3 more balance sheet loans paid off. Consequently, our liquidity has increased further since the end of the third quarter.Credit is holding up nicely for the most part, but we are seeing some delays on loan payoffs as lenders have become quite cautious before loan refinancings close. Ongoing negotiations for loan extensions are regular currencies these days, but so far it seems that most sponsors can, will and must contribute more equity to maintain ownership in their assets.As rates have risen, property values naturally fell and while we don't think the price deterioration is over, we do think the pace of depreciation is slow. If the higher-for-longer interest rate scenario plays out in the year ahead, we anticipate that our low coupon fixed rate corporate borrowings will enable us to maintain high net interest margins that are supportive of our dividend. Given our high levels of liquidity, we will consider repurchasing some of these corporate bonds and retiring debt while supplementing earnings in the quarters ahead.Switching topics, we get asked a lot about how changes to the funding models at regional banks will impact Ladder given how many commercial real estate loans are refinanced in this part of the banking sector. The answer, we believe, is that short-term, some loans on our balance sheet may have challenges in refinancing. But in the longer term, if regional banks get smaller, hold more capital and have diminished lending capabilities, the positive impact to alternative lenders like us should be very positive.The last few years have seen plenty of turbulence brought on by global pandemic, near 0 interest rates, followed by the highest rates seen in 4 decades, along with heightened tensions with China, Russia and chaos in the Middle East. And it's been rough on fixed income investors generally. Ladder has successfully managed through all of these market conditions, keeping leverage low and liquidity high.We expect the turbulence to continue for a bit longer until the Fed is convinced that the further rate hikes they're thinking about are no longer necessary. Until that happens, we are well positioned to manage through a higher rate credit cycle and to take advantage of the opportunities markets like this invariably produce.Operator, we can now take some questions.
[Operator Instructions] Our first question is from Sarah Barcomb with BTIG.
So during the last conference call, you mentioned that regional banks were still in the lending market. I think Silicon Valley actually took you out on one of your loans and private credit was coming in to bid on assets in your target universe. So I'm just curious if you have any updated observations with respect to how the competitive landscape as well as the takeout financing markets have changed at least over the previous quarter?
Sure. Thanks, Sarah. I would say that it's more of the same. The regional banks are still lending. I would also indicate that when you used to be given a closing date by a borrower who asked you for a payoff statement, it was reasonably reliable that it would probably happen on that date or near it. It's not at all unusual to see things back up a couple of weeks now. And we're asked for short term extensions just to accomplish the refi. And I just think it's a heightened level of detail analysis at this point.So like, whereas you might not have had an estoppel from a small tenant, they're requiring it now. So a lot of T's getting crossed and I's getting dotted. And I think it's slowing the process, not stopping it although obviously some banks I think have just changed their criteria with a lower capital base. But private credit is still out there. I think that a lot of the names that we typically deal with in the world of CLO and transitional bond and transitional lending, some of them are having some difficulties now with their inventories. And so there are some new names popping up.And I think I indicated in the last call some of the names I've never heard of. But there's a lot of capital around and on the sidelines. It's rather expensive. And I think many borrowers coming up on maturity dates believe that the existing lender is their best opportunity to get through a whatever refinancing or an extension, because they know the asset at that point they're obviously not going to fall down if they say they'll do it. But -- so I would say no real change, other than a little bit more ticking and tying before the actual wires are sent.
Okay. And then you touched on this in your prepared remarks, Brian, but you guys are still running with very strong liquidity and low leverage. I was hoping you could comment a bit more on why you're running with so much cash. I understand there's high yields on cash right now and you did buy some securities and some of your cap stack during the quarter. I guess should we expect more of the same in this next quarter, or could we start to see some more allocation towards maybe CRE equity? You've already kind of touched on loan originations, but just curious if that high cash balance has anything to do with covenants or just defensive positioning?
