Ladder Capital Corp (LADR) 2014 Q1 法說會逐字稿

Good afternoon. I'll be your conference operator today. At this time, I'd like to welcome everyone to the Ladder Capital Corp first-quarter FY14 earnings conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Ladder's General Counsel, Ms. Pamela McCormack. You may begin.

Thank you, and good afternoon, everyone. I'd like to welcome you to Ladder Capital's Corp's earning call for the first quarter of 2014. With me this afternoon are Brian Harris, the Company's Chief Executive Officer, and Marc Fox, the Company's Chief Financial Officer. This afternoon, we released our financial results for the quarter ended March 31, 2014. The earnings release is available in the Investor Relations section of the Company's website, and our quarterly report will be filed with the SEC shortly.

Before the call begins, I'd 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 these forward-looking statements.

I refer you to Ladder Capital Corp's Form 10-K for the year ended December 31, 2013, for a more detailed discussion for 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 cautioned not to place undue reliance on these 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are contained in our earnings release. With that, I'll turn the call over to our Chief Executive Officer, Brian Harris.

Thank you, Pamela, and thanks to all of you for joining us as we report our first-quarter earnings for 2014. Ladder produced core earnings of $57.2 million in the first quarter; this translates into a core earnings per weighted average share outstanding for the quarter, an after-tax calculation of $0.37 per share.

During the quarter, as we began deploying the proceeds from our IPO in early February, our annualized return on average equity was approximately 17.6%. We view the first quarter as confirmation of the success of our flexible business model.

Now I'll briefly describe each of the three major business lines that we operate in. During the quarter, we originated a total of $611.1 million worth of loans, made up of $463.6 million of loans targeted for securitization and $147.6 million of loans to be held on our balance sheet. The balance sheet loans are mostly first mortgage loans, with just $18 million of the new loans originated as mezzanine loans.

We contributed a total of $772.4 million of loans into two securitizations in the quarter, for a net gain of $36.7 million. This volume was in line with our internal models and the profit margins were moderately above where we modeled them.

While I would not usually expect to provide too much information on next-quarter figures, given that we received the proceeds from our IPO in early February, I would like to mention a few items regarding how we are deploying new capital rates. While the first quarter saw new loan originations of $611 million, I can report that during the month of April, as we entered the second quarter, we originated over $950 million of loans in one month, more than the entire first quarter of 2014.

In addition, we have been focusing on the origination of larger loans, as we indicated we would in our road show meetings. In April alone, we closed on four loans that had combined funded balances at closing of over $760 million. Two of the four loans mentioned were in New York City, the largest being a $350 million loan on an office building with a seven-year maturity. The other two large loans were in Los Angeles and Chicago.

In another of our business lines, securities, we purchased just over $200 million and sold about $58.3 million during the quarter, with about $47 million in pay-offs from our inventory. At the end of the quarter, we held $1.75 billion of these securities, which are mostly AAA-rated and had an average duration of 53 months. These positions are primarily financed through the Federal Home Loan Bank. We generated a profit of $1.8 million from the sale of the securities mentioned during the quarter.

Our real estate business was relatively quiet during the quarter, with no new purchases, and the sale of 48 condominiums for a gain of $6.7 million, a gain of more than 50% over where the assets were carried on our books. 44 of the sales were from our Las Vegas inventory, while the other four were sold during our initial efforts in Miami, Florida. At the end of the first quarter, we had 289 units remaining in Las Vegas, and 320 units remaining in our Miami inventory. We also ended the quarter with a debt-to-equity ratio of 1.37 times.

During the quarter, we observed a gradual tightening of credit spreads. However, unrest in Ukraine, as Russia annexed Crimea, certainly caused some anxiety. Overall, interest rates fell in the quarter as investors bought US treasuries in response, and some credits spreads widened, if only temporarily.

While the northeastern part of the United States suffered a brutal winter, it became difficult to read how well or how poorly the economy was performing. When interest rates fell, it was unclear if it was because of a flight to safety, a slowdown in the US economy, or because demand for yield was possibly driving a bubble in the bond market.

We think all of the above contributed to cause rates to fall. We think the economy is growing, but modestly, and will continue at that pace until people have more discretionary spending at their disposal. Generally, this environment has been constructed for our Business, and we expect more of the same in the near term. With that, I'll turn you over to our CFO, Marc Fox, who will run you through the financial results in more detail.

