Ladder Capital Corp (LADR) 2013 Q4 法說會逐字稿

Good afternoon, my name is Candace, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ladder Capital Finance Holdings fourth-quarter and full-year 2013 earnings conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Ladder Capital Corp's Chief Strategy Officer, General Counsel and Co-Head of Securitization, Ms Pamela McCormack, you may begin.

Thank you, and good evening, everyone. I would like welcome you to the Ladder Capital Financial Holdings earnings call for the fourth quarter of 2013.

With me this evening are Brian Harris, the Company's Chief Executive, and Marc Fox, the Company's Chief Financial Officer. This afternoon we released our financial results for Ladder Capital Finance Holdings LLLP for the quarter ended December 31, 2013. The earnings release is available in the Investor Relations section of the Company's website, and our annual report will be filed with the SEC shortly.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information, and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs, and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I will refer you to Ladder Capital Finance Holdings annual report on Form 10-K for more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Accordingly, you are [encouraged] not to place undue reliance of forward-looking statements. The Company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. The Company's presentation of this information is not intended to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP.

With that, I will turn the call over to our Chief Executive Officer, Brian Harris.

Thanks very much, Pamela, and welcome to Ladder Capital's first earnings call post IPO. We welcome all of our new equity investors, as we move into 2014 and beyond.

In 2013, we generated core earnings of $202.3 million, compared to $177.5 million in 2012. This exceeded the high end of the range we provided in our recent development section of our IPO prospectus, and equates to a14% year-over-year growth from 2012. For the fourth quarter of 2013, we generated core earnings of $20.9 million, while at the same time building a substantial inventory of high quality mortgage loans targeted for securitization in the first part of 2014.

I am pleased to report that the earnings origination activity and securitization volumes in 2013 were the strongest we have seen since Ladder's opening in 2008, with $2.5 billion of loans originated, and $2.2 billion securitized in six separate securitization transactions during the year. We also experienced strong investment activity in our complementary securities and real estate equity business lines, and grew our asset base to $3.5 billion by year-end.

Our balanced business model is working very well. Our IPO, the strong fundamental supply/demand backdrop in the commercial real estate finance sector, and our substantial access to capital, including our membership in the Federal Home Loan Bank, as well as the unsecured corporate bond market, have served us to be energized as we enter 2014. And we feel very well-positioned to continue to generate attractive profit levels in 2014 and the foreseeable future, as our underlying market continued to expand.

Since this is our first earnings call as a publicly-traded company, I would like to take a step back to review who we are, what we do, and what are objectives are going forward.

Ladder has three core products that complement each other in the commercial real estate space. I generally talk about these products as three corners of a triangle, as any of you -- those who met us on the roadshow presentation are well aware. These are the same complementary business lines that my management team and myself have been investing in over the last 20 years with very good results.

In the first corner, which we will call corner A, we have our commercial real estate lending. Ladder has a nationwide in-house direct origination platform. We originate predominantly first mortgage loans on stabilized cash-flowing commercial real estate.

We originated $2.5 billion of loans last year, including $2 billion of loans eligible for securitization and just shy of $500 million of transitional loans, which we intend to hold on our balance sheet. This segment, and particularly our securitization business, produces the highest returns on equity for us at Ladder.

Our securitization business is a highly capital efficient business that enables us to recycle equity repeatedly. The key drivers of profitability in our securitization business are the size and volume of the loans that we securitize, the profitability of those securitizations, and the leverage we use against those loans while we hold them.

Underlying all of this, is a commitment to solid underwriting and credit practices, with respect to every investment we make, whether we intend to hold it on our balance sheet or sell it via securitization. At Ladder, we work hard to drive profitability and improving volumes, but we have always been conservative in our modest use of leverage.

Last year, we securitized $2.2 billion worth of loans, which produced a gain of $157 million. Since founding in 2008, through the end of 2013, our average securitization profit margin has been 6.7%.

As the securitization market continues to normalize, we do expect a moderating trend in profit margin on growing origination volumes, trending towards the average 4% to 4.5% that we have experienced throughout our careers thus far. This is consistent with the business results we have been seeing so far in the first quarter of 2014, and continues to be wider than the generally perceived market levels of 2% to 3% profit margins.

