Ladder Capital - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was a reinvestment quarter: GAAP diluted EPS was $0.09 and distributable EPS was $0.20, with after-tax distributable ROAE of 6.6% as Ladder redeployed liquidity from record 2024 payoffs into $329M of new loans and $521M of AAA securities.
• Balance sheet strength and flexibility remain a core theme: liquidity of ~$1.3B (including ~$480M cash), 83% of assets unencumbered, 72% of debt unsecured at a 5.2% weighted average coupon; gross leverage of 1.83x and adjusted leverage of ~1.4x position Ladder to prudently add leverage as originations scale.
• Corporate actions are supportive: Board increased the repurchase authorization to $100M in April; Fitch subsequently upgraded Ladder to investment grade (BBB-) in May, making it the only commercial mortgage REIT with an investment-grade rating — a potential multiple/cost-of-capital catalyst.
• Estimates context: Q1 distributable EPS missed consensus (0.20 vs 0.218*) and “total revenue” missed (Actual ~$51.2M vs ~$59.8M*), while Q4 2024 had a revenue beat and a slight EPS miss; originations expected to accelerate, which could drive estimate revisions as loan yields outpace securities carry.
• Near-term stock reaction catalysts: IG rating uplift and higher buyback authorization, combined with management’s expectation for originations to exceed Q1 and potential conduit securitization tailwinds if the curve steepens.

What Went Well and What Went Wrong

What Went Well

• Origination momentum and pipeline: New loan originations ($329M) outpaced payoffs ($181M); 74% of originations were multifamily or industrial; pipeline under application is ~$250M.
  • “We originated $265 million of first lien balance sheet loans at credit spreads ranging from 270 to 700 basis points and averaging 394 basis points over 1 month SOFR.” — Brian Harris.
• Liquidity and unsecured funding mix: ~$1.3B liquidity, 83% asset base unencumbered, 72% of debt unsecured at 5.2% coupon; repurchased $20M of unsecured bonds, called a CLO, repaid $323M of secured CLO debt.
• Securities portfolio build at attractive spreads: Added $521M AAA securities at ~5.79% unlevered yield in Q1; portfolio $1.5B at 5.67% unlevered yield and continued adding into widening in April — all unencumbered for additional liquidity.

What Went Wrong

• Earnings vs consensus headwinds: Q1 distributable EPS and “total revenue” were below Street consensus, reflecting timing of redeployment and muted payoffs vs prior year; Q1 GAAP diluted EPS fell to $0.09 from $0.25 in Q4.
• Nonaccrual additions: Two loans totaling $38.7M (hotel and office) were placed on nonaccrual; nonaccrual loans at $116M across 4 loans; however, CECL reserve held at $52M.
• Lower carry vs prior quarter: Net interest income decreased to $20.3M from $27.2M in Q4 2024 as the portfolio shifted and payoffs muted earnings temporarily; total other income also declined quarter-over-quarter.

Transcript

Operator (participant)

Good morning and welcome to Ladder Capital Corp's earnings call for the first quarter of 2025. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended March 31, 2025. 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.

Pamela McCormack (President)

Good morning. During the first quarter, Ladder generated distributable earnings of $25.5 million or $0.20 per share for a return on equity of 6.6% with modest adjusted leverage of just 1.4 times. We remain pleased with Ladder's positioning in 2025 following our strong performance in 2024. Over $1.7 billion, or 51% of our balance sheet loans, paid off in 2024, marking the highest annual payoff volume in Ladder's history, with nearly $600 million of proceeds from loan payoffs in the fourth quarter alone. While the timing of these payoffs temporarily muted earnings, reinvestment momentum is now building. Getting paid back is the most important part of the mortgage business, and we're excited to redeploy the liquidity generated from loan payoffs into new loans at lower reset bases that better reflect current market conditions.

During the first quarter, we originated $329 million in new loans and acquired $521 million in AAA securities, bringing our total first quarter investment activity to over $800 million. Our discipline model has firmly established our position as a leading middle-market-focused commercial real estate finance REIT. Over the past several years, we have consistently delivered strong earnings, preserved book value, achieved record loan payoffs, avoided material losses, enhanced and extended our liability structure, and maintained the highest credit ratings in the sector, all amid a challenging macroeconomic backdrop. The strength of our platform was most recently evident through the return on equity Ladder generated in 2024, one of the strongest in the sector. As we look ahead for the remainder of 2025, we recognize the continued possibility of market volatility and uncertainty.

