Ladder Capital - Q4 2023

Transcript

Operator (participant)

Good morning, and welcome to Ladder Capital Corp's earnings call for the fourth quarter of 2023. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter and year ended December 31, 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.

Pamela McCormack (President)

Good morning! We are pleased to provide an overview of Ladder's financial performance for the Q4 and full year of 2023. In the Q4, Ladder generated distributable earnings of $40 million or $0.32 per share, resulting in a 10.5% return on equity. For the full year of 2023, Ladder reported distributable earnings of $167.7 million or $1.34 per share, generating a 10.9% return on equity. Ladder demonstrated notable financial strengthening across key metrics over the course of the year. With a smaller asset base and lower leverage, we achieved higher returns. Our adjusted leverage ratio stands at 0.7x, excluding investment-grade securities and unrestricted cash and cash equivalents.

Distributable Earnings increased 13% year-over-year, and undepreciated book value increased to $13.79. Our financial performance benefited from a positive correlation to rising interest rates, with net interest income growing 58%. Our commitment to an unsecured capital structure contributed to this growth as we benefited from $1.6 billion of unsecured bonds at a low fixed-rate, weighted average coupon of 4.7%. We increased our liquidity position to over $1.3 billion by year-end, with cash and cash equivalents up 67% year-over-year. In 2023, we received approximately $1 billion in cash from paydowns of loans and securities, which was accompanied by a $462 million or 11% reduction in total leverage.

Future funding commitments also declined by over $100 million or 36%, and our unencumbered assets increased to 55% of total assets. In addition, dividend coverage also rose to 146% in 2023, reinforcing the safety and durability of our dividend. Furthermore, our credit ratings were reaffirmed by all three rating agencies during the year, with two agencies continuing to rate Ladder just one notch below investment grade. In the face of significant market disruption, the company's actions have notably strengthened our financial position, as evidenced by these positive trends. As we enter 2024, our efforts have left us well-positioned to quickly pivot to offense. Our originators continue to explore the markets for new investments in an environment we anticipate will offer compelling opportunities for well-capitalized lenders like Ladder, particularly given the pullback by the middle market banks.

Regarding our loan portfolio, we received $727 million in repayments, reducing the portfolio balance by 19% from the start of the year. This amount includes a full payoff of 35 loans and approximately $100 million in proceeds from the repayment of office loans. Subsequent to year-end, we received an additional $70 million in proceeds from the payoff of 4 unencumbered loans, including one office loan. We attribute our robust payoffs to our strategy of originating smaller loans in the middle market. This approach grants our borrowers access to a broader range of capital sources for repayment, whether through refinancing or asset sales. Our balance sheet loan portfolio stands at $3.1 billion as of December 31, with a weighted average yield of 9.65% and an average loan size of $27 million.

We have limited future funding commitments, totaling only $204 million, with approximately two-thirds of that amount contingent upon a favorable leasing activity or other positive developments of the underlying properties. In the fourth quarter, we successfully concluded foreclosure proceedings, resolving two loans on nonaccrual. This includes a $23 million loan on a retail property on the Upper West Side of Manhattan, which had been on nonaccrual since the second quarter of 2018, and a $35 million loan on a newly constructed multifamily in Pittsburgh, Pennsylvania, discussed on our third quarter earnings call. Lastly, in the fourth quarter, we placed one $115 million loan on nonaccrual status. The loan is collateralized by a newly renovated multifamily portfolio in Los Angeles, California, and we anticipate taking title to the asset during the first half of 2024.

As Paul will discuss, we did not identify any specific impairments during the quarter and increased our general CECL reserve to align with our assessment of current market conditions. Heading into 2024, we expect to pivot to offense while continuing to actively monitor our loan portfolio. Despite the liquidity pullback from regional banks impacting our market, we believe that the long-term advantages for non-bank CRE lenders like Ladder, stemming from reduced competition for lending in our space, outweigh any short-term obstacles. In the meantime, we're continuing to work with our well-capitalized sponsors, who in most cases, we've seen investing new capital into their assets, expecting a more palatable interest rate environment later this year.... That said, as we have consistently demonstrated, even during the challenges posed by COVID, we make a clear distinction between a default and a loss.

As a well-capitalized and experienced real estate owner, we possess the capacity to proficiently own and manage the underlying real estate. Our ongoing objective will be to maximize our value at our conservative loan basis, particularly as we navigate the upcoming quarters with the current higher for now interest rate environment. Turning to our securities and real estate portfolios. Over the course of 2023, we received $196 million in paydowns in our securities portfolio and acquired over $88 million of new positions, ending the year with a $486 million portfolio comprised primarily of AAA securities, earning an unlevered yield of 6.82%.

Our $947 million real estate portfolio, mainly comprised of net lease properties with long-term leases to investment-grade tenants, contributed $50 million in net rental income in the fourth quarter and $59 million in 2023. In summary, we enter 2024 with a strong balance sheet, substantial dry powder, modest leverage, and a well-covered dividend. As the commercial real estate market continues to reset, we remain focused on optimizing the credit of our existing loan book, and we are well positioned to deploy our capital for the right opportunities that we believe will present themselves as transaction activity rebounds. With that, I'll turn the call over to Paul.