In the past, we have achieved these wider profit margins through a well-established business practice and a credit discipline, including the cross-selling and offering of a wide array of diverse lending products that banks are not receptive to offering, and that are not offered outside of the scope of a typical lending operation. We are also known for our structuring capabilities, and our ability to respond quickly, making us very reliable in financing.

We are comfortable with 4% to 4.5% estimated normalized average range of profitability. We believe our asset-light core securitization operation has value well in excess of book value, that should become more evident to investors as they begin to understand Ladder, and see the strength of our earnings power.

In the second quarter of our triangle, corner B, we have our securities investments. When markets are occasionally disrupted, we use our deep in-house commercial mortgage-backed security expertise to buy highly-liquid investment-grade rated securities, nearly always AAA, at prices that we find compelling.

This business is a natural hedge for our loan origination business, and we have been able to purchase attractively-priced CMBS for several times in our history since opening, most recently, following the taper tantrum in May when Ben Bernanke said the word taper. In the third and fourth quarters of 2013, we purchased over $1 billion of securities.

Going to the last corner of our triangle, corner C, we have our net lease and other real estate equity. These investments are sourced on a highly-selective basis from our proprietary, national loan origination network, and are typically sourced through a borrower seeking a loan on a property acquisition that we think is interesting enough to participate in ourselves.

Our real estate investment activity allow for potential upside in our balance sheet, and serve a source of conduit loans that we are able to originate on non-competitive basis. We own approximately 4 million square feet of real estate, including a portfolio of long-term net lease property, a portfolio of office buildings, two multifamily/condominium assets, which we acquired as completed standing inventory at discounted bulk pricing with no construction risk. In the fourth quarter of 2013, we purchased one office building for $51.5 million, and an apartment complex for $80 million that we plan to sell as condominiums.

Now I would now like to take a few moments to review the overall commercial state securitization market, as well as some Ladder-specific factors that will influence our securitization profit margins going forward.

First, securitization is a long-term business that benefits from favorable macro drivers. Ladder's seasoned management team has been a leader in the commercial real estate loan securitization business for approximately 20 years, both at Ladder and inside of some of the largest global investments banks.

Commercial mortgage lending is a large product, with over $3.1 trillion of commercial real estate mortgages outstanding in the US. The commercial real estate lending industry is currently experiencing highly favorable supply dynamics, with a large amount of lending capacity in the United States having been eliminated during the financial crisis. New regulatory oversight and resulting capital charges, together with the banking sector's dramatically reduced use of leverage, have limited banks appetite to accumulate loans on their balance sheet, compared to pre-crisis era, or to offer the broad array of commercial products that Ladder is able to offer.

At the same time, we are seeing favorable demand dynamics with $1.6 trillion worth of loans coming due, and needing to be refinanced over the next five years. This equates to more than $300 billion of loans maturing each year.

These supply and demand factors enables us to achieve higher than normal securitization profit margins over the past several years. We have, however, modeled Ladder's business at a more normalized historical industry margin of 4.25 points.

We still expect profit levels to remain highly attractive, given our mix of business, growing origination volumes and expanded capital base. The potential for a shortened securitization cycle, coupled with strong underlying demand for our products should continue to support Ladder's growth in earnings and book value.

Now let's turn from the industry to our Company. We believe Ladder has sustainable competitive advantages in the loan securitization business, which have enabled us to realize industry-leading securitization profit margins in the past, and we expect this trend to continue.

First and foremost, we have pricing discipline. Our originators are compensated based on actual realized profits and never on volume.

Having our originators fully-aligned with management and our shareholders, on both credit risk and expected profit metrics, is key. We believe we have this right, and our results speak for themselves.

In addition to pricing discipline, we have underwriting and credit discipline. We strive for zero loss results and attractive profitability, and we've been able to strike that balance very well at Ladder, with strong risk-adjusted returns and zero credit losses since inception.

We also offer multiple complementary loan products, which we can do because we are not constrained by the same regulatory roles as banks. This opens up substantial cross-selling opportunities.

For example, we can make a balance sheet loan on a transitional asset. And then, when renovation, re-positioning or other form of transition has been completed, we can refinance that borrower into a conduit eligible loan by waiving an exit fee. This provides our borrower with a substantial incentive for refinancing the loan with the Ladder versus others.