However, with substantial liquidity, modest leverage, and a robust balance sheet, including one of the lowest-cost capital in our space, we're well prepared to navigate these challenges and capitalize on the opportunities they may create. Enhanced liquidity and credit ratings. As of March 31, 2025, Ladder had $1.3 billion in liquidity, including $480 million, or over 10% of total assets comprised of cash and cash equivalents. 83% of our asset base was unencumbered as of quarter end, and 72% of Ladder's debt was comprised of unsecured corporate bonds. Ladder remains on positive outlook from both Moody's and Fitch, with ratings just one notch below investment grade, while S&P upgraded our credit rating by one notch in 2024.

The recent expansion and upsizing of our $850 million unsecured corporate revolving credit facility, coupled with our $500 million unsecured bond issuance in 2024, represent meaningful progress in our shift towards unsecured debt as our primary funding source, an important milestone on our path towards potential investment-grade ratings. Loan portfolio overview, as of March 31, 2025, our loan portfolio stood at $1.7 billion, representing 38% of total assets, with a weighted average yield of 8.7%. Our future funding commitments remain minimal, totaling just $40 million. During the first quarter, new loan originations outpaced payoffs. We received $181 million in loan payoffs, including the full repayment of nine loans. In contrast, we originated $329 million of new loans, consisting of a $64 million fixed-rate conduit loan with a coupon of 6.8% and $265 million in balance sheet loans at a weighted average spread of 394 basis points.

Notably, 74% of these originations were backed by multifamily or industrial assets. Additionally, our pipeline continues to grow, with approximately $250 million in new loans currently under application. Given the robust payoffs achieved in 2024, we expect muted payoffs for the remainder of the year. Asset repositioning and risk management. During the first quarter, we placed two more loans totaling $38.7 million on non-accrual status, a $13.7 million hotel loan, and a $24.9 million office loan. Overall, our non-accrual loan balance represents only 2.6% of our assets. We did not take any impairments this quarter, and our CECL reserve remained at $52 million as of March 31, 2025. We continue to believe this reserve is sufficient to cover any potential losses we may incur, highlighting the strength of our underwriting and asset management, which remain a core driver of our success. Consistent carry income from our real estate portfolio.

Our $892 million real estate portfolio generated $12.2 million of net operating income during the first quarter. The portfolio primarily consists of net lease properties with long-term leases to investment-grade rated tenants. In addition, we sold one net lease property, generating a $900,000 gain in distributable earnings during the quarter. Growing securities portfolio. During the first quarter, we acquired an additional $521 million in AAA-rated securities at a weighted average unlevered yield of 5.79%. As of March 31, our portfolio totaled $1.5 billion, with a weighted average unlevered yield of 5.67%, primarily comprised of AAA-rated securities. As Brian will cover in more detail, we continue to invest in securities during the second quarter as spreads widened, ensuring stable earnings and enhanced liquidity for Ladder with the entire portfolio remaining unlevered. 2025 outlook.

Ladder's business plan continues to prove effective amid a highly dynamic environment shaped by persistent interest rate volatility and geopolitical uncertainty, including the reemergence of tariffs. These trade tensions have contributed to uncertainty and impacted commercial real estate demand, especially in sectors tied to global supply chains. While this volatility may dampen price discovery and deal execution, it should also present attractive opportunities for well-capitalized platforms like Ladder. Our discipline, balance sheet strength, and real-time market intelligence gathered from our multi-cylinder business model are crucial in enabling us to proactively navigate market fluctuations and capitalize on opportunities with the best risk-adjusted returns when others may be constrained. In conclusion, we remain highly liquid and very well situated to act with certainty and speed to deploy capital into new investments that can drive earnings growth and deliver long-term value to our shareholders. With that, I'll turn the call over to Paul.

Paul Miceli (CFO)

Thank you, Pamela. In the first quarter of 2025, Ladder generated $25.5 million of distributable earnings, or $0.20 per share of distributable EPS, achieving a return on average equity of 6.6% as our balance sheet remained flush with liquidity and low leverage after ending 2024 with record payoffs. As of March 31, 2025, Ladder's balance sheet remained strong, was primarily comprised of cash and a liquid AAA securities portfolio with room to grow leverage as we deploy our capital. As of March 31, 2025, Ladder's liquidity was $1.3 billion, comprised of cash and cash equivalents, and our newly upsized and extended $850 million unsecured revolver, which remains undrawn. Total gross leverage was 1.83 times as of quarter end as we continue to de-lever, far from our target range of between two and three times leverage.