Paul Miceli (CFO)

Thank you, Pamela. As discussed in the fourth quarter of 2023, Ladder generated distributable earnings of $40 million, or $0.32 of distributable earnings per share. For the full year in 2023, Ladder generated $167.7 million of distributable earnings, or $1.34 of distributable earnings per share, a return on equity of 10.9% for 2023. Our strong earnings in 2023 were driven by robust net interest income and steady net operating income from our real estate portfolio and benefited from our primarily fixed rate liability structure. Our balance sheet loan book continued to receive a healthy rate of paydowns in the fourth quarter, which totaled $167 million. This was partially offset by $11 million of fundings on existing commitments.

The portfolio totaled $3.1 billion as of year-end across 116 loans and represented 56% of our total assets. As previously mentioned, in the fourth quarter of 2023, we completed the foreclosure proceedings on two nonaccrual loans totaling $58 million. Overall, in 2023, we added three REO assets and sold $144 million hotel asset previously foreclosed on, which produced an $800,000 gain for distributable earnings, demonstrating our ability to maximize value on assets where we proceed with foreclosure. In the fourth quarter, we increased our CECL reserve by $6 million, bringing our general reserve to $43 million or an approximate 137 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 overall global macroeconomic conditions. We continue to believe the credit quality of our loan portfolio benefits from the diversity in collateral, geography, as well as granularity, given our small average loan size, which was demonstrated by the $727 million in proceeds received from paydown in 2023, including the full payoff of 35 loans. Our $947 million real estate segment continues to perform well, providing a stable source of net operating income to our earnings. The portfolio includes 156 net lease properties, representing approximately 70% of the segment. Our net lease tenants are strong credits, primarily investment grade rated, and committed to long-term leases with an average remaining lease term of 9 years.

As of December 31, the carrying value of our securities portfolio was $486 million. 99% of the portfolio was investment grade rated, with 86% being AAA rated. Over 71% of the portfolio was unencumbered as of year-end and readily financeable, providing an additional source of potential liquidity, complementing the $1.3 billion of same-day liquidity we had as of year-end. Ladder same-day liquidity simply represents unrestricted cash and cash equivalents of over $1 billion, plus our undrawn unsecured corporate revolver capacity of $324 million. It's worth noting in January 2024, we extended our corporate revolver with our 9-bank syndicate to a new 5-year term out to 2029.

The facility carries an attractive interest rate of SOFR plus 250 basis points on an unsecured basis, with further reductions upon achievement of investment grade ratings. This enhancement demonstrates the strength of our capital structure, as well as Ladder's strong relationships with these financial institutions. As of December 31, 2023, our adjusted leverage ratio was 1.6 times, which was down year-over-year as we delevered our balance sheet while producing steady earnings, strong dividend coverage, and an attractive double-digit return on equity. Unsecured corporate bonds remain the foundation to our capital structure, with $1.6 billion outstanding, or 41% of our debt, with a weighted average maturity of nearly four years and an attractive fixed rate coupon of 4.7%.

We'll also note in 2023, we repurchased $68 million in principal of our unsecured bonds at 83.5% of par, generating $10.7 million of gains. As of December 31, our unencumbered asset pool stood at $3 billion or 55% of our balance sheet. 81% of this unencumbered asset pool is comprised of first mortgage loans, securities, and unrestricted cash and cash equivalents. We believe our liquidity position and large pool of high-quality, unencumbered assets provided Ladder with strong financial flexibility in 2023 and continues to do so as we enter 2024... and as Pamela discussed, is reflected in our corporate credit rating that is one notch from investment grade from two of three rating agencies, with all three rating agencies reaffirming our credit rating in 2023.

In 2023, we also repurchased $2.5 million of our common stock at a weighted average price of $9.22 per share, and our current share buyback authorization of $50 million. That's $44 million of remaining capacity as of December 31, 2023. Ladder's undepreciated book value per share was $13.79 as of December 31, 2023, with 126.9 million shares outstanding. Finally, as Pamela discussed, our dividend is well covered, and in the fourth quarter, Ladder declared a $0.23 per share dividend, which was paid on January 16, 2024.

For more details on our fourth quarter and full year 2023 operating results, please refer to our earnings supplement, which is available on our website, as well as our annual report on Form 10-K, which we expect to file in the coming days. With that, I will turn the call over to Brian.

Brian Harris (CEO)

Thanks, Paul. We were happy when 2023 came to an end, and also very pleased with our financial results from start to finish. I credit our success to having gotten our company ready for turbulent markets in the years leading up to 2023. I tend to highlight our differentiated liability structure with a large component of fixed rate debt when explaining why things went well at Ladder during the year. But in truth, it's more complicated than that. Over 10 years ago, we decided to finance our business with a greater concentration of corporate unsecured fixed-rate debt, foregoing the typical mortgage REIT model of using repo lines to lever returns, even though floating-rate repo finance was cheaper at the time when we issued the bonds.