Sure. It has nothing to do with covenants. We are massively covering all of our covenants at this point. In fact, I think our fixed cost coverage is exceedingly high relative to what's called for in the space. Whereas I think a lot of organizations that fund floating rate loans with floating rate liabilities, their fixed cost coverages have actually gotten below covenants and are asking for waivers. But not the case with us.The only reason we're holding so much cash is because loans keep paying off at a pace that exceeds our investment abilities. There's plenty of cheap things out there, but a lot of it has got some problems to it. So we would love to be buying more CLO AAAs. The A classes on these new deals are really very, very attractive. Although there have been a couple of deals that we've stayed away from because they look like kitchen sink deals, and we're a little uncomfortable with it.Unfortunately, I normally would say, I would expect this volume to pick up, but I'm not sure it will given where rates are. If it does, we will continue to acquire and have continued acquiring securities into the fourth quarter. And as much as I'd like to tell you that we'll probably be a net investor with money going into investments rather than coming back to us. In the first 3 weeks of October, we took another $52 million in payoffs.So Country Club problem perhaps and it doesn't -- you have to remember the differential between a T-bill now at around 5.5% and where you can possibly lend money safely, I call it 9%, 9.5% million, it's not such a huge difference. And because we use very little leverage, it really doesn't impact us too much. But we're pretty comfortable that we'll be able to continue picking up assets and you're starting to see some assets change hands with lenders or else notes being sold and we might get involved in some of those also. But to-date, it's been slim pickings on the safe investment side mainly because of the continuation in our opinion that values continue to drop although as I said on the call dropping at a lower rate at this point, the pace of deterioration is slowing down, which kind of has to happen. So I kind of feel like we're getting near the end of this credit cycle and that should bode well for us and the liquidity that we carry.
Our next question is from Jade Rahmani with KBW.
Wanted to ask first about Ladder's current capital structure and capital package. Within a stable environment assumption, what cash balance do you think would be reasonable to hold? And if you executed on that, what ROE do you think the company could optimally generate?
Well, the first question is pretty easy. Usually about $100 million we like to have around. We'll take it down to $50 million often, so that's not a hard rule, but around $100 million we like keeping local if there's just normal conditions prevailing. But the kind of ROE, if we were to take it down to $100 million, it all depends on what kind of leverage is. If we were to go to 3:1 leverage, that would add close to $3 billion in inventory, which we're employing for some leverage.If we didn't employ any leverage at all, we would be able to drop $1 billion worth of assets to the bottom line. And if you call that 8%, $80 million gets there without any real change. But you're giving up the 5.5% on the T-bills. So we think double-digit ROE is very attainable. Right now despite the fact that we're carrying a lot of cash, there are plenty of opportunities for us. Our corporate bonds because of the surge in interest rates in September look very attractive to us. Our stock looks very cheap to us also. And we'd like to -- everything is on.We would love to write bridge loans. We'd love to own securities. We'd love to own real estate. And real estate might be creeping into the picture here. But those transactions take a while, as you can imagine. But securities don't take very long at all, which is one of the reasons that we're gravitating in that direction because you're effectively getting almost 50% subordination on a cross pool of the assets. Many of the new CLO deals are static, which we prefer because you know the universe you're dealing with.So there is no attempt on our part to be holding unusual amounts of liquidity. It is simply patience and our capital structure allows that patience because even with a diminished asset base during times like this, I think it calls for extra liquidity, extra caution and extra -- and lower leverage. So that part is just endemic to us. It's in our DNA to keep leverage down and keep liquidity up. But I will admit, this is pretty excessive right now. But it isn't because of anything we're doing on purpose.We're not trying to show you we have a lot of liquidity. In fact, we're a little surprised the market hasn't rewarded it a little bit more, although we do have one of the lowest dividend yields in the space. But we began moving out of cash and securities last quarter and I think we'll continue doing that in the fourth quarter. But in a market like this, you don't really mind payoffs because I think that that's the credit quality is a question in a market like this and so far we're doing well.
Jade, just one thing. When Brian says a $100 million of cash, that comfort level is supported by a $324 million unsecured line that we could draw at any time.