As of March 31, 2025, 72% of our debt was comprised of unsecured corporate bonds with a weighted average remaining maturity of 3.5 years and an attractive weighted average fixed-rate coupon of 5.2%. In the first quarter, we repurchased $20 million in principal value of our unsecured bonds, including $8 million of our 2025 bonds maturing this October, which now have $288 million in principal that remains outstanding. In the first quarter, we called our FL2 CLO as it continued to amortize. In total, in the first quarter, we repaid $323 million of secured CLO debt. As Pamela noted, Ladder remains on positive outlook, one notch from an investment-grade credit rating with two rating agencies. Ladder is currently running a balance sheet within many of the investment-grade metrics of the rating agencies.

Given our long track record as a disciplined and prudent manager of capital, we are hopeful we will become an investment-grade rated company in the near term. As of March 31, 2025, our unencumbered asset pool stood at $3.7 billion, or 83% of total assets. 85% of this unencumbered asset pool is comprised of first mortgage loans, securities, and unrestricted cash and cash equivalents. As of March 31, 2025, Ladder's undepreciated book value per share was $13.66, which is net of $0.41 per share of CECL general reserve established. In the first quarter of 2025, we repurchased 71,000 shares of our common stock at a weighted average price of $11.42 per share. As of March 31, 2025, $66.8 million remains outstanding on Ladder's stock repurchase program. Subsequent to quarter end in April, Ladder's board of directors approved an increase to Ladder's share buyback authorization to $100 million.

In the first quarter, Ladder declared a $0.23 per share dividend, which was paid on April 15, 2025. As we continue to deploy the liquidity we have amassed through successful payoffs in 2024 and begin to prudently add leverage to our de-levered balance sheet, we are hopeful we return to consistent dividend coverage in the coming quarters. As Pamela discussed our performance in detail, I will highlight a few additional points regarding the performance of each of our segments from the first quarter. As of March 31, 2025, our non-accrual loan balance was $116 million across four loans, and our CECL reserve was $52 million, or $0.41 per share, as I previously mentioned. We believe this reserve level is adequate to cover any potential loss in our loan portfolio, including consideration of the continued macroeconomic shifts ongoing in the global economy.

As of March 31, 2025, the carrying value of our securities portfolio is $1.5 billion, up 37% from year-end, with a weighted average yield of 5.67% as we continue to rotate capital out of T-bills and into AAA securities while we allow for our loan pipeline to build. As of March 31, 2025, 99% of the securities portfolio was investment-grade rated, with 96% being AAA rated. As mentioned, the entire portfolio of predominantly AAA securities is unencumbered and readily financeable, providing an additional source of potential liquidity, complementing the $1.3 billion of same-day liquidity we maintain. Our $892 million real estate segment continued to generate stable net operating income in the first quarter of 2025. The portfolio includes 149 net lease properties, primarily investment-grade credits, committed to long-term leases with a weighted average remaining lease term of 7.5 years.

In the first quarter, we sold one net lease property for $13 million of proceeds, generating a $0.9 million gain for distributable earnings and a $3.8 million gain for GAAP, which includes the recapture of previously recorded depreciation and amortization expense. In conclusion, looking back over the five years since the onset of COVID-19 in March of 2020, Ladder has maintained a remarkably steady book equity of approximately $1.5 billion. We believe this is a testament to our long-held focus on principal preservation first and return on equity second, with a consistent strategy of financing our three core businesses, primarily with unsecured debt and modest leverage. For further details on our first quarter 2025 operating results, please refer to our earnings supplement, which is available on our website and Ladder's quarterly report on Form 10-Q, which we expect to file in the coming days.

With that, I will turn it over to Brian.

Brian Harris (Founder and CEO)

Thanks, Paul. At the end of 2024, we held about $1.3 billion in cash and T-bills following a high volume of loan payoffs in the second half of the year. In the first quarter of 2025, we began to deploy that capital into new investments in a post-pandemic, post-election, higher interest rate environment. As the year began, we felt like loan requests coming out of the refi channel were unattractive and largely relating to older properties with broken business plans with too much existing leverage in place. We tried to focus on originating mortgage loans on new acquisitions and on newer properties where we could find them. By the end of the first quarter, we were seeing much more attractive lending opportunities, with acquisitions becoming more common, along with newly built multifamily units coming off construction loans and in their initial lease-up phase.