Thank you, Brian, and good afternoon. I will now review Ladder Capital's financial results for the quarter ended March 31, 2014. Core earnings for the quarter were $57.2 million, compared to a Company record, $94.4 million, earned in the first quarter of the 2013. The $57.2 million of core earnings represents the third highest performance by this measure in this Company's history. Based on an average shareholder's equity balance of approximately $1.3 billion, this result reflects a 17.6% return on average equity.

First quarter of 2014, GAAP net income was $18.4 million, compared to $88 million for the three months ended, March 31, 2013. As noted in the press release, the largest GAAP-to-core earnings adjustments related to the adjustment of the timing of the recognition of hedge results to coincide with the realization of gains and losses on the disposition of hedged assets and real estate depreciation.

As Brian mentioned, in February, we successfully competed an initial public offering of shares in Ladder Capital Corp. The IPO generated net proceeds of $238.8 million, which immediately made Ladder a more formidable competitor, able to carry a larger investment portfolio, all from a more durable funding base.

The IPO was executed in conjunction with a number of transactions that are referenced in our SEC filings as reorganization transactions. Those transactions included the creation of Ladder Capital Corp, a C corp, that invested the proceeds of the IPO as equity into Ladder Capital Finance Holdings LLP, or LCFH, the operating partnership that had previously been the ultimate parent company, within the Ladder Capital organizational structure. Those transactions are described in the supplemental pages included in the press release distributed earlier today.

As a result of those transactions, today, approximately 51% of the equity invested in LCFH is owned by Ladder Capital Corp and its shareholders. The remaining 49% of LCFH equity interests are held by pre-IPO LCFH partners. This change in ownership structure has resulted in changes in presentation to each of the financial statements, and the addition of a number of new financial statement footnotes.

In addition to information regarding capital structure changes, the supplemental materials provided with the press release also provide insight into Ladder's income tax provision, the computation and presentation of accumulated other comprehensive income, and earnings per share computations.

In reviewing this information, and our Form 10-Q, it important to note that many of the related computations performed in accordance with GAAP were based on determinations of income and expenses attributable to the period prior to the February 11 IPO date and attributable to the period from that date forward. One such example is the computation of earnings per share in conformance with GAAP.

The EPS amounts presented in our financial statements are based on the net income attributable to the Class A common shareholders that was earned from February 11 until quarter end. To aid in the evaluation of our performance, we have included the computation of a non-GAAP measure called core EPS, $0.37 a share for this quarter, which takes into account the full first-quarter core earnings of $57.2 million, adjusted for income tax and divided by the weighted average number of common shares outstanding on a diluted basis.

Turning back to our first-quarter results, during the first quarter, Ladder's investment activities focused on loan origination and securitization, and a modest expansion of the securities portfolio. The lower balance of loans at quarter-end was attributable to the two securitizations executed during the quarter, including $405 million of loans sold in March. Our loan portfolio has since expanded, with almost $1 billion of originations in April, including $679.9 million of conduit loans, and $302.2 million of balance sheet loans. Real estate activity was limited to continued sales of condominium inventory at solid profit margins.

In a review of trends reflected in the first-quarter income statement, a number of items stand out. Consistent with past quarters, Ladder maintained a steady stream of net interest income. We have expanded our base of interest-bearing investments to approximately $2.6 billion, 45% higher than the level just six months earlier, and net interest income has risen 28.7% over that time frame to almost $22 million in this quarter.

The Firm also experienced growth in operating lease income as a result of its investments made late in 2013. Operating lease income was $13.2 million for the quarter, compared to $10.8 million in the fourth quarter of 2013, and only $6.5 million in the first quarter of that year.

Securitization activity in 2014 resulted in income statement gains of $41.3 million from the sale of securitized loans net. After factoring in related hedging results, the sale of servicing, and deal expenses, and other GAAP-related adjustments, the net economic benefit was $36.7 million, or 4.75% of the $772.4 million of loans sold.

As Brian noted, we continue to enjoy strong condominium unit sales volumes and profit margins at Veer Towers, with a pace of unit sales almost doubled during this quarter versus the average rate in 2013. We also commenced sales of units at Terrazas River Park Village in Miami during the quarter.

Expenses increased from $29.4 million in the first quarter of 2013 to $38.6 million during the first quarter of 2004 (sic -- see press release "2014"). Most of the year-over-year difference was attributable to a $9 million increase in real estate operating expenses, and depreciation and amortization related to our larger real estate portfolio.