Similarly, we can choose to hold a modest mezzanine position on top of a borrower's proceeds to win a mortgage. Although we had only $127 million of mezzanine loans on our books at the end of 2013, and this is very small compared to our balance sheet of $3.5 billion, the fact that we can commit to providing and comfortably holding that mezzanine loan along with a conduit loan in a one-stop shopping format, provides us with another tool to use -- to appropriately enhance our profit margins without taking unnatural credit risk.

Another advantage that Ladder enjoys is our veteran senior team of managers, originators, and underwriters, which include some of the industry's most seasoned professionals. We enjoy great direct borrower and broker relationships on a national basis, and we provide strong customer service for which we have often been rewarded with significant repeat business.

Finally, Ladder's access to low-cost debt, including the Federal Home Loan Bank membership, and our access to the corporate unsecured bond market, are marks of distinction for us, and represent significant long-term advantages for the Company. Our borrowers appreciate the fact, that we are an established national brand with flexible permanent capital and a reputation for [liability].

In addition, our expanded capital base and stabile liability structure shows -- should allow us to increase larger loans in the future, and execute more single asset securitizations as the market conditions improve. As we enter into 2014, I expect Ladder to be an active seller of loans into securitization, and a frequent seller of some of the securities we have recently acquired over the last six months.

With that, I will now turn you over to our CFO, Marc Fox.

Thank you, Brian, and good evening.

I will now review Ladder Capital's financial results for the quarter and year ended December 31, 2013. For the 2013 calendar year, core earnings were $202.3 million, an increase of 14%, compared to $177.5 million earned in 2012. For the fourth quarter of 2013, we reported core earnings of $20.9 million, versus $31 million in the fourth quarter of 2012.

Full-year GAAP net income for 2013, that was attributable to preferred and common unit holders, was $189.8 million, compared to $169.5 million during 2012, and GAAP net income for the three months ended December 31, 2013 was $21.5 million. During 2013, Ladder expanded its investment activities in all three of its major businesses, maintaining solid profit margins, earned -- earning a strong return on average equity, while managing risk effectively, and adding further strength to its funding base.

In review of trends reflected in the fourth-quarter and full-year income statement, a number of items stand out. During 2013, from quarter to quarter, Ladder maintained a steady stream of net interest income, while experiencing substantial growth in operating lease income. Operating lease income increased from $8.3 million in 2012 to $37.4 million in 2013, as we acquired two individual office buildings, an apartment complex, and one office portfolio during the past year. Combined, these properties represent an investment of $284.3 million.

Real estate operating expenses were actually de minimus in 2012, when our real estate portfolio was comprised of 33 single tenant net lease properties and the Veer Tower condominiums that were acquired in December of that year. In 2013, after deducting net real estate operating expenses of $14.1 million, the real estate portfolio generated $23.3 million of net operating income.

As noted, we achieved strong net gains from securitization activity in 2013. After securitizing over $1 billion of loans in the third quarter, Ladder bulked up its conduit loan inventory in fourth quarter in preparation for 2014. Finally, of course, depreciation and amortization increased during the year, as more properties had been acquired.

I will now highlight some key balance sheet metrics as of December 31, 2013. Total assets were approximately $3.5 billion, an increase of $982.9 million since September 30, as $694 million of new loan originations and $486.8 million of securities purchases increased our asset base during the period in which we securitized $49 million of loans, and sold less than $60 million of securities.

We had total cash of $107.3 million, including $78.7 million of unrestricted cash at year end. Approximately 95.2% of our debt investments was senior secured, including first mortgage loans and commercial mortgage-backed securities secured by first mortgage loans, which is consistent with the senior secured focus of the Company.

Our senior secured assets plus cash, comprise 75% of our total asset base. Unencumbered assets, including cash, was $703.6 million at quarter end, reflecting a 2.2 to 1 ratio to unsecured debt outstanding.

Turning to the right side of the balance sheet, total capital was $1.19 billion, up slightly from the end of last quarter. The debt to equity ratio was 1.87 times, up from 1.05 times at the end of the third quarter, once again reflecting the incremental financing required to support our expanded base of earning assets.