Okay. On the IG front, investment grade, is that still the company's number one strategic priority or is that just aspirational? And in achieving investment grade, what are the main pitfalls? What would you have to give up?
Pamela, you want to take that one?
Yes. I mean, we are absolutely still committed to trying to become an investment grade company. We'll always be balancing that against the cost of funds and ROE. But for us, it has been a pretty objective, we have to get to 50% of our debt is unsecured debt versus the 41% today. So not a terrible stretch. And we continue to think it will be a big differentiator for Ladder.And if you look at just the way we run the company today, we're a slightly smaller, leaner company today with a $300 million to $400 million less of assets. But all of our debt levels, our cash, liquidity, higher, lower leverage, higher percentage of non-marked market debt, larger amount of unencumbered assets, we're well positioned to do it when the market allows at a price that's accretive to Ladder.And we think it'll be a real differentiator for Ladder in the space. I personally am a big fan of it and think there is a space in the market for a high single-digit, low double-digit investment grade company with primarily senior secured assets. We pretty much run the company that way today anyway.
The only thing I would add, Jade, is we began the process, perhaps it was an aspirational goal years and years ago, but given where we are now, we've kind of almost gotten there in that we're at, I think over 40% of our liabilities are unsecured right now. We still maintain firmly that if there was ever proof that having unsecured term debt is a winner, not a loser in the business, it has been proven right here although admittedly, we were paying higher prices than a lot of others when LIBOR was at 12 basis points.But taking the long view, as insider owners do, we feel pretty comfortable with it. We still think it's the right strategy, but do we think that we would not part with some of this liquidity and acquire some of those unsecured bonds that aren't due for years, given the prices that they're at? We absolutely will do that. We have no concerns at all about that kind of rigidness of keeping unsecured debt outstanding.
Just one note on -- one further note, Jade. We have $3 billion, more than half of our assets right now, 55% are unencumbered. It's really meaningful and I think not just it positions the company. I think one of the big questions right now when you're looking at credit is no one wants to be a fourth seller in this market. I can't even begin to describe the flexibility we have on the balance sheet right now to be patient when we need to be.
Our next question is from Steve Delaney with JMP Securities.
Congrats on another strong quarter and what is obviously a very tough environment. I'm curious where you guys stand currently on required distributions of re-taxable income. And at some point in the next few quarters, is there a chance that you would need to pay out a special dividend? And obviously, what I'm looking at is distributable EPS versus your dividend. And I realize that taxable is a different calculation for sure. So if you guys could comment on that, I'd appreciate it.
Hey, Steve, this is Paul. So 2023, no, we don't anticipate a special dividend, but it's something we're monitoring carefully as we get into 2024.
Okay. So it sounds like if you continue to put up good earnings and you don't do anything with it that maybe that would be an option next year. Of course, you can always just boost the regular quarterly payout, so.
That's about the same, Steve. I think you should just assume that the Board will regularly consider the dividend every quarter.
Sure. And obviously, just for more we said and think about it as an investor and analyst, a lot more return and utility in boosting the regular than a special. People have short memories and they forget those special dividends. So you probably only do it when you have to do it. And just looking forward to get to a better place in 2024. You've talked a lot about willing to be more offensive. Brian, what's the -- a lot of reasons that got us in the place we are now and unbelievable rate increases and rapid increases in rates is certainly one of those things I think probably the most disruptive.But looking out to next year, what would be the top 1 or 2 things in the macro financial regulatory complex, what does this market really need to kind of get back to some sense of normalcy in terms of risk return?