Our income tax provision for the first quarter was $5.3 million, reflecting an effective combined rate of 40.58%, which was applied to 51.04% of the pre-tax income earned by Ladder from the February 11 IPO date forward. 51.04% is the proportion of ownership attributable to Class A shareholders of Ladder Capital Corp. In addition, the income attributed to holders of LP unit equity interest in LCFH is subject to the unincorporated business tax in New York City.

In terms of key balance sheet metrics as of March 31, 2014, total assets were approximately $3.5 billion, remaining roughly the same as compared to the end of 2013. We had total cash of $148.1 million, including $115.5 million of unrestricted catch. Approximately 94.6% of our debt investment assets were senior secured, including first mortgage loans and commercial mortgage-backed securities secured by first mortgage loans, which are consistent with the senior secured focus of the Company.

Our senior secured assets plus cash comprised 74.4% of our total asset base. Total unencumbered assets, including cash, were $1.05 billion at quarter-end, reflecting a 3.2 to 1 ratio to unsecured debt outstanding.

Turning to the right side of the balance sheet, equity capital was $1.42 billion at quarter end. The presentation on the balance sheet, and the statement of changes in equity capital reflects the exchange of the Series A and B preferred units and common units issued by LCFH or Class A common stock in Ladder Capital Corp and LP units.

In addition you will notice on the face of the balance sheet, accumulated other comprehensive income is now presented as a separate line item component of equity. In the past, OCI was included in equity in an amount equal to the unrealized gain or loss on Ladder Security's portfolio.

The computation of OCI within the newly implemented [up C] structure is different. It is based on the change in the unrealized gain or loss on the securities portfolio only since the IPO date and that amount is tax affected to the extent it would be allocated to the holders of Class A common stock. The debt-to-equity ratio was 1.37, down from 1.9 times at the end of 2013, reflecting the addition of the net equity capital from February's IPO.

I'll now move to a discussion of our investment activities during the first quarter. We previously referenced our loan production and securitization volumes. In terms of asset yields, the average coupon on the loans held for sale that were originated in the quarter was approximately 5.2%, and the average coupon on the loan held for investment originated during the quarter reflected a weighted average spread of approximately 8.04% over one month LIBOR. The weighted average loan-to-value ratio of the commercial real estate loans on our balance sheet was approximately 67% at the end the first quarter compared to 69% at the end of the prior quarter.

Our securities portfolio increased by $92.8 million to $1.75 billion during the quarter, and at the end of the quarter, 84% of our securities positions were rated AAA or were backed by agencies of the US government. The weighted average duration of our securities portfolio remained at 4.4 years as of March 31, not materially different from the average duration at the end of the prior quarter.

We did not acquire any real estate properties during the quarter. The size of our real estate portfolio decreased by $20.5 million due to the sale of condominium units. As a result, the total size of our real estate portfolio as of March 31 was $603.8 million in 39 properties.

Finally, I would like to discuss our financing highlights for the quarter. In addition to the IPO, we have continued to enhance the maturity profile of our debt, while maintaining a diverse set of funding sources, and access to a significant amount of additional financing availability. As of March 31, we had $1.96 billion of debt outstanding, and committed financing availability of over $1.92 billion for additional investments.

In the first quarter of 2014, after increasing borrowings above the $1 billion mark earlier in the quarter, we reduced Federal Home Loan Bank borrowings with proceeds from the March securitization to $933 million compared to $989 million at the end of 2013. As of March 31, 2014, $507 million of the funds borrowed from the Federal Home Loan Bank had remaining terms of over one year.

Short-term securities repurchased financing was $246.7 million at the end of the quarter, down by $115 million versus the end of 2013. On the other hand, long-term non-recourse mortgage loan financing increased slightly during the quarter to $331.9 million as we added long-term financing on an office building we acquired in the fourth quarter of last year.

At March 31, our average cost of debt was 2.62%, compared to 2.43% at the end of 2013. In conclusion, we are very pleased to turn in a profitable quarter in which we continued to build our asset base and position Ladder for success in future quarters. With that, operator, let's please turn to questions and answers.

Your first question is from Stephen Laws.

Hi. Good afternoon. Thanks for taking my questions, and congratulations on your first-quarter results as a public company.

Thank you.