I will now move to a discussion of our investment activities during the fourth quarter. Of the $694 million of loans that Ladder originated, $441.6 million were commercial mortgage loans held for sale or conduit loans, and $252.3 million were commercial mortgage loans held for investment.

The average coupon on the loans held for sale originated in the fourth quarter, was approximately 5.53%, and the average coupon on loans held for investment originated in the quarter reflected a weighted average spread of approximately 8.35% over one month LIBOR. We securitized $49 million of principal balance of loans, resulting in securitization income totaling $2.7 million after adjustments for associated derivative hedging results.

The weighted average loan to value ratio of the commercial real estate loans on our balance sheet was approximately 69% at the end of the fourth quarter, compared to 63% at the end of the third quarter.

Our securities portfolio increased by $340.3 million to $1.66 billion during the quarter. Total securities purchases of $486.8 million in the quarter were again strong, following a third quarter in which securities purchases were almost $600 million. At year end, 90% of the securities positions were rated AAA, or were backed by agencies of the US government.

As a result of these purchases, the weighted average duration of our securities portfolio was 4.4 years, as of December 31, compared to 4.2 years as of September 30, and we acquired two new real estate properties during the fourth quarter for a total investment of $131.3 million. We also sold 23 of the 427 units acquired in the Veer Towers condominium investment during the quarter, bringing the total number of units sold to 94 through year end. Total size of our real estate portfolio as of December 31, was $624.2 million and 39 properties.

Finally, I would like to discuss our financing highlights from the quarter. We continue to enhance the maturity profile of our debt, while maintaining a diverse set of funding sources, and access to significant amounts of additional financing availability.

As of December 31, we had $2.2 billion of debt outstanding, and committed financing availability of over $2.1 billion for additional investments. In the fourth quarter of 2013, we increased the total amount of funds borrowed from Federal Home Loan Bank to $989 million, $501 million of which is long-term financing with remaining terms of over one year.

Short-term securities repurchased financing was $361.6 million at the end of quarter, as we utilized some of this funding to finance the substantial increase in our asset base.

Long-term mortgage financing was unchanged during the quarter at $291.1 million. During the quarter, our average cost of debt was 2.43%, compared to 3.44% in the preceding quarter. The decrease was attributable to an increase in FHLB debt, and the effect of higher average debt balances on this computation.

Also during the quarter, we executed our initial Form 10-Q filing as an SEC registrant in compliance with the terms of our senior unsecured notes indenture, and we will be filing quarterly and annual financial reports with the SEC going forward.

Ladder's return on equity for 2013 was 17%, an increase over the [16.7]% [ROAE] achieved in 2012. These are ROAE calculations are based on our core earnings.

Finally, as you are all aware, in February Ladder Capital Corp completed its Initial Public Offering that resulted in $238 million of net proceeds, that were initially used to pay down debt outstanding debt, and which is now being utilized to fund new investment activity at Ladder. In conclusion, we are very pleased to turn in a profitable quarter, in which we built up our asset base to position Ladder for success in future quarters.

With that, operator, let's please turn to Q&A.

(Operator Instructions)

Your first question comes from Steve DeLaney. Your line is now open.

Good afternoon, everyone, and congratulation on your successful IPO. Brian, in your opening remarks, you touched on my question. You talked about gain on sale margins, and your outlook that they would hold at the 4% range. And you noted that some are talking about a reversion down to maybe a 2% to 3%, and I heard that from a couple of companies directly this week on the road.

What you are really saying I think, is that all gain on sale margins are not created equal. Could you comment a little more, and about what you mean by pricing discipline? And is this simply a function, that you are delivering loans into a securitization that may have higher average loan coupons than the loans that some of these other originators are selling? Thanks.

Sure, Steve. Thanks very much. Yes, I think that you can see our asset accumulations that took place in the fourth quarter, pretty much going across-the-board, not just in our conduit loan acquisitions or lending activities, but also, in our transitional loans were also up, we are also acquiring securities. Those are examples of time periods, when it would appear we believe pricing will improve, as opposed to the current fourth quarter selling.

So we did not really participate in securitizations in the fourth quarter, because we felt there was a lot of sale activity taking place, as people were trying to make their numbers. We held onto our assets and the loans we had originated and held them really for the first quarter, where seasonally we feel like there is a lot more capital available for acquiring assets like the one that we sell. And I think that, that was largely proven to be the case.