I think if the Fed, and I think they will get to this point, I think the Fed will get to a point where they indicate they're going to stop raising rates. That will be the -- they don't have to cut rates, but they have to stop raising rates and that'll be a big step in the right direction. And I think a lot of asset classes will go up in value as a result of that. Right now there's a lot of headline asset classes that would make you think things are going okay. But this is the third year of a difficult fixed income investment environment.And fixed income investors aren't usually losing money 3 years in a row, but this time they are. So if nothing else, I mean, I think the bond investor has been whipsawed around, he's been told to buy duration because rates will be getting cut. I've never really seen more economists forecasting rate cuts before the end of a rate cycle or recession even arrives. So there's been a lot of information and opinions which change rapidly, no shortage of changed opinions at the Fed.So I think a little stability around it's not going to get worse would go a long way right now. And I think you kind of see this even in the real estate side where like for instance, I hit a point with San Francisco where I said, can I possibly hear anything about San Francisco that would make me think it's worse? And you hit a point where you just can't.And then things, all of a sudden, you start looking at some headlines and they're getting better, a little bit better here and there. The AI complex out in Hayes Valley is doing pretty well. So it's really the first thing is, as they say, when you're digging a hole, put the shovel down. I think it's that mentality of it's, okay, the worst is over. And I don't think we feel that way just yet although the worst is almost over is probably comfortable.Obviously, what would really move this thing around is if you took 100 basis points off the tenure. That would certainly do it. Right now I think primarily what we're dealing with is a Fed-induced commercial real estate recession. They did it on purpose. And it isn't just supply and demand. Its carrying costs are gigantic.And it's unfortunate when you see property owners who actually executed their business plan pretty well and on time and then they have to go buy a cap that costs millions of dollars because just 2 years ago, cap rates cost almost nothing. I'll say also though that one of the reasons we might have been just holding off a bit on the aggressiveness side is we wrote $1 billion worth of loans in the fourth quarter of 2021.And since we write a lot of short loans, we're now in the fourth quarter of '23. So we're getting a pretty good report card and sense as to, okay, how did we do? Are we as good at credit as we say we are? And we feel pretty good. So once we start, you may see payoffs pick up here because we're coming up to that 2-year period where borrowers are going to have to re-up a cap, maybe some reserves and put up more equity.So I think that because we wrote a lot of loans after the pandemic effectively ended, the leverage is a little lower in our operation as well as the loan balances being smaller. So I think that's one of the reasons we're seeing more payoffs than a lot of others. And I expect that to continue, so this cash pile could go higher, but there's nothing in the system right now that would indicate that we have too much cash or we need to suddenly get rid of it.We're easily covering our dividend. We expect that to continue. We'd love to get to a point where we think the credit cycle is over and then we can start looking at that dividend proactively and sharing profits. There's other ways we can get money to shareholders through stock as well as bond buybacks. So we like where we are, played for higher rates, thought they were coming and they're here.And probably the lesson learned is because interest rates were low for so long, a lot of property owners really should have taken some steps to protect themselves against higher rates because the insurance cost of that was quite low just 24 months ago. And I'm sure if we get in another cycle in our lifetimes where this happens, that will be a lesson that comes back onto the blackboard for people.
Our next question is from Matthew Howlett with B. Riley Securities.
Hey, Brian, I mean, like you pointed out you've got plenty of excess capital, the balance sheet is in terrific shape. You have a high-class problem where you're getting more repayments. I think you're below 1.0 out net of cash ex these securities. What's the argument against really getting more aggressive on the share buyback, open market purchases, Dutch tenders?Is it the opportunity cost? Do you want to wait for what could be opportunities in real estate? You're probably getting high 20% leverage on securities. You're obviously buying back some of your corporate debt. I mean, what would be -- it just seems that the IRR analysis is 20 plus percent on buying back stock at these levels?