We were pleased to have originated $265 million of first lien balance sheet loans at credit spreads ranging from 270-700 basis points and averaging 394 basis points over one month SOFR. We also originated a $64 million fixed-rate mortgage that we plan to securitize at some point this year when we accumulate enough of these kinds of fixed-rate loans to participate in a conduit securitization. This loan was a refinance of a $76 million loan we made to the same sponsor 10 years ago. Further investments in the first quarter included the addition of $521 million of AAA securities, and as volatility gripped capital markets as April began, we added over $160 million more of AAA securities so far this month.

For the remainder of the year, we expect to favor more investments in loans, but when volatility causes spikes in credit spreads, as it did in early April, we'd benefit from the ability to pivot and add more highly rated liquid securities to our inventory. In short, we expect to add similar assets in the quarters ahead with a preference for higher-yielding loans versus securities. On the right side of the balance sheet, we called one of our two CLOs issued in 2021 after payoffs in the pool of mortgage loans eliminated the A-class. Overall secured debt was paid down by $346 million in the first quarter.

If market volatility decreases, we hope to issue another corporate unsecured bond as summer approaches, but I would note that with an undrawn revolver of $850 million and $1.5 billion of unlevered securities, we are under no pressure to issue any new debt and will only do so if we believe conditions are attractive. To wrap things up today, looking forward, we expect the Treasury curve to steepen, with short-term rates falling while longer-term rates will be rising. This is not a great scenario for the overall economy as savers earn less interest and costs to service most forms of debt increase. We believe this scenario should be supportive of a larger opportunity to participate more meaningfully in conduit securitizations.

While it has been a while since we had meaningful earnings contribution from our conduit business, owing in part to an inverted yield curve that persisted for years, this product is the highest ROE product in our product mix, and we would welcome the return of the conduit business at Ladder. We expect the Fed will start to cut short-term rates in the near term, primarily because of where we see the two-year Treasury yield versus the Fed funds rate that the Fed controls. We believe the long end of the Treasury curve will rise as inflation ticks up and the deficit increases. While such rise would generally not be a great sign for the economy, we believe it would be an environment that an operation like ours can thrive in given the strength of our balance sheet and overall liquidity position. Thanks for listening today.

I think we can take some questions now.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question is from Randy Binner with B. Riley. Please proceed.

Randy Binner (Managing Director)

Hey, thanks. I guess I'll start on the origination activity, which was positive in the quarter and the blended 394 basis point spread you noted, but it was pretty wide, like 270-700, I think. The question is, we kind of thought of over kind of as plus 300 as a good level of where you're able to put money to work. Was there exceptionally good activity in the first quarter that had that elevated, or can we think like high 300s is where loan origination money can be put to work this year?

Brian Harris (Founder and CEO)

Okay, Randy, thank you. This is Brian. The quarter, as you can imagine, with all the volatility that commercial real estate has been going through in the last few years, not since the inauguration, there are difficult situations out there. There are lenders that want to be paid off and might be willing to take a discount they were not willing to take a while ago. There are also a lot of acquisitions going on at different reset prices. I think what happens sometimes in markets like that, I'll call it special situations, they always pop up once in a while. I would expect to see more coming out of a downturn. Sometimes what is very important is that you move quickly.

When someone is buying something that they feel is very cheap and they want to move fast on it, sometimes they're not overly worried about what the rate is as long as you get them to the closing very quickly. There were some situations like that. Because we hold things on our balance sheet and we're not beholden to B-piece buyers or rating agency subordination levels, we can pretty much just make a credit decision. Because we're all in one house and there's no third parties outside the building making the determination, I think we can drive a premium cost once in a while on yield to us. Also, the one thing I've been noticing, as I said, was we seem to be looking at a whole lot of brand new multifamily properties that are coming off construction loans and in lease-up.

That market is 225-275, and depending on what state you're in and what the leverage point is. That is the most prevalent product we're seeing financing opportunities for. I do not think I would try to indicate to you we're going to start being at 250-270 most of the time, because I do think that we will continue to see barbelling situations pop up. I also hesitate to draw too many conclusions around a sample size of 200 and change million dollars, $260 million, because one loan could really swing things around a little there. This is the kind of market where you will see opportunities to receive premium pricing for your liquidity and speed. Hope that answers.