So we have seen some recent commentary, I guess, from some analysts talking about profit margins. We are not experiencing that type of pressure on those profit margins, and I do think it owes to our success really, in positioning bridge loans that convert to conduit loans, and in addition to that, I think the way we structure assets.

But most importantly, I think from December to the first quarter, I think that we just don't like to sell into sloppy markets. And we felt that our interest rates -- if you saw what happened to the interest rates going into year-end, they were actually on the rise, and they quickly came down right after January 1.

Yes, but I think today -- (Multiple Speakers).

So largely --

We are 30 basis points lower today, than obviously at the end of December. And so, what you are saying is, you see these loans as something you have created out of your pipeline, and you will be tactical about how -- when you decide to pull the trigger and contribute them to a securitization. You are going to try to find tight spreads and low rates? Is that what I am hearing you say?

Yes, I think that -- securitization is a choice. And I think that if we feel -- we don't regurgitate every loan that we have got on our balance sheet, every chance we get, so to turn things over quickly. We actually assess each market, we wipe the basis clean every night, and we ask ourselves would we rather buy this or sell this at this basis?

And typically, I think you will find, that especially in years that are very productive, I think 2013 was a very good year. Typically, in years that we are doing very well in, we don't really feel a lot a pressure to move assets at the end of the year. And that, it is also usually a very sloppy time for moving assets.

Understood. Listen, thanks for taking the question and for the comments. Appreciate it.

Sure.

And your next question comes from Stephen Laws with Deutsche Bank. Your line is now open.

Hello, thanks for taking my question. I think Steve hit on the margin side, and I apologize, because I missed the first couple of minutes. Maybe, could you talk about -- any change over the last four or five weeks with expected market volumes of issuance this year. I have seen estimates of $100 billion to $110 billion. And then, things that could potentially move the market share for Ladder? I mean, what -- I think we are looking at maybe $3.4 billion or $3.5 billion of volume this year. But what are you think about, as far as the range of potential volume that you will see through the engine of this year in 2014?

Well, I don't think I have seen much in the last four or five weeks that would change my opinion, because I think that rates have maybe moved down a little bit, but volatility has also moved up as of last Friday. Certainly with some of the geopolitical events that are taking place. But keep in mind, Ladder does not really pursue market share. We tend to pursue gain on sale, if we are going sell. So if we are able to drive profit margins on lower volume, then that is what we will do, because it is a less risky transaction for us.

However, our volume is up. One of the things that we have said that we would do, as we went -- as we got off of the roadshow for the IPO, was we would probably participate in doing larger loans. And I think the coming months, we will see that bear out. We have already begun that process. So our volume is up. Our margins are compressed a little bit. I am not saying that we don't feel anything in the competitive area there. But I think what is actually causing the margin to compress is not necessarily competitive forces, but more the fall in interest rates.

Because as interest rates fall, if there is a perception that rates will rise over the next 10 years, you gradually lose market participants as the10 year AAA security yields less than 4%. That seems to be when insurance companies become very active. So there was a period in time there, where the insurance companies are laying back a little bit because yields were rather low, to that 4% number.

But as the world believes that number may be around for a lot longer than perhaps they thought, before Janet Yellen got on TV. Then I think that you see people capitulating and buying into the lower rated yields, where you might get a 3.75% today, and I think that, that is largely accepted today. So did that answer it?

Great. Yes. That's helpful. I appreciate it. Maybe one, maybe more qualitatively, being a public company -- I know you have been a public filer for some time. So clearly, you are up to speed with all of the internal compliance things you have around that. I mean, are there any benefits you are seeing now being a public company, whether it is with a financing counter-party, whether it is through the recruiting of talent? Is your name more recognizable? I am just curious to see if there is any benefits or concerns there, that have come out just with being public company?

Yes, I think so. I think the validity, when we started the Company in 2008, I think that people that -- there were a few people available because of the financial crisis, and some people thought we could put something together that worked every well.

However, I think once you have an IPO and you are publicly-traded, and people are able to find information and hear calls like this, we are no longer speculative to most people. And I think at the same time, while we have been growing from 2008 until 2014 now, I think the competitors in many cases are shrinking, and their commitment to the business is getting smaller in many cases.