We realized after what happened to the U.S. banking system in 2007 and 2008, that there would be fewer banks, larger banks, and more highly regulated banks. So we felt the usual bank financing models in use might need some shoring up as they were becoming more and more problematic in an increasingly more volatile world with less cushion against market shocks. While we never saw a pandemic coming or the enormous global central bank intervention that took place in response to it, these items only served to cement our case to manage our company with safer debt, even if it came at a higher cost, using less leverage. Just as we had indicated we would do when we founded Ladder in the fall of 2008.

We've stayed true to that model, and while it was helpful that we got the timing and direction of the Fed's hiking cycle correct, our constant vigilance around avoiding credit mistakes has really been the linchpin to our success. While not perfect by any means, we believe we were better than most in our approach towards lending over the last three years. Although we're not without some headaches in these difficult times, our disciplined approach in keeping our exposure and assets at a reasonable basis has served us well once again, as it has for the better part of our lengthy careers. In March of last year, after a few banks failed, largely due to a basic lack of understanding about duration on the part of bank CEOs and regulators, the funding model for regional banks in the U.S. changed. These changes may very well be permanent.

If banks don't compensate savers with appropriate interest rates on deposits, we now see how easily savers can and will move their savings to where their capital is treated better. At Ladder, we own over $1 billion of T-bills that earn approximately 5.4% and mature in less than 90 days. This is not as a result of any plan we have, but rather a luxury we enjoy because we issued about $1.3 billion of fixed-rate unsecured bonds with an average rate of just 4.5%, with a remaining average maturity of about 4 years. We now have a rather barbelled asset base of T-bills at 5.4% and a loan portfolio that earns an unlevered return of approximately 9.7%.

This combination allows us to cover our quarterly cash dividend using only modest leverage during these precarious times in commercial real estate, while the deficit at the U.S. Treasury is spiraling out of control. Our fortress-like balance sheet allows us to turn our attention to getting through the current downturn in commercial real estate values in the aftermath of soaring interest rates, and with a banking system with little appetite to finance new commercial real estate loans. We've navigated this environment with considerable success so far. In 2023, as mentioned earlier, we received $727 million in proceeds from paydowns on balance sheet loans, which did include the full payoff of 35 loans.

We also received $196.1 million of principal paydowns and payoffs in our CMBS and CLO securities portfolio, further increasing our liquidity as a result of our low leverage business model. Because of our high level of liquidity, we are able to work with our sponsors on loans that are having difficulty refinancing. However, if we share this benefit with those borrowers, the borrowers too, must pitch in with additional capital to keep the asset in their control. We've been fortunate so far, having modified some large loans after substantial new equity was posted to create more time to resolve stress from higher rates. In 2023, we received $119 million in additional equity from our borrowers on 56 loans.

We have also received additional credit enhancement in the form of well-heeled sponsors providing full recourse on some of our larger loans outstanding. In our equity portfolio, our largest office property is triple net leased for another 8 years, with decades worth of extensions available to the tenant, who happens to be one of the largest banks in the United States. In this case, the tenant is currently putting the finishing touches on buildings that we own, that they rent at a tenant cost between $250 million and $300 million, including construction of a new 1,400-space parking deck, so they can concentrate even more employees into these buildings. We're just not worried about that one. I'll wrap things up here by thanking our employees who worked so hard last year in a daily environment of falling asset prices.

We reported distributable earnings of $168 million in a year where our asset base got smaller every quarter, yet we continued to produce double-digit ROEs while holding substantial levels of cash. We feel the Fed is at least done raising rates for the time being. If they do begin to lower rates, this will come as welcome relief to property owners. With less competition for lending assignments from regional banks, private credit is indeed moving in to take part in this vast addressable opportunity, and we have every intention of taking advantage of our already strong position in mortgage lending and plan to deploy our large cash holdings into something more interesting than T-bills. Thanks for listening. Operator, we can open the line for some questions now.

Operator (participant)

Thank you. We will now be conducting a question and answer session. 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. First question comes from Sarah Barcomb with BTIG. Please go ahead.

Sarah Barcomb (Analyst)

Hey, good morning, everyone. Thanks for taking the question. So you mentioned in the prepared remarks that you're positioned to quickly pivot to offense, and there's a vast opportunity for private credit here. So should we expect Ladder to start originating new loans as soon as this quarter? Or are you waiting for the Fed to start cutting rates? I'm just looking for more detail on, you know, what and when would allow you to be more constructive and, and start putting that large cash balance to work. Thank you.

Brian Harris (CEO)

Thanks, Sarah. Yeah, you should expect us to start originating loans this quarter, and in full transparency, we've actually been quoting loans through the fourth quarter also. Admittedly, though, we have not been overly successful in getting applications signed. Interestingly, because oftentimes, we are losing the loan opportunity to either an insurance company at lower rates and lower proceeds, because the borrower has decided they prefer the lower rate, or else, we've been getting beat by names of companies that we've never heard of. And so that'll, further evidence that the private markets are, in fact, pushing capital into the space. But I would expect that not to last. We are quoting conduit loans. We're quoting bridge loans.