Randy Binner (Managing Director)

Yeah, that's helpful.

Just one quick clarification or follow-up is, I think of that origination in the quarter, there was a percentage that was multifamily and industrial. I missed that. How much of it was in those two classes?

Brian Harris (Founder and CEO)

I think they said 74%, but I'm not sure. Craig, do you have? Adam If you know the answer? Yeah, 74%.

Yeah, it was 74%.

The old man got it right.

Randy Binner (Managing Director)

Okay, thanks. Appreciate it.

Operator (participant)

Our next question is from Jade Rahmani with KBW. Please proceed.

Jade Rahmani (Managing Director of Commercial Real Estate Finance Sector)

Thanks very much. I was wondering if you expect originations to maintain or exceed the pace that you generated in the first quarter?

Brian Harris (Founder and CEO)

I would expect them to exceed it.

Jade Rahmani (Managing Director of Commercial Real Estate Finance Sector)

Okay. Has there been any slowdown? I think you may have alluded to this post-quarter end.

Brian Harris (Founder and CEO)

Slowdown in which part of the pipeline? The part where they're assigning applications and posting deposits or closings or securitizations? There has definitely been a slowdown in securitizations with all the volatility. However, we were not looking to participate in anything anyway. On the origination side, I think that there, like many businesses, a lot of borrowers are kind of freezing until they get a sense as to what's going on here. At 10:00 A.M., it looks one way, and at 3:00 P.M., it looks different. That will dampen activity. Coming off of what we've gone through in the last two years, where effectively we're an asset management operation trying to get capital back in the building, wildly successful in getting paid off, then we turned on the jets the other way and started making investments of over $800 million in the quarter.

While spreads have been widening out, I haven't seen a falloff in activity. It's not hard to see an acceleration of activity when you're originating $300 million in a quarter. I would expect us to originate in excess of that. It was really a start as opposed to an average quarter, I think. I think you can expect us, regardless of the volatility in the space, I mean, things can go too far. I think in general, you'll see these numbers going up as we and we're planning to migrate out of those securities that we purchased into the loan platforms.

Jade Rahmani (Managing Director of Commercial Real Estate Finance Sector)

Thank you. How are you thinking about the net lease portfolio longer term? Do you plan to grow it? Do you plan to continue to sell down properties before leases come due? Is there a core set of the portfolio where you will hold the properties even as lease maturity approaches? Just overall, what are your views regarding that portfolio?

Brian Harris (Founder and CEO)

We actually have a very non-proprietary view of holding on to those assets. They're for sale every day, one and all. Oftentimes, people will call us, and sometimes if it's a small asset, it'll be somebody who knows the neighborhood. I think we sold one supermarket in Oklahoma, and it isn't because we put it up for sale and marketed it. We answered the phone. It was somebody who had purchased another supermarket from us previously. Nice, easy process, and it added a little bit to earnings and got some—it proves out that gap in book value from what the undepreciated book value number. We are usually in active discussions on people who want to buy those things. Those conversations take place more when the stock market is higher for strange reasons. With stocks falling, people are less apt to be doing things.

I want you to know that we're not actively managing, trying to sell it. We're prepared to hold all of them. When we make that purchase, there's always a price where we target a sale. In fact, the day we close, we have a targeted sale. We have a date and a price that we think we're going to sell it at. After we write that down, we don't, on that day, put the property up for sale at that price. We just kind of use it as a guideline as to if we get a bid here, why don't we try this? Because we're not in any need of capital, there's no active attempt to sell things.

Happy to add to that portfolio, happy to grow it, but I think I've said on numerous calls like this, that will take place more frequently in a steep yield curve where you can borrow money on the short end of the curve and purchase long-term cash flows on the long end of the curve. That creates a wonderful arbitrage. We're not there yet. We're not eyeing anything. There have been a couple of triple-net portfolios that have come across our desks recently, but we're not active there. I suspect that portfolio will probably go down just a bit in the next two quarters, and I think it'll probably go up after that, precedent being that the yield curve is a little steeper.

Jade Rahmani (Managing Director of Commercial Real Estate Finance Sector)

Thank you very much.