As we mentioned, a lot of the capacity has been taken out of the system for the lending operations in the US. But as far as our size at this point, and our being well-known in the marketplace, yes, I feel like we can hire. I don't think anybody is not going to come to work at Ladder, because they consider us to be well less committed to the space, than one of the large money center banks. In fact, we might very well be more committed to the space than those same banks.

Great. That is helpful color. Thanks a lot for taking my questions.

Sure.

Your next question comes from Dan Altscher with FBR. Your line is now open.

Hello, thanks, and good afternoon, and congratulations again on the successful IPO. I was wondering if we could talk a little bit about, maybe single asset securitization. I read recently that it looks like you might be participating in a $300 million loan. Can you just talk a little bit about that, if that is the case, and expectations for doing a single asset securitization in maybe the coming weeks or months?

Sure. I think that what you are referring to, is probably something that was carried in the press, that indicated we were under application for a rather large asset in midtown Manhattan. That is in fact the case. We are under application, but we don't really talk too much about our exit strategies until we get to that point.

We think that we have multiple exit strategies there as possibilities, and we will probably not be in any rush. Because I think that we are adding a lot of assets to our balance sheet with our new capital, and at the same time, we are selling certain things in the first half of the year. So I would say, possible, certainly, and the asset is large enough to qualify as a single asset securitization, however, we haven't closed it yet. So until we do that, I think we will probably reserve comment as to how we would dispose of it.

Sure. No, that makes sense.

Switching topics a little bit, actually to the securities portfolio. Brian, I think if I read between the lines in your comments, and the press release noting that spreads have now retightened a little bit. Is it right to think that you may be laying off a little bit of -- recently acquired [senior] debt exposure. Kind of playing that part of the story, of buying when it is cheap, and selling when it starts to get a little expensive? Is that maybe the right way to think about that, into 1Q?

Yes. I think that is our general opinion. I wouldn't say necessarily that we are going sell into expenses necessarily. We will look at the basis every day. We did see some artificial forces at work, after the Bernanke statement around tapering. We actually think those artificial forces lasted, and right through year-end, and not through just June, because the stock market was up so much last year.

Typically, you will sell some assets in the stock market to protect gains in other assets. We felt that the fixed income market might have been sold this year, as a tax item to shelter gains in the stock market. And I think that is the reason we saw interest rates go up right through the end of the year, because of the sell pressure in fixed income assets. And then, if you noticed right after January, they came back down, and we are seeing commensurate tightening of spreads from, certainly from New Year's until now.

But, yes, I would anticipate us selling some of the assets, especially some of the longer duration ones that we own. However, on the short end, if you noticed Marc mentioned that our average life on our securities portfolio went from 4.2 to 4.4 years. Things that are short, in the 5-year to 7-year range, we will not be in any hurry to sell, unless we really feel like we like the price. Because we like where the yield curve is positioned, and as you roll down that curve from 7 to 5 years, or 5 to 3 years.

So the longer assets, I think comment is correct, we will be probably of seller of those. Maybe not all of them, we are very comfortable with them. However, the short assets may be around for a while.

Thanks. Maybe one quick numbers question for Marc actually, just to make sure I got it right. It sounded like the $49 million of -- I guess, it was principal balance or balance that was sold -- and the $2.2 million of income, that roughly translates to a 4.5% gain on sale. Is that -- generically, did that sound about right?

It was actually $2.7 million of income, but the $49 million of loans is correct.

Got it. Okay. So $2.7 million, so that is roughly 5.5% then gain on sale?

That's correct.

There was [loan participation] that we sold,

Perfect. Thanks so much.

Your next question comes from Charles Nathan with Wells Fargo Security. Your line is now open.

Hello, and thanks for taking my question. I wanted to ask about the balance sheet mortgage loans. I understand that you can't comment on exit strategies on specific transactions. But is it fair to assume that the majority of that balance, will eventually be refinanced into conduit loans, versus sold into partnerships, or held for investment long-term?

I think that, when we make a loan that we hold for our balance sheet, and that would include mezzanine loans in addition to that. So the certainly mezzanine loans will not go via the route of the conduit loan. Those will either be sold in secondary market or else they will beheld to maturity.