We prefer acquisitions to refinances for obvious reasons, but. That probably limits the, you know, the amount of opportunities, because most of what's in the market right now is refi. But, as acquisitions pick up, I think you could expect us to be more active, and, there is no deliberate plan on our part to be hoarding capital at this point. However, sitting with a 5.40 T-bill rate and able to buy securities in the CLO and CMBS world at attractive levels, we've been adding there, mostly on the security side. In fact, while we've been on this call, we bought $10 million. But, I think we'll probably continue to buy more of those than we will make loans, but we are indeed quoting loans on a daily basis.

Sarah Barcomb (Analyst)

Okay, great. Thanks. I appreciate the comments on the competitive set there, too. That's interesting. Maybe just going back to the in-place portfolio for my follow-up. Just because the specific CECL remains pretty low relative to peers, and we don't have risk rankings on a loan level here, I was just hoping whether you, you know, you think there's certain aspects of your portfolio that could maybe start to become a bigger concern if rates remain elevated throughout the course of the year, or for longer. So maybe, you know, you could comment on the performance of your 2021 and 2022 vintage multifamily assets. You know, those kind of stick out to me. You know, could we start to see more keys coming back there? Appreciate any comments there. Thank you.

Brian Harris (CEO)

Sure. We are the late 2021 is really what I would call the dangerous spot for multifamily, because cap rates were quite low and leverage was quite high available in markets. I think we're gonna continue to see some stress in the system through the first half of this year. And when I say in the system, I don't mean at Ladder necessarily, but generally. I don't believe we're quite through this, but we feel like we're getting near the tree line here as we exit the forest. And so I would anticipate. I actually think rates are gonna go down a little bit here from what we've been hearing, and cap rates have gone down for sure because of the forward nature of purchasing caps.

So what we have right now is a deterioration in the equity ROEs, and not necessarily blowing up the debt column yet or taking losses over there. So, as long as rates stay here or go lower, I'm pretty optimistic. If for some reason rates start going higher, and I think the events of the New York Community Bank this week is a reminder to all of us that that could possibly happen. You know, I do think we've got another six-month slog. I don't necessarily get overly concerned about where we stand relative to other people in our CECL reserves, because we have focused on small loans.

And, when I say small, not terribly small, about $20-$25 million, as opposed to $200-$300 million, which are extraordinarily difficult to finance today. So while we might have some uncertainties about, you know, the outcomes of what's on our books right now, I can only reflect back on the last 12 months, which certainly was no picnic in the markets, and we got 35 payoffs. And since January first, we've got another $70 million in payoffs. So, those are the indisputable parts of the conversation around smaller loans and diversification. And, we're pretty optimistic, although we certainly do have some stress points in the system, that could go either way. So far, they've been going the right way.

However, to the extent that carrying costs of these assets continues to stay high, at some point, you do wonder, does the sponsor simply run out of money? So far, I think the sponsors who have ability to hang on are hanging on. However, if it got materially worse or if they simply exhausted their equity availability, then yeah, we might see some properties come across the transom.

Sarah Barcomb (Analyst)

Okay. Thank you, Brian.

Brian Harris (CEO)

Sure.

Operator (participant)

Next question, Stephen Laws with Raymond James. Please go ahead.

Stephen Laws (Managing Director)

Hi, good morning. I wanted to follow up on Sarah's question, you know, can you talk about the relative returns you're seeing in new loan originations versus securities? You know, did you buy any securities out of MF1 sale a week or 2 ago, or kind of what type of securities do you find most attractive? I think, Brian, you mentioned you just bought some, this morning.

Brian Harris (CEO)

Right. We have been primarily focused on either transactions that we've owned for a while that we kinda like, and we're adding to it. Or, but more importantly, I think we're seeing a lack of discrimination in pricing between static deals, where you know every loan in the pool, and managed deals, where depending on how much time, you might not know any of the loans in the pool. So we have been focusing on the static end of things. And as I said, we bought something this morning, that was a 2021 deal, and it is static, and we know all the loans in the pool, they're performing fine.

So those returns, I can't speak to the new issue market because I think that—I mean, I could speculate as to what it is, but we didn't buy those bonds, so I don't know. But the assets we are acquiring in the securities business on the static side are yielding, you know, high teens, low twenties, if we lever them. However, given the cash pile that we've got, we haven't even been levering those. So you'll notice that a good part of our interest expense has, you know, disappeared. The secured debt that we carry has gone down because we're just paying off repo, which is quite expensive, and we're not using leverage unless we need to.

Stephen Laws (Managing Director)

Yeah. Then to touch on, you know, whether we talk about the $1.3 billion of liquidity or the $1 billion of cash, you know, what is... When you think of normal operating environment, how much cash or liquidity would you hold or to ask another way? How much of your liquidity do you expect to deploy? You know, what's the incremental earnings power when you think about, you know, all of that, you know, once that money is deployed?

Brian Harris (CEO)

I think it's powerful, and I think under normal circumstances, which, I wonder if we'll ever see them again, but, going back, I think to 2019 is the last time I can imagine that I could say that was when we were in normal times. But, in normal times, if we can go that far, I would say we would carry about $50 million-$100 million in cash. And as long as we've got the revolver, which, as Paul mentioned, we've extended for another 5 years with all of our lenders, that's plenty of day-to-day liquidity. So we could, in theory, depart with $1.2 billion in cash.