Operator (participant)

Our next question is from Steve Delaney with Citizens JMP Securities. Please proceed.

Steve Delaney (Managing Director and Senior Equity Analyst)

Hey, good morning, everyone. Brian, interesting. You know, to tend your comments about the steeper curve and it making that more attractive for net lease. We are down six basis points today to 432 on the ten-year. In your crystal ball, like over the next six months, where do you think it could rise to? What are you looking for to take advantage of it? Do you need up 50 basis points, or is it something more modest than that? Thank you.

Brian Harris (Founder and CEO)

It actually, Steve, rather than trying to figure out, I think the ten-year is going to go higher, first of all, because the U.S. has a massive deficit and they're going to have to fund it. So much dollars are going into interest now that you're old enough at this point to remember crowding out. When the government is borrowing an enormous amount of money, there's less credit available for people who want to do other things that are a little more productive than paying interest. I think the ten-year will go higher. I also think the short end will go lower. We're seeing an indication of that right now if you look at where the two-year is versus one-month SOFR.

You might remember a couple of years back where we got out in front of a scenario where we thought rates were going to rise rapidly on the short end. I remember the day we were on a phone call, I think we had just borrowed money for seven years at 4.25%, and we were being chastised for paying too much interest because Libor was at 25 basis points. We indicated we would play the long game there as opposed to where things were right now. We felt Libor was going to go up dramatically because the two-year was rocketing higher. As much as the TVs like to talk about Trump and Powell and arguments and who does what, at the end of the day, the two-year is driving where that short end is going to go.

I am now of the opinion that Powell will cut rates, and not because I think he wants to satisfy Trump. I think that Powell will cut rates because the two-year is going to force him into it. I think you can expect a lower short end and a higher long end, which will create the differential is what we worry about there. I do not care how much the two-year goes down if the ten-year goes up a lot. If the two-year stays right where it is, it is okay. I do not think that is what is going to happen. I do think that we are in for a little bit of a slowdown here, and that should precipitate the Fed to make a move lower. I think that is what all the forward curves are saying anyway.

The real question is how much of a stomach does the administration have for a ten-year at 5% or 4.75%? Throwing darts is not what I do for a living. I would probably tell you the ten-year will probably get up around 4.75% in six months.

Steve Delaney (Managing Director and Senior Equity Analyst)

Yeah, optically, that's a little more attractive, I think, especially for the real estate market than their five handle. Obviously, CMBS, RMBS, non-agency, of course, things have blown out, right? And much wider. You put some money to work. Interestingly on that, and I mean, I guess you're looking when you step in there, what are you looking at? Five to seven-year kind of durations? And how do you protect yourself if you add a lot of CMBS, fixed-rate CMBS against the steepening? Do you put some swaps on? How do you take advantage of the CMBS basis widening without taking interest rate risk?

Brian Harris (Founder and CEO)

I would say that what we call the CMBS, the mortgage-backed securities business, covers a lot of different products. CMBS has widened really with the rest of the world. If you take a look at some of the residential mortgage REITs, they've been suffering some book value declines, spreads are blowing out, and they keep issuing shares to buy more. These are at very historically wide credit spreads. The way I was taught a long time ago, the best hedge is at the price you buy it at. The way we protect ourselves in an environment where we have said for a while, we suspect rates will go up if the government doesn't get the ten-year on the—sorry, I can't remember the word now—the deficit, at least under some kind of a game plan.

We do not really own a lot of ten-year instruments except fixed-rate that we plan on securitizing. Right now, we own very little of that. What we do have on, we do hedge with swaps. We do not ever hedge one-to-one. We own that one loan that we did at 6.8%. We have that hedged about 50% right now. That is a daily occurrence. We move that around often. The way we really avoid a credit blowout and a lot of volatility is you buy floating-rate instruments that are two-year AAAs. That leads you to another part of the mortgage-backed security world, which is CLOs. The CLOs that are out there right now, there has been a slowdown in production of these also where people are just saying they are going to wait till volatility comes down.

All that translates to is, "I don't like where I have to sell bonds." You hear us expressing a view that we like buying bonds here, which is what you would expect. The way we do not leverage ourselves aggressively at all. In fact, I think we have $1.5 billion of AAA securities with no leverage at all. We finance ourselves as we are now at a mature phase of this company where we finance ourselves through long-term corporate debt that does not have mark-to-market in its process. Those are all vehicles that hedge you against volatility.