Yes. I don't have a cogent argument against buying stock back at these levels, so there's no resistance to it. And -- but it's -- and I want to stress this that there's a lot of opportunities right now, despite the fact that we seem to be husbanding cash around. We're not. We're just not seeing enough opportunities, at least on the non-CUSIP side of things. Yes. You can buy treasury bonds and that's a fine place to park for a little while if you want to make 5.5% and hold on to cash. But the securities, the A classes are in the CLOs are still the best game in town.We could move over to conduit, but those have duration and hedging right now is very expensive, so I don't see that happening. We are starting to look at real estate. Cap rates have backed up and we might skip a little bit of the normal lending portion of the movie and just move right to the equity side of things, depending on how cap rates move. And triple net lease stuff is getting pretty cheap also right now. So there's no -- and I just want to stress that when you're in a restaurant and they tell you, here's our specials today and they all sound good, you can't get 1/3 of each of them, right? But you can do 1/3 of each of these.And so while I don't have any objection to buying stock back, we do it during open window periods and unfortunately a lot of open window periods are not available when the end of quarters come and things get particularly interesting on the volatility side. But again, patience, nothing wrong with it. We can buy our bonds back and generate big returns very quickly there, but delever the company, but get rid of unsecured debt. We've always suffered from being too small though.And so I think that in order for us to acquire the stock through a repurchase program, yes, it's cheap, but it has to get really cheap and then we act and I think Paul read the levels that we've been buying our stock back at right here. So if all things, we're not going to communicate all of those policies in an earnings call, but if we were to get off the phone now and the window was open, yes, we'd probably start acquiring some stock here and certainly would be looking at some of those bonds, not all of them, but certainly lots of them.And so it's a pretty attractive investment landscape and we don't necessarily need to buy things that other people are working on. We can do things internally here ourselves. But yes, we kind of balance all of those at one time around do we want to become an IG company? Do we want to maintain liquidity? Are we at all concerned if anything should get much worse? And no one ever talks about that. Could things get much worse? And there's a couple of headlines going on right now in outside of Russia and in the Middle East that could make you think this could get worse.So we're a little cautious there too. So I would say when we acquire our own instruments, it's really because they've just gotten silly. But we like having them out there and we're happy to support them. We like our investors in those spaces and you'll rarely see us just buy stock without bonds and you'll rarely see us just buy bonds without stock because we're rather respectful of both sides of that investor line.
Makes total sense. I know you've been buying back stock. I figure I asked the question because you guys are in a unique position to be able to do it aggressively. And look, the buying back the debt here at $0.80 is terrific. It looks like you're buying with the 29s and the 27s. Is that -- am I seeing that as what you're sort of primarily buying back last quarter?
Yes. That's what we were looking at. I mean, there weren't many repurchases last quarter, but yes, that's where we were. We have a number for each of those 3 bonds every morning and we pass that over to the traders and if they come up at those prices we buy them. So we do have a price for the '25 also, but given that it matures in 2 years you can imagine it's a higher price. So there's no -- they're all investments that we're interested in and the -- oddly the reason the short bond is the higher price isn't just because it's short, it's also the highest rate.So when the 2025s payoff, we're actually going to -- the average rate of our corporate is going to fall to 4.5%. So it's extraordinarily cheap capital. The entire complex is below the Treasury curve at this point. So again, don't look to take them off the market because -- but the pace of investment has not been what we would have anticipated. And I think that goes back to what Steve said earlier. It's not just rates higher. It's the pace at which they got there. I mean, there are rate shocks reverberating through the system.I think you guys all follow the residential space also and if you saw the givebacks and book value, it was unbelievable. And so -- we -- patience, I don't think the train is leaving the station here. I don't think that we are in danger of others doing better than us in the near term because we just have a lot of capital. But on the other hand, when you look out at the company and you say, well, yes, the market cap of the company is $1.2 billion and they have $850 million in cash with no debt coming due and less than 1.0 coverage, you just sit there and shake your head and say, how is that?Now I respect the fact that we have the lowest dividend in the space, but the reality is just the earnings power of the company with no leverage and tons of liquidity and access to low corporate debt, it is an attractive outlook, at least from where we sit right now.