If you run that leverage at even 1-to-1, that's, you know, $2.4 billion in assets. If you ran it to 3-to-1, it's $3.5 billion in assets, with all assets unlevered, yielding 6%-7%. So that's powerful earnings power.

Stephen Laws (Managing Director)

Yeah. Seems like there's a lot of upside there. And then, you know, pretty conservative on the dividend from a payout standpoint, you know, thoughts around that. Is that something that will need to move up, given REIT taxable income as this money is deployed? Or how do you look at, you know, your dividend level?

Brian Harris (CEO)

We think the next move will be up rather than down. However, I don't want to forecast. First of all, we wouldn't forecast a dividend policy here on a call. But, we're not planning that right now, nor do we feel that we are pressed to do that for any regulatory reasons around REIT accounting. The main reason being, we think capital is important right now, and we do think capital availability allows us to do a lot of things that will exceed our dividend. And so as a result of that, we think this is the kind of market where investors would want us to hold on to cash, that we can invest at higher yields and drive the dividend later, as opposed to now.

Yeah, I think for the most part, in the space, the discussions around dividends are about who's cutting them, not who's raising them. And, yeah, but we're pretty comfortable. We like having a lot of cash. We are hopeful that we can even issue another bond deal before the end of the first half. And if we do, then we'll have an extraordinary amount of liquidity, in which case, we'll probably be forced to lower our returns a little bit. But right now, we're being very, very cautious and very discerning on what investments we will and won't make.

Stephen Laws (Managing Director)

Great. Appreciate the comments this morning, Brian. Thank you.

Operator (participant)

... Next question, Steve Delaney with Citizens JMP. Please go ahead.

Steve DeLaney (Managing Director and Senior Equity Analyst)

Thanks. Good morning, Brian, Pamela, and everyone. Nice to be on with you. Nice to see the market rewarding your strong report this morning in sort of a choppy tape. Just curious, Brian, you've talked about the balance sheet lending capacity kind of opportunistically. This is getting ahead a little bit, but any thoughts about the CMBS conduit lending market? Obviously, you know, weak on a quarterly basis, you know, on average about $750 million in 2023. More importantly, very weak profitability. Kinda, there's gotta be a lot of good floating-rate loans out there, where property owners are just maybe waiting for a break in the ten-year, and then they'll try to hit a ten-year fixed rate loan.

What's your view of conduit lending over the next 1-2 years, and should we expect Ladder to be involved? Thank you.

Brian Harris (CEO)

Sure. Ladder will be involved, and we do expect it to continue to pick up. It has been picking up. It's very reminiscent of 2008 when we started. You had a very, very slow securitization business with very low volumes because spreads were quite high. In this situation, it's not that spreads are high, spreads are okay, it's that rates are high, that when you set the indicator. So at the end of the day, it's just the cost of money, and that's what really drives that formula. The other thing that's going on right now is, there's really little differential between a 5-year and a 10-year on the credit curve.

Steve DeLaney (Managing Director and Senior Equity Analyst)

Sure.

Brian Harris (CEO)

And so the sponsor, the borrower, wants to borrow 10 years, whereas the lender wants to lend for 5 years. But that gets very tricky because when you make a 5-year loan in the conduit business, you start running into B-piece mechanics, where yields are in the 20s. So, if you're to collect a 20-something% return over 5 years, as opposed to something lower in the 10-year category, I think that's the tension going on right now between 5 and 10 years. Lenders want 5, the borrowers want 10. I do believe the borrowers will win that argument, and ultimately you will see a 10-year product coming out because there's plenty of investors looking for duration.

I think evidenced yesterday by the largest 10-year ever auctioned off, it kind of went out the door pretty comfortably. And that should give a lot of people a lot of comfort in that you can go out 10 years on the curve. The bigger problem, I think, right now is really the difficulty that you know the sector is having with work-from- home even in multifamily, which is intuitively a stable category, but expenses are just going through the roof and insurance as well as taxes. So it's a difficult market, but it always does come back, and it always does defrost. And I would say this is what, this is how it looks right before a really good opportunity occurs.

Back in, I don't know what year exactly, but around 2009 or 2010, we were making over $100 million a year in the conduit business. I would not rule that out. I think we're gonna need a normalization of the yield curve. We almost started getting there until recently, but I think that this is probably gonna be a second half of the year conversation, more than a first half of the year.

Steve DeLaney (Managing Director and Senior Equity Analyst)

Yeah. Okay, thanks for that. And I just would add again, you know, I think you're using your buyback selectively. Obviously, when you do that, you're retiring permanent capital, but also to Steven's question, when you pay out a dividend, you're getting rid of permanent capital, too. I think, you know, anything around 80% of book or lower, you need to buy the stock and not increase the dividend. That's just one old man's view. Thanks for your comments.

Brian Harris (CEO)

Yeah, I would say, Steve, just also, if you look back at our stock repurchases, they kind of kick in at a certain level.