Three things to hit on. First, gain on sale margins, 475 basis points roughly on a net basis there. As you look at the environment today, I know you made a couple comments in your prepared remarks, but is that a level you think is sustainable? Do you think it's still trending toward the 400 to 450 basis point target that you referenced on your last conference call? Any color on how you see the gain on sale margin trending from here?

All right. There is some pricing pressure that we're experiencing in the marketplace today, but I would characterize that pricing pressure, really as seasonal more than anything else. Any time you have large financial institutions that are in the lending business, with a cost of funds at nearly zero, people in the business of making loans and selling them often times will gravitate towards bulking up their inventories in the first quarter of a year and that usually gives them nine months to get out of the position.

So while I would say that we are experiencing some pricing pressure, I would also indicate to you that, that is not unusual at all for this time period during a year on a calendar basis. Usually as we go from first to second quarter, that's usually when pricing pressures are most intense and then usually after June, things tend to get a little bit easier after that because some of the positions that have been put on those balance sheets need to start getting off those balance sheets.

So to answer your question, I don't think I would like to comment on the margins that we see going forward, but we are comfortable with the margins that we have modeled in our Business during our IPO.

I appreciate the color there and, with my model, it's 425 basis points, still have some cushion there, versus where you guys posted first-quarter margins.

Moving to leverage, I realize in the conduit business, leverage will move around based on how recently you completed a securitization and what the available for sale line item is. But as we think about -- I'm not sure if there's ever a normalized level -- but can you maybe talk about where you see the leverage operating?

Is this level, 1.3 times, where you see it or is this something we'll see move higher as you're able to source and other balance sheet real estate investments?

Okay. I would think that, given the capital raise in February, we were putting capital to work, as described in the April commentary, and I would tell you that a 1.3 is low, relative to where I anticipate running this Business on a go-forward basis, but I would see no change to our model again.

I would anticipate, 2 to 3 is probably the right range on a stabilized basis. But as you say, it does move up and down quite a bit. The more securities we own, the more leverage there tends to be. The more loans we own, I would say, that would take leverage in a different direction.

Great, and then one final questions.

When I think about the real estate portfolio, you mentioned selling a number of units in Las Vegas, and a couple in Miami at an average price of about a 50% premium to book value, where they are on the balance sheet. Is it a fair assumption to think about that as roughly having been about a $200 million investment, and if the prices hold constant, that we could see gains of about $100 million there, almost a $1 per share above what they're traded on the balance sheet?

Is that the right way to look at the opportunity for upside of the remaining assets to be sold?

Well, let me break the question up into two parts. I think what you're doing is you're taking a $120 million investment in Las Vegas and you're adding to it an $80 million investment in Miami for $200 million. Keep in mind when we purchased the Las Vegas units, there were 420 of them; now there's -- I said 289 of them remaining. So some of that inventory has been taken and some gains have been posted.

So I would say to you that the Las Vegas portfolio would appear to be holding a margin of approximately 40% to 50% on what we have in it. If you saw the Case-Shiller Home Price Index, Las Vegas is the leading price appreciation market year over year, and I think we're feeling the effects of that. Obviously, it can turn down or it could go higher, but given what we see right now, we think that the -- versus the basis, the Las Vegas portfolio is a lot more well understood than the Miami portfolio.

The Miami portfolio, which was an $80 million purchase that we did in December, which we only sold four units so far because really we've only begun getting through our CapEx plan and begun executing our business plan to sell those units. So that story is a little bit more unknown. I can indicate to you that it feels like our basis in those unit, which is $225 a foot, feels very comfortable.

But I can't tell you exactly where the pricing, after selling four units, will probably average out. So I'll probably need another quarter or two to figure that out.

Okay, well, that color is very helpful, thinking about the potential upside of those investments. So thanks for taking my questions. I appreciate it.

Sure.

Your next question is from Dan Altscher. Your line is open.

Thanks and good afternoon and I appreciate you taking my questions, as well. One of the large loan originations you referenced in April, the $350 million office portfolio, was that related to a single borrower office that was, l like said -- been in the news, that you guys were maybe mandated on?

Yes, there were a few headlines that went by that said it was a $300 million loan. Those were incorrect. We did do a $350 million seven-year loan on a single asset here in New York City, which was documented in the press.

Got it. Okay. So good. That $350 million is better than $300 million, I suppose (laughter).