Yes. And on that menu, I noticed you have that nonrecourse CLO financing. But where does that trade? I mean, sometimes we see companies going to repurchase that own debt even AAAs and below. Is that less attractive than buying new issue AAAs? Or could you move down the credits and buy if you feel really good about the credit, because they're your CLOs to go buy some of the like AA or single A, is that part of the menu or --
Yes, absolutely. We own one of our BBBs in its entirety. We're not going to default on it. So it was very cheap and so we own that. We do have some rules around accounting when we buy things to make sure we don't have inside information. But so it's a little bit of a logistical pain in the ass. But we're happy to buy those and they are attractive. We oftentimes will tell you what a A-class and a CLO levered return looks like and it is in the mid-20s right now. But when we buy them, we hardly ever use leverage. We just keep the 7.75. But we also know the spike that we have over $800 million in cash, we could also sell those securities and get cash too.So the liquidity picture is extraordinary and we're very interested in making investments, but so far we're still dealing what it looks like, in most cases in the lending side, you're dealing with somebody else's headache. It's a bridge loan that somebody else doesn't want to extend and the borrower doesn't want to put up more money and he doesn't want to put a cap on it. And ultimately, these soft hands will get forced from the table and you'll be dealing with new investors with capital that are taking lower leverage and putting up bigger reserves and we're kind of getting to that point in the cycle I think.
Got you. And just last question, just while you brought up geography in the West Coast. We talked about New York a while back, and you seemed open to going in there. Any market you just wouldn't go into, or something that you're thinking counterintuitive that you'd go into? Just curious, you're always insightful on that side of it and I appreciate the question.
Sure. Listen, for many years I've been doing this for about 4 decades and every time I said I wouldn't make a loan in Hartford, the following week I made a loan in Hartford. And it really goes to the adage of no bad assets, just bad prices. So -- and when we opened Ladder, the financial collapse was taking place in the residential side and nothing was getting hit harder than Detroit in the auto companies. And we became one of the largest lenders in Michigan.And so I wouldn't say there's cities we will not lend in, but the -- and the prices may very well be getting down to where they're interesting. But realistically, I don't imagine that we're going to run into a whole lot of investment opportunities in Portland, Minneapolis, Philadelphia, Washington, D.C., is an utter disaster. Yes. And some of the hot markets are even rolling over. You saw Austin today was in the news as something that I think their population is dropping for the first time in a long time.So you just have to keep an eye on the local picture and you could easily, like when, for instance, if you say Portland, well, downtown Portland is what I mean. If you just cross one of those many bridges in Portland, it's not nearly as bad and it's a quarter mile away. It's not -- so I would say a short answer to your question is no red lines, but realistically kind of hard to lend in certain cities, given what's going on, especially by the way, taxes.Taxes are going to become an object of discussion in our world pretty soon because for whatever reason municipalities keep raising taxes as if real estate values are going up. And it's just -- it's going to probably be the final punch in the face to existing holders of real estate. That will -- it's -- you can't tack your way out of the problem. I just don't see it. And they're going to try and it will make values even lower and then it will probably turn.
[Operator Instructions] Our next question is from Stephen Laws with Raymond James.
Brian, you've covered a lot. I had one more question I wanted to touch on floors. An existing portfolio, really low weighted average floor, where's in any new originations or where are you taking those any mods or extensions? And if it's not moving higher, given kind of the fixed rate debt that was a benefit on the -- with rates increasing, any consideration to buying your own floors to kind of lock in that spread or protect against a rollover in rates impacting portfolio returns?
Yes. I would say the floors we're looking at, I'll quote a rate floor, that's just the way I think as opposed to a SOFR floor. But usually, when we send apps and we sent many, they say something along the lines of 9%, 9.25% on the rate floor. The floors don't really matter right now because the actual index is up so high so fast. We are running the calculus in a few cases where somebody who says, if you let me pay you up early, I can buy my cap back and it's worth over $1 million and I can give that to you.So it is part of the calculus now, it's more on the borrower side of things. I'm always a little leery when borrowers don't want to have a cap because ultimately all that means is you're just going to pay that rate over time instead of all at once. So usually, floors and usually caps borrowers and lenders tend to agree on because it does protect the borrower as well as the lender.So I think when you get to the point where you're seeing borrowers now wanting to switch to fixed rates so that they don't have to acquire a cap and also they understand what their risks are as far as where rates could go. But that hasn't happened too often with us, although I think it is happening in a few other places.
Brian, I would just add that we are increasing the floors on modifications generally.