Steve DeLaney (Managing Director and Senior Equity Analyst)

Mm-hmm.

Brian Harris (CEO)

I think if you actually do a little review of that history, you'll find your comment to be pretty prescient.

Steve DeLaney (Managing Director and Senior Equity Analyst)

Yeah. Yeah. Thank you very much.

Operator (participant)

Next question, Jade Rahmani with KBW. Please go ahead.

Jade Rahmani (Managing Director, Equity Research Analyst)

Thank you very much. Just to follow up to Sarah's question about multifamily. You know, I was reviewing a report on multifamily and it's called Multifamily Mortgage Credit Risk: Lessons from History, and there's some comments in there that stand out. You know, it's a boom and bust asset class, and the ease of build creates excess supply, which results in lower vacancies. So I think in addition to the expense headwinds you noted, there's also pressure on new lease rent, and probably occupancies will dip in the Sun Belt market. So can you comment on multifamily Sun Belt exposure, what you see happening there? And just framing expectations, I mean, I think that with upcoming maturities in some of these low cap rate deals, there inevitably will be a lot of pressure when it comes to qualify for a refinance.

Brian Harris (CEO)

I'm going to actually call on Craig Robertson to answer part of this. But I would tell you just for—I assume when you say Sun Belt, I don't know if you're talking about Ladder or general. But however, I don't think the Sun Belt is gonna have nearly the problems that a lot of people think, and it's mainly because of the demographics of the United States. The baby boomers continue to retire, they continue to age, and there is no shortage of people moving to the Sun Belt. And I think as long as the stock market is plumbing all-time highs, and as long as home values are quite high, you'll continue to see that go on as they—even if they part with their low-rate mortgages in Boston, Philadelphia, and New York.

But as far as our Sun Belt exposure goes, it appears to be doing okay. The stress is, if there is any, is coming from management that has too many assets at one time, and they're struggling with it. You have to keep them focused, and also the operating expenses. The rents are okay, and I do believe there is some overbuilding that has taken place in a few places. Principally, Austin, Texas, has quite a bit, but even we're beginning to see some parts of North Carolina look overbuilt, too. But we're not seeing problems with rents. If they're not quite where we wanted them to be, they're awfully close, and in many cases, those rents are being achieved without the requisite improvements that were supposed to be made.

So a lot of the future advance money is not going out the door, and so if the rents are being achieved or nearly achieved without actually performing those, those improvements. So Craig, I don't know, do you have anything on our particular Sun Belt exposure you want to share?

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

No, I mean, hard to add much to that. I think when we look at the Sun Belt exposure, the rents really are holding up. We tended to lend on either newly built product or product at lower leverage points. So I think when we look at how the assets are performing, we still feel very comfortable at where we own them at our basis and at the yields that the properties are generating. And when we have had, you know, short-term blips in sponsorship, it's been possible to right them by examining the business plans, reevaluating, and take them through. So occupancy has held up across the portfolio, and I think we have avoided largely a lot of the markets where that focus is right now, and that are exhibiting some of the stress, and Austin is a great example of that.

Jade Rahmani (Managing Director, Equity Research Analyst)

I assume you're implying that there's little Austin exposure. Can you just comment on the debt yields that these properties are at or soon to be at based on your underwriting?

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

Yeah. Right now, our multi-portfolio shows a debt yield in the, the high 5s at 85% occupancy, with business plans still ongoing. We see those going up as they continue to lease. As I said, we're in mid-80s occupancy with lease up and turns going, and when we pro forma it forward, even with current expense levels and current rents, we see those normalizing at levels that we're, we're very comfortable with in the mid-70s a- and plus, depending on the asset.

Jade Rahmani (Managing Director, Equity Research Analyst)

That's on a debt yield basis?

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

That's on a debt yield basis, yes.

Jade Rahmani (Managing Director, Equity Research Analyst)

Okay. So, I mean, that could present challenges for the equity, wouldn't it? Those debt yields don't leave that much room.

Brian Harris (CEO)

Yeah.

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

Yeah.

Brian Harris (CEO)

We, we-

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

But-

Brian Harris (CEO)

The equity calculations on properties that were purchased 2-2.5 years ago are less rosy than they were 2.5 years ago, for sure.

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

Yep.

Jade Rahmani (Managing Director, Equity Research Analyst)

So what do you-

Craig Robertson (Head of Underwriting and Loan Portfolio Manager)

But our experience has been that the pain has been highlighted in the equity, and there still have been positive returns, if, when the business plans are completed, and that's been manifesting in our payoffs.

Jade Rahmani (Managing Director, Equity Research Analyst)

Okay. So as a base case, let's say a property gets to a 7% or 6.5% debt yield, just, you know, allowing some inflation pressure. What do you think happens in that situation when the loan comes up for maturity?

Brian Harris (CEO)

We expect the sponsor to purchase a cap and reload reserves if required, and possibly even pay down the debt to a place where the lender, us, is comfortable. If they don't, then, you know, we'll see if they want to try to bring in an additional layer of debt through the mezzanine market. We are seeing that a little bit, but which would pay us down and accomplish everything other than, you know, restoring ROEs to the equity. But it is what it is. I mean, it's just, it's more expensive to own real estate today than it was two and a half years ago. That's not our fault, it's not their fault. It just is a fact, and we're not overly concerned with it.