Steve Delaney (Managing Director and Senior Equity Analyst)

Appreciate the comments, Brian. Sounds like you've got some attractive opportunities here over the next quarter or two. Thank you.

Brian Harris (Founder and CEO)

Thank you.

Operator (participant)

As a reminder, this is star one on your telephone keypad if you would like to ask a question. Our next question is from John Nickodemus with BTIG. Please proceed.

John Nickodemus (Director and Equity Research Analyst)

Morning, everyone. I was looking at your slide six in the latest supplemental, just sort of the percentages between the different assets within your portfolio. Obviously, we've seen cash come down a bunch, securities go up a bunch, and then also loans start to creep back up with loan portfolio growth returning. I'm just curious kind of how you're envisioning this slide or just this allocation proceeding as the year goes on, given the $160 million of AAAs being added in April alone. Also sounds like originations are going to keep ramping. Based on what you're seeing right now, do you have a sort of steady-state mix that you're looking at for the different percentages allocated to each asset class? Thanks.

Brian Harris (Founder and CEO)

Sure. We do not have any game plan as to what concentrations we want in anything. We run the company from an overarching perspective of we want to have a lot of liquidity around during anything that is coming, particularly in the volatility we have been seeing here. In that scenario, we generally like having AAA securities, especially when they are yielding. If we were to lever them, and as I said, we have not, we are competing with people who do leverage them. We have to be mindful of that. If we were to take $1 billion of AAA securities and borrow $900 million, the $100 million left would probably be yielding in the 12%, 13%, 14% area, depending on what the price was that we bought the securities at. That, to me, is an episodic relationship. If things tighten, we will sell all of the securities.

If things really widen a lot, then we'll buy a lot more of them. For the most part, we know what our financing cost is. It doesn't move around a lot because it's fixed-rate primarily. 72% of our liabilities are fixed-rate corporate debt. I think our cost of funds there is 5.3%. Right now, we're not having any trouble at all accomplishing an ARB there. I would expect, because we're now coming out, if the country goes into a recession, and I think it might, I don't think it'll be a horrific one, but I think it might go into one, commercial real estate is still coming out of a recession. It was in three years ago, and it's coming out first. We are seeing improvement in fundamentals. I think that follows people who are concerned about possibly losing their jobs.

There's a lot less moving around. When people start opening their 401(k)s at the end of the quarter, they might decide to sell their house with a 3% mortgage and move to Florida. We try to get in front of those things. For the company, having done this through many cycles, you will see more loans on our balance sheet going forward. You will see more participation in the conduit if the yield curve steepens. You'll see less securities and less cash on our balance sheet. The reason for the less cash, don't think we're becoming cowboys. We have an $850 million revolver.

John Nickodemus (Director and Equity Research Analyst)

Great. That is really helpful, Brian. I appreciate that. The other one for me is just the origination pipeline. I know Pamela said 74% of what came in in the first quarter was either multifamily or industrial. Is it a similar sort of balance you are seeing with what you are looking at for the rest of the year, or is that shifting at all, especially given the recent tariff news? Thanks.

Brian Harris (Founder and CEO)

I think, Pamela, if you want to take that one, or?

Pamela McCormack (President)

Yeah. I think so.

Brian Harris (Founder and CEO)

I'm happy to. Okay.

Pamela McCormack (President)

Again, because of the fallout right now, it's all subject to change. Right now, it looks like a very similar 70% multifamily contribution on what's under app. If we find these one-off opportunities, the barbelling, that could change a little bit. I think, generally speaking, I would expect it to be a majority of our originations.

John Nickodemus (Director and Equity Research Analyst)

Great. Thanks a lot, Pamela. That's all for me.

Operator (participant)

There are no further questions at this time. I would like to turn the floor back over to Brian Harris for closing remarks.

Brian Harris (Founder and CEO)

Okay. Thank you for all listening live or later. I look forward to our next call. Our business plan is unfolding the way we've indicated it would. We migrated cash out of cash and T-bills and into securities where they're waiting to be called upon to head for the runway as we write loans that will be higher yielding. I look forward to having shared that with you over the following three quarters. It looks like we've got ourselves in a very good position with a lot of liquidity at a time where there's widespread and high rates and a lack of competitiveness in the market. I look forward to this, and we'll catch you next quarter.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.