With that in mind, clearly you've deployed a lot of capital so far in just April alone. How are you feeling on your capital needs right now? It seems like clearly you have used all the proceeds from the IPO, but how do you think about need for additional capital going forward with what appears to be a very good April?

Well, the capital deployment was rapid, and while we were on the road show, we were thinking about that. Typically, in the lending business, when you put a loan under application, it doesn't close for 60 to 90 days, so if you take a look at the calendar there, it all makes sense that a lot of that would close in April. Of the $950 million of so that we closed in April, probably about $500 million of that would be targeted for securitization and that would include the $350 million loan.

I'm not sure when we'll do that, but that was really the game plan there. And the other $400 million-plus was really targeted for the balance sheet. So, as you know, from the securitization business, that once those assets are ultimately securitized, that capital recycles back into the Company, along with any gains, hopefully, that we will earn.

So we're not feeling any need to return to the capital markets at this time. My guess is, should we return to the capital markets, and we suspect we will one day, the first -- if no conditions change relative to today, it would probably be a debt situation as opposed to an equity situation.

Great, thanks. You answered my next question, which was going to be the breakout of held for investment versus held for sale for April.

But maybe just one additional question, more on the strategic front. You guys may have been working on some strategic focus around enhancing value for shareholders -- that can take many forms. Can you maybe provide any update on where you are in that process or what you might be looking at?

Well, obviously, we are always looking to increase value to our shareholders, and one of the ways to do that is through an increase in after-tax income. We are currently engaging with certain experts in the area of accounting to make sure that anything that we're contemplating doing will be accretive and not have any unintended consequences that would disrupt a lot of the good things that we've done so far since the formation of the Company.

We want to make sure that our financing lines all stay in place. We want to make sure that our bond holders are all kept apprised of what's going on and are happy. So I can't give you an exactly timeline. I can tell you that we are working on it, though.

We have quite a few assets that we break our business really up into the moving business, which would be the securitization business, or anything else that we plan to sell, and the storage business, which tends to be more REIT-like assets that we tend to hold on our balance sheet. So when you take a look at what we did in April, with $500 million targeted for securitization and $400 million and change targeted for balance sheet, it gives you an idea that we're obviously giving that some thought.

Okay, great. I'll try to read between the lines on -- and take all those pieces apart. Good quarter, everyone. Thanks.

Thanks.

Your next question is from Jade Rahmani.

Hi. Thanks for taking the questions. Can you characterize the investment pipeline that you're valuing? Any color you could provide in terms of size, average deal size, if that's consistent with what you did in the quarter? And also where incremental yields are going and whether that's at all shifting toward more on-balance sheet type situations or you'd expect the mix of what you securitized to stay the same?

Sure. In the first quarter, the average loan size of assets that we securitized was around $18 million. We have clearly moved into some larger loans that will pull that average up, probably, over the next quarter. I'm not sure, haven't done that math, but intuitively, it feels like we're moving in that direction. That's part of the business plan.

The pipeline, I won't comment on, other than what I've given you for April at this point, but I would anticipate a business-as-usual quarter. But there is plenty of volatility out there. There are still situations going on over in Ukraine, where a lot of these conversations can change very rapidly.

But the balance sheet business is a business that we're very comfortable with, because it really falls on our strengths, which we feel are credit and the fortress-like balance sheet that we've created with our financing vehicles, and it is far less competitive than the so-called conduit market. However, the conduit market has the highest percentage of ROE dollars so we're a constant presence in that market, and I would say that we are relatively constructive at this time on it.

I don't see spread widening dramatically any time soon. There seems to be a pretty comfortable balance from our standpoint, in the supply and demand business of the conduits. But I would say probably there's a little bit more demand actually than supply, which is what's causing the spread so far to tighten this year.

In terms of 2Q securitization volume that we should expect, I don't think I've seen you guys contribute loans to any securitization so far this quarter. I may be missing something, though. But do you expect the timing to be back-half weighted and volume to be similar to what you did in the first quarter, or is it possible the 2Q's securitized volume could be lighter than the first quarter?

I would caveat that by saying that the $350 million loan that we have closed on our books right now, we can securitize that pretty much whenever we feel like we want to and that could be now or it could be for a long time from now. It's a very high-quality loan that we're very comfortable with on the balance sheet.

There are some rather large securitizations taking place in New York -- on New York assets in the very near future, so we're taking a look at whether or not we want to put that asset in the market against those assets or should we wait until after those assets are securitized. We have not made up our mind up on that.