We also have two types of transitional loan on our balance sheet. One, is where the exit strategy is to target it for a conduit securitization. Would I call it the vast majority of them? No, I would not. Because -- and another thing that we do sometimes, as Marc had mentioned, that some of our loans that we originated in the fourth quarter, had a pretty healthy rates attached to them. What was the rate, Marc, on the LIBOR plus -- was it 8.40%

8.35%.

Yes, when you see LIBOR plus 8.35% on a rate for us, that is usually something that is staying on the balance sheet, and the borrower is either going to sell the property. Sometimes, it could be simply delivering a multi-family loan to one of the agencies that will finance it, but they weren't ready to go by year-end.

And we also wrote a rather large condo inventory loan for an asset in the Southeast, and that will be paid back through the sale of the units, as opposed to any refinance or securitization. So I would say probably half, might be the right number. I wouldn't say, the vast majority though.

Okay. Great. And I have just a quick follow-up. I think, the activities or the retraction of banks from the commercial real estate lending space has been widely publicized. But could you comment on competition from non-bank financials? And if you are seeing that tick up, and how you view that competition in the marketplace from a pricing standpoint?

We -- it depends really where you are, and how the asset is being sourced. I think if -- for instance, in the Northeast, New York City in particular, we happen to know a lot of borrowers here. That is a very competitive market, because not only are a lot of the lending operations in the conduit business sourced here -- I mean, headquartered here. But in addition to that, the banking sector here, just at the savings and loans, in addition to Citicorp, Wells Fargo, Bank of America, lots of names, it is a very competitive place.

When you get into smaller loans though, which I think we tend to focus on. When I say small, generally about $20 million, $25 million. These are not the very big loans that are -- the REITs that borrow money from Wall Street, and for different, --various channels of other customer activities. So I think that depending -- in the Northeast, it is a very competitive market. One nice -- and it is certainly competitive with the banks. What makes banks less competitive, is when there is interest only, as opposed to amortization in the schedule for the loan repayment.

And we are seeing more interest-only in some of these securitizations. That is oftentimes viewed, as one of the underwriting criteria that is slipping if you will, as credit statistics slip. But also, I think that we do a lot of loans that the borrowers know that we are a little bit more expensive, than what they might be able to get. But many of the assets and borrowers that we deal with, we have dealt with on many occasions, and they know us well.

And in addition to that, if we are dealing with broker whose job is simply to find the best price out there, we will oftentimes call upon our relationship with our broker for some of the transitional loans that we write, that others don't necessarily. In addition, our ability to provide mezzanine financing in an up-rate environment is critical to people. Because they are afraid if they go into application and rates go up, they won't be open to get proceeds they need.

However, we provide one-stop shopping, where we will get them through that closing. And I think in beginning of the year, you really had a feeling that people thought rates were going to go up. And if anything, they have been surprised to the downside. But there is competition, but when dealing with a balance sheet the size of Ladders, even though it is growing, it is still not anywhere near the size of a lot of banks, or certainly our former employees that -- employers we work with.

We feel like we have a good handle on where spreads will go, and we originate loans according to -- not so much -- I think most people originate loans as to where spreads are. We originate loans according to where we think spreads will be, when we go to choose them. So if we think spreads are unnaturally wide for artificial reasons, we will originate loans into that, and anticipate that our funding sources, if we were wrong will carry us through.

Great. I appreciate the color. Thank you.

Sure.

(Operator Instructions)

Your next question comes from Jade Rahmani with KBW. Your line is now open.

Great. Thanks for taking the question. With respect to what you are seeing in securitization market, in your view is year-to-date volume for the industry tracking with your expectations? And is what we are experiencing related to seasonality or rate volatility, or even just the aggregation phase following the strong fourth quarter? Or is there something else going on that would change volume expectations?

I think most of what we are seeing is result of two primary factors. I think that lenders are generally more aggressive in the beginning of a year. Because many lenders, the way they are compensated, they get paid right after year-end based on their performance during the year. So given -- it is very hard to take any lender with a cost of funds that are so low as it is today, and give them 12 months to sell the asset. That is a carry trade that most lenders will put on.