Like, for instance, you know, we, we foreclosed and took title to a property in Pittsburgh, which is mostly multifamily and brand new. There is nothing wrong with where we own this property. In fact, we're considering if we can take it to Freddie Mac right now. However, the sponsor either did not have the capital or did not feel it was worth his while to continue feeding a poor ROE from 2.5 years prior to that.

So as I said earlier in my comments, what we're really experiencing and seeing now so far is most of the pain is on the equity side, and the sponsors are deciding, "Do we put more money into this, even though the first ROE calculation didn't pan out the way we wanted it to, or do we just say, 'Let's not chase this?'" And as Pamela mentioned, you know, we take great pride in not calling defaults losses until we believe we have evidence of loss occurring. But so far, all the pain that is existing, not all of it, but most of the pain you're seeing is really on the equity side. And as I said, we're almost through it.

2021 was when we started seeing extraordinarily leveraged properties be purchased at 3-3.5 caps. That was right around the time where Ladder Capital switched to doing fixed-rate, 2-year loans with fees in and fees out, and we attracted brand-new properties coming off construction loans. And so as a result of that, that's the, that's the season we're dealing with right now. We're dealing with fixed-rate loans that are maturing, that are doing just fine, and they're brand new. And so the borrower has to figure out how to refinance it, pay it down, or extend it, but... And we're happy to work with them on that if they're performing fine. But, you know, I think still the, the ROE calculation is just not what, what they had hoped it would be.

Speaker 10

... The only thing I want to add is-

Brian Harris (CEO)

Agency refis are in the mid-5s. There's pref available, and the sponsor can also sell the assets as the debt yields we talked about, and we're seeing that as well.

Speaker 10

The only thing I wanted to add is, of our payoffs in this year, 40% were in multifamily. So agree with your comment, but caveat that you're seeing sponsors defend, especially when it's not a widely syndicated asset and they're invested in the asset. We are seeing them pay off, and we are seeing them defend. And as Brian said, we're, you know, comfortable at our basis in any event, and I think some of this could actually lead to opportunity.

Jade Rahmani (Managing Director, Equity Research Analyst)

It probably will. Thanks very much.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Matthew Howlett with B. Riley Securities. Please go ahead.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Yeah. Hey, thanks for taking my question. Just to follow up on the theme around credit. I mean, look at the headlines every day on commercial real estate. You know, Barry Sternlicht out there saying $1 trillion in losses for the office sector, and I look at the fear in the stock prices, even the lenders, but your portfolio is holding up well to managing higher interest rates. You've taken very few properties back. I mean, what's the disconnect? I mean, Brian, you talked about the sponsors are going to still holding on. Do we—You know, for a while now, do we really need to see rates just come down, cap rates come down, for this to all work out and not see this crisis in defaults that some of the headlines are suggesting?

Brian Harris (CEO)

I actually don't think that's it. I think what you're seeing, the headlines in particular, tend to be focused around large cities and media centers. And, there was a lot of lending that took place in Washington, D.C., and some of the larger gateway cities, and, you know, those cities are struggling with something other than high interest rates. There is a work from home component of that. There's a criminal element taking place. There's people, a wealth exodus taking place in some of these states. It's a tax situation where people are moving out of certain Northeast cities down to Sun Belt. So, those are fixable. It's not like they can't be straightened out, but the market is resetting, and that's going to be painful.

So the disconnect, I think, is at Ladder, is that we have smaller loans. We do have some large loans. We have a couple of loans over $100 million, and two or three of them actually. Two of them are in Miami or Aventura. We feel good there. It's probably the best office market in the United States. And just a high degree of caution and, you know, a lack of belief that large institutions would not give... You know, a lot of people thought they would never give properties back, but they're economic animals. These are non-recourse loans, and they're handing them back. And, you know, ultimately, it'll reset, find a new level, and, you know, the good part is we are seeing those buildings trade.

I mean, and if you start seeing banks selling commercial real estate mortgages at very deep discounts, that's going to add a little more pressure, too. But I think you have to really look at where the lending has taken place, and I don't think Ladder will ever be accused of competing in the most competitive markets with other lenders. In fact, we prefer flyover states and smaller populations, which we always felt that the pandemic would actually broaden out the workforce and allow people to stay in St. Louis, stay in Memphis, and stay in Houston, rather than move to Los Angeles or New York. So, I think that is the disconnect if there is one.

You know, having said that, there's pressure on all of it, but, you know, there. But still, the work from home item, we're not really talking about a big difference because Friday was already gone. So a lot of people are at three and four days a week. You're seeing a lot of companies go to five days a week now. But the real problem is places like Washington, D.C., where the federal government is still operating under an emergency COVID protocol. They are not back at their jobs. They do not go to the office, and Starbucks and McDonald's are closing, you know, in certain cities, not because there's anything wrong with the city. It's just that everyone's staying home. So it's also probably one of the reasons that apartments will hold up more than people think.