Are you getting those close to market rate or how far below kind of spots over those floors?
A lot of it's still dependent, but pretty close to market rate on most of them.
How much cash flow you have too. If -- some of our assets, especially on the office side that are actually quite well occupied with rents that have gone up, there's a lot of cash flow. It's just a hard asset to refinance today.
Our next question from Jade Rahmani with KBW.
Multifamily is showing some softness in areas, a little bit of dip in occupancy and some markets like Phoenix with negative rent growth. With the portfolio at 36% multifamily and you mentioned the billion of originations 4Q '21, how are you feeling about the outlook in multifamily credit?
I think multifamily got too expensive. I think we were vocal about that, that we didn't think a 3 cap was a great idea. And even if you thought rents might double, it still has turned into a bad idea because rates have outpaced the rent growth and when you throw in the OpEx increases you pretty much blew the thing up. So I feel okay about multis though because homes are so unaffordable at these high rates and there's nothing available.So I do believe that there's a large contingent of the population that would like to own a home that simply can't for a myriad of reasons. But -- so I tend to think that apartments, if you hang in there long enough, you don't usually get in trouble with apartments, especially in a high inflation environment. And so we're constructive on it. And I think we made the first move in that direction to show consistency here.Back in '21, in the fourth quarter, we noticed and you may recall me saying it on an earnings call, that some of the caps were just becoming incredibly expensive. And so when we saw that, we got a little concerned about the rehab story of a 1970s garden-style apartment. And we're going to paint it, change the windows and rents double. What we focused on and you might remember we moved over to it, to avoid the cost of the cap on new originations, we wrote fixed rate loans, but they had points in, points out and they were 2-year loans.So those fixed rate loans are coming due at Ladder and they appear to be doing pretty well and that we were very comfortable that Fannie or Freddie could take most of the loan out, if not all of it. But with a little bit of seasoning, those rents are still going higher in most cases. And if we do have to get caught with it with a lending decision that didn't go as planned, we would much rather own a brand new apartment building that's just been built in 2021.The other thing that 2021 originations on brand new buildings did was this is when inflation was really taking off. So what happened was a lot of the transactions that required a lot of lumber and steel and all kinds of commodities, prices began getting away from the developer, whereas the brand new construction that simply had to be leased up, the costs were over.So yes, we're very comfortable with the book. We actually have hundreds of millions of dollars in fixed rate multifamily loans coming due that even if they extend because they don't feel like they're fully stabilized, the rates will be going much higher because most of those are around 5% to 5.5%.
Okay. I'll follow up offline with that. The other big question, I know everyone's fixated on liquidity, but scale. To really put Ladder in a different playing field, scale needs to increase. And yet with the aspirations for IG, you need to maintain lots of unencumbered assets and a high unsecured debt ratio. So buying a mortgage REIT would put that at risk. So to me, the answer would be therefore real estate ownership, whether it be portfolios or maybe buying a net lease company. What are your thoughts on that?
Yes. I think you're probably right. On the other hand, if I saw a mortgage REIT that had just dropped 20% of its book value in 90 days, that price has changed things too. And there -- we may very well move in a direction that doesn't help us in the IG arena because we're just not there yet. But I think if we ever do try to and make a move to become an investment-grade credit and I think we will, it will be obvious. We'll go out and we'll do a large issue when it's unsecured and we'll do that at a time where the rate that we're going to pay is going to make some sense relative to where we can lend money or buy assets.So your instincts are right there. I think certainly given the leverage that goes with some mortgage REITs and especially mortgage REITs with deteriorating assets, yes, I'd rather start over in a new building on a net lease side. And we have quite a bit of net lease here, but they're not quite as wide as they'll need to be if they're going to be financed. And -- but I think they'll get there.
There are no further questions at this time. I'd like to hand the floor back over to Brian Harris for any closing comments.
Well, thank you for tuning in on our first daytime call and hopefully this will work a little bit easier for everybody and hope we're going to continue that. But thanks for tuning in and thanks for staying with us and future looks bright. We feel good about it. Thanks.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.