So I do think that there is normal seasonality, because of capital allocations granted to these lending areas that starts in January. I went to the -- there was a conference in January, CFSA down in Florida. I have rarely have seen it that bullish, from a standpoint of that it was going to be a healthy year. And I think 2013 was good for most people.

I think it is a combination of seasonality, just because it is the new year. But also perhaps more, because they are not afraid to make a mistake, because their cost of funds is so low, that the carry trade -- the carry can cover up any small blemishes that people incur. Does that answer?

Yes. And with respect to first quarter securitizations, since we are mostly through the quarter, do you have expectation you can provide for Ladder?

Well, we certainly try to stick to public documents. I think that it is probably widely known at this point, that we probably are going to participate in one more securitization before the end of the quarter.

Okay. Then with respect to the on-balance sheet product, I just wanted to confirm it is primarily sourced through the same originators that source conduit production, and that you don't have segregated teams set up? And I guess, the same -- I would assume the same is true for the real property that you acquired opportunistically?

That is 100% true, not primarily. All originators at Ladder are capable of originating transitional loans, conduit loans, mezzanine loans or equity opportunities. We don't have any specialized groups.

Okay. Great. And finally, just the environment for transitional loans, what are you seeing in terms of opportunities and competition? Are you seeing a pick up in deal flow, with respect to that product type and where -- I mean, the LIBOR-plus over 8% you gave, that is pretty significant. Are you seeing target yields in that range? Or is most of what you evaluate modestly below that?

We see a lot of volume, modestly below that. And I think that we could ramp-up that volume pretty rapidly, if we wanted to. We are rather picky around what we will and won't do. And when we put a loan on our balance sheet for an extended period of time, we have to not only assess the performance of the credit, but we also have to assess our ability to finance that asset through various stages of its transition.

So I would tell you that we don't pay to much attention to it as far as -- but I think that what has really gone on in transitional loan area, is banks are very hesitant to add them. Now you are seeing some REITs out there, that are -- and some of the newer ones, especially ones that raised a lot of money, because it is a balance sheet utilization issue more than anything. They issue enormous amounts of floating rate mortgages, and they simply put a public carry trade on. Which is, it works just fine.

But I think that we pass on a lot of those opportunities presently, because we feel like, for our capital we are able to find better opportunities at higher rates. And perhaps, I think what drives that is usually cash flow. I think we are very comfortable with assets that have a little bit less cash flow that, than some of our competitors are. I think a lot of our competitors lend money at LIBOR plus 500 or 600 range. And we do too -- now I don't think there is anything wrong with that rate, it is just that I think we just see more opportunities to achieve higher rates than that.

Okay. Great. Take you for taking the questions. Appreciate the color.

And your next question from Wayne Cooperman with Cobalt Capital. Your line is now open. Wayne Cooperman, your line is now open.

Your next call comes from Jim Young with West Family Investments. Your line is now open.

Yes, hello. You mentioned your ROE modestly increased from 2012 to 2013. I am just wondering if this trend will continue into 2014?

Yes. We anticipate it probably will. I think it will be modest. It is very acceptable where it is, and that we won't take unnatural risk to try to maintain a series of quarters where it increases. But we feel very comfortable with that. I think that, we, certainly have a lot of ability through our financing arrangements to create higher levels of yield. But we prefer to keep our leverage at a reasonable level, and we don't torque it just to try to hit higher returns. So I think high teens is a fine number for us to be targeting, and I anticipate that being the case for the year.

Okay. And then secondly, could you just remind us, what is your stated dividend policy?

We currently don't distribute a dividend.

And are there any plans to do so in 2014?

I think we are working on a couple of projects that will lower our tax rates. We tend to pay pretty high taxes as a C-Corp right now. We have numerous situations that we are working on to try to lower that. And I think one of those scenarios at least, would involve probably a lower tax rate, and quite possibly a dividend payment. However, can I give you a date? No. I don't have that date in mind right now.

(Operator Instructions)

And we have no further questions at this time. I will turn the call back to our presenters for closing remarks.

Well, I would just like to thank everybody who took the time out this afternoon to listen to us, and those of you who have supported us along the way. And we look forward to further interactions with you. Thank you very much for your help and your support. Goodbye.

This concludes today's conference call. You may now disconnect.