We're. We don't think the apartment situation is nearly as bad as a lot of people think. The problem with the apartment situation was people were financing 3 caps at a time when they probably should not have been. If they started looking at them as 6 caps, that normalizes very quickly.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Absolutely. So Brian, do you feel what's happening with New York Community Bank, I mean, is this going to fuel a crisis like 2008, 2009? It doesn't sound like it. And, and do you view it as, like, an opportunity for Ladder? I mean, if, if more of these banks have to sell assets, retreat, from the lending, how do you— Do you think it's going to-

Speaker 10

Yeah, I mean-

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

more banks go down?

Brian Harris (CEO)

I offer a layman's opinion on that. I have no inside information, nor do I really think I have it figured out, but you have to. There's something going on there because New York Community Bank was part of the solution around Signature Bank. So you have to assume before the FDIC allowed them to participate in taking assets and deposits from Signature Bank, they took a look at them, and so they must have been healthy, less than a year ago. So what happened? Now, they do have large loans, and I... There was some discussion about how one of the loans that caused a big headache was a co-op loan in New York.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Right.

Brian Harris (CEO)

That, that is nearly inconceivable to me because co-op loans rarely borrow money, and if they do, it's usually 20-30% leverage. But they do have a lot of rent-controlled loans on their balance sheet, and they probably have some office loans that are probably a little too big for them. So I, I, I struggle with it. There seems to be a disconnect there. Something happened later about when they started looking at their portfolio. This isn't, this isn't Signature Bank and Silicon Valley Bank having 10-year assets that if they sell one, they have to mark the whole book and their capital goes up in flames. This is something different.

And, I do think they have some defaults that I can't imagine they didn't know about them, but, I do view this as rather idiosyncratic to them. However, I do think lenders with high concentrations of rent-controlled apartments and rent-stabilized apartments, given the changes that have taken place in some of these cities, those are gonna be problematic. I don't think they're gonna be problematic to the point of, like, putting them out of business. I do think there'll be some losses there, though.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Mm-hmm.

Brian Harris (CEO)

As far as opportunity goes, yeah, I don't know. I mean, we've actually bought loans from New York Community Bank in the past, not in this round. They're a pretty good lender from what I know of, and so Signature was a little bit more aggressive, but not bad at all. And you know, we wouldn't have any trouble buying loans from them if they wanted to sell them. But my suspicion is they're gonna wanna sell office loans in New York, which might be a little less comfortable for us.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Yeah, I know they're out with some packages now, at least on the residential side and other stuff. Last question, you referenced the bond deal in the first half of this year. You've been masterful in how you've, you know, structured the balance sheet. Would you be talking about a CLO or another security deal? And just curious, would you wanna go tip a little bit towards more floating rate debt? Or do you feel like, you know, you got the way you have it structured now, the fixed rate debt, the unsecured, you wanna keep it exactly the way you know, you've done it?

Brian Harris (CEO)

I think the comment I would give is, first of all, no, I don't see a new CLO deal going out until we start originating more loans.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Okay.

Brian Harris (CEO)

We have two out there right now. They're just coming off their managed period, so they'll start paying down soon. But, as far as a new issue, that would be a fixed-rate, unsecured, hopefully longer than seven years, because we do have a 2029 outstanding, which will come due, and we'd like to always you know, take out more term rather than inside of the longest maturity we've got. But given the liquidity situation we've got, we're frankly not going to borrow money unless it's cheap. And, you know, much to people who invest in mortgage REITs right now want to lend money because it's expensive, and so there's a little bit of a disconnect there. However, we did see some signs of life there.

There was a mortgage REIT that it did issue a billion-dollar unsecured the other day at pretty attractive terms. What's that?

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

It's over 7%, correct? We're looking at the same one.

Brian Harris (CEO)

Yeah, yeah, that's right. I think the name of the company was Mr. Cooper, but. And that tightened about 50 from where the talk was. So there has been a real lack of supply in that market, and I'd like to get involved in that if we can, and issue more unsecured corporate debt. However, this recent pop in spreads, rates, and noise around New York Community Bank has probably dashed that for a little while. But I do think as we get out towards, you know, if the yield curve starts getting a little bit more normalized, where the two-year falls again, yeah, we might very well go then. We have to be able to lend money at rates higher than we're borrowing it at.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Right. Right, exactly. I saw the same thing you, that you saw. And, and, look, we'll just, we'll, we'll just wait for that. You guys have plenty of options, and I really appreciate the, the answers. Thanks, everyone.

Brian Harris (CEO)

Sure.

Operator (participant)

I would now like to turn the call over to Brian Harris for closing remarks.

Brian Harris (CEO)

Long year, difficult year, successful year at Ladder. Thank you to our investors, our employees, bondholders, and we appreciate you staying with us. It was, you know, a stressful time, but, you know, we tend to do well in those periods of time, and we are very optimistic about the future here. We think that most of the difficulties are gonna be ending around June or July, and then things will be a lot better from there. And we're hoping to hit a point where all of our products are contributing to our earnings each quarter. So thank you all, and we'll see you at the end of the first quarter.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.