Steve Delaney

Steve Delaney questioned Ladder Capital's underwriting discipline for bridge loans, given the significant losses seen across the commercial mortgage REIT industry over the past 3-5 years, and what measures Ladder would take to avoid similar issues.

Answer

Brian Harris (CEO, Ladder Capital Corp) attributed past industry losses to a combination of low cap rates, zero interest rates, high liquidity, and rapidly rising interest rates, alongside the 'work from home' trend and overinvestment in 'gateway cities.' He acknowledged Ladder's losses, though 'de minimis' compared to competitors, were higher than internal models. Harris identified key mistakes as refinancing competitor bridge loans and being cautious about large cities with unionized workforces and high crime. He emphasized Ladder's focus on 'flyover cities' and newer properties, avoiding high-leverage financing requests.

Steve Delaney asked about Ladder Capital's underwriting discipline for bridge loans, particularly in light of significant industry losses over the past three to five years. He sought insights into past underwriting mistakes and how Ladder plans to avoid similar 'carnage' moving forward.

Answer

Brian Harris, CEO of Ladder Capital Corp, attributed past industry losses to a combination of low cap rates, zero interest rates, high liquidity, and rapidly rising interest rates, especially in apartment buildings and 'gateway cities.' He highlighted Ladder's historical avoidance of high-leverage deals and preference for 'flyover cities.' Mr. Harris emphasized increased caution when refinancing competitor bridge loans and in large cities with unionized workforces and crime, acknowledging that while Ladder's losses were de minimis compared to competitors, they were still unacceptably high by their own models.

Steve Delaney asked if improving the Return on Equity (ROE) to the 9%-10% range, in a prudent manner, was part of Ladder Capital's vision for the next one to two years, and if the current strategy would necessarily lead to a higher ROE.

Answer

CEO Brian Harris affirmed that improving ROE is a key objective. He outlined the strategy: writing more loans, utilizing cash liquidity, and then selling down securities to reinvest in higher-yielding loans. He noted that with anticipated Fed rate cuts, Ladder's cost of funds (especially the revolver at SOFR + 125) is expected to decrease, while loan rates have recently increased. He projected adding $1 billion to $2 billion of net assets and picking up 3%-4% profit margin by replacing 5.5% yielding securities with 8.5% yielding loans, which he believes will significantly boost dividend, ROE, and earnings.

Steve Delaney asked about the projected growth of Ladder Capital Corp's $1.9 billion loan portfolio over the next year, inquiring about the potential size it could reach given the current capital base and increased activity. He also questioned whether improving the 8.3% ROE to the 9-10% range was part of the company's vision for the next one to two years and if the current strategy would achieve this.

Answer

CEO Brian Harris stated expectations for the loan portfolio to grow by over $1 billion, aiming to return to a size of around $3.4 billion, driven by strong origination activity and a pipeline of over $500 million in applications. He confirmed that improving ROE is a key objective, planning to achieve this by writing more loans, utilizing cash, selling securities, and benefiting from lower cost of funds (e.g., revolver at SOFR+125 with anticipated Fed rate cuts). Mr. Harris projected a 3-4% increase in profit margin by reinvesting 5.5% securities into 8.5% loans, emphasizing stable credit conditions.

Steve Delaney inquired about the impact of interest rates on Redwood Trust's securitized prime jumbo portfolio, specifically regarding the WAC and CPR dynamics, and the current range for 30-year fixed prime jumbo loans. He also asked if the recent refi pickup was driven by home price appreciation (HPA) or cash-out needs.

Answer

CEO Chris Abate noted that a third of the quarter's volume was refi-related, but most homeowners are out of the money. He stated that the portfolio is trending towards current coupon, and the business is primarily focused on mortgage banking rather than portfolio investing. Chris Abate mentioned current prime jumbo rates were around 6.25%, with Aspire rates about 100 basis points higher. He confirmed seeing some HPA-driven and cash-out refi business, attributing the broader refi pickup to increased capacity and technology allowing homeowners to refi with smaller rate differentials.

Steve Delaney of Citizens JMP Securities, LLC asked for details on the 15 new loan officers hired at Lima One, including their geographic focus, product specialty, and the resulting total number of producers.

Answer

President & CIO Bryan Wulfsohn responded that the new hires are high-quality additions from competitors, with a focus on expanding in the West and Midwest. He noted that it takes a few months for new hires to ramp up but expects aggressive growth in the second half of the year. The team is now approaching 50 producers with a goal of growing to 80.

Steve Delaney of Citizens JMP Securities, LLC asked for confirmation that the recent 'deluge of liquidity' was primarily in the bridge lending business and inquired about the quality of current originations compared to the 2021-2022 vintages.

Answer

Michael Comparato, President, clarified that the surge in liquidity is widespread across all credit sectors, especially in securitized products like CRE CLOs. He elaborated that current originations are of significantly higher quality, focusing on newer vintage assets needing a 'bridge of time' rather than heavy transitional business plans. He also stated that current credit metrics like debt yield and LTV are markedly better than those from three to five years ago.

Steve Delaney from Citizens JMP Securities, LLC sought color on the source of the "deluge of liquidity" in the credit markets and asked for a comparison of the credit quality of today's loan originations versus the 2021-2022 vintage.

Answer

Michael Comparato, President, attributed the liquidity to investors feeling the market is near a bottom. He contrasted current originations with the 2021-2022 vintage, noting today's loans are for higher-quality, newer multifamily assets requiring a "bridge of time" for lease-up rather than heavy transitional business plans. He stated that both asset quality and credit metrics like debt yield and LTV are markedly better now.