The fact that you haven't seen our name in any securitizations, we haven't actually closed any securitizations in the second quarter. As you know, we also work with partners in securitizations, so we oftentimes don't announce ourselves in transactions or we're not picked up in the press until we're sure that we're going. And sometimes, some of these pools are moving around rapidly, so we hold off on actually saying we're in.

But I would indicate to you that with the clear [beta] being that you could swing this number pretty hard with a $350 million asset, I do anticipate some activity in the second quarter, but we don't think about back-end weighting it at all.

Okay. And then lastly, in the past or last quarter, you said there was a bright line between what was conduit-eligible and what wasn't. And I'm wondering if the gap between what's conduit-eligible and what isn't has compressed at all, and if you could just remind us of what in your mind that clear line is?

Sure. A conduit eligible loan, at least at Ladder Capital, will generally be an asset that is a five-, seven-, or 10-year fixed rate loan. It usually will entail hedging against interest rate movement and possibly credit spreads and it'll be targeted for securitization. There are other organizations that securitize floating rate loans. We tend to avoid that business.

We view it more as a financing than a sale. And that business oftentimes is our balance sheet business, which we just keep here and we finance through different vehicles rather than a securitization market.

Most floating rate securitizations, they only sell the most senior bonds, they hold the first [offs] positions, the originator does. So the clear line for us is term, fixed year, cash-flowing, and rating-agency friendly against their criteria. Whereas our -- what I would call our bridge loans -- our loans that are either in some form of transition, they could be empty, they could be full where the tenant is rolling over in the next few months.

So its not a comfortable securitized asset because the cash flows could change rapidly in the near future. And almost always on our balance sheet, our bridge loans are less than four years in maturity.

And just in terms of LTVs, where are LTVs that you're doing on both sides and have those increased lately? And thanks for taking the questions.

Sure. The LTVs in the securitized assets, I'm going to say, are about 67%. That is -- I wouldn't hang my hat on that, but I think that's in the neighborhood of where it is. On the balance sheet, if there -- when you put an asset on your balance sheet that has less cash flow, a lot of times people think that you're putting additional risk on, which I guess you are, in a traditional sense. However, what we think is you're really putting liquidity risk on because there's just less competition there.

So depending on the level of cash flow and the certainty of it going forward, for an empty building, we will have much lower LTVs than a securitized business. We might be in the 50%, maybe less where there's substantial equity in the transaction -- for a 50% occupied building, you might see us as 60%, 65%, and for 100% occupied building, you could easily see us at 75% or even 80% if we want to impute the synthetic mezzanine tranche that oftentimes follows in the securitized world.

So there's no real rules on the balance sheet other than we are credit-conscious at all times, but rule of thumb will be, the more cash flow there is, the higher the LTV will go. The less cash flow, the less liquidity -- meaning the lower LTV, the higher component of equity we'll require from the borrower. Does that answer you?

Yes, that does. Great. Thank you.

Your next question is from Ken Bruce.

Good afternoon, gentlemen. Thanks for your time today.

My first question, looking at the pace of volume in the second quarter, that's obviously a very healthy level. Can you give us a sense as to what is driving that? And just to give a little bit of context here, obviously there has been quite a bit of volume in commercial real estate lending, but you also are hearing about a lot of competition as it relates to the conduits.

So can we just maybe get you to step back and give us a sense as to what's the state of play in the market? Where are you seeing the opportunities? Clearly that $900 million number in a month is a very good level, and just juxtapose that with all the discussions around how much competition there is in the market?

Sure. Well, you have to take that into -- let me parse that question into a few different parts of the answer. All the securitized businesses, I don't think you can look at it on a quarter-to-quarter basis. You really have to look at it on a year-on-year basis, so when you see a lot of activity in the second quarter, which you are referencing and we see also, a lot of that has to do with a lack of activity really in March and it's just smoothing things out.

When you want to look at the general conditions in the market, you have to break it up into two pieces. One is the large loan market, which is the single asset securitizations. There will be several transactions in the second quarter over $1 billion. There were very few of those in the first quarter, yet last year in the first quarter, there were a lot of them. So I wouldn't draw too many conclusions from that, other than it's just timing.

The actual business of many borrowers and transactions -- multiple borrowers that are unrelated with different property types is probably a better measure, and I believe that business was up slightly quarter on quarter, first quarter last year to first quarter this year. Our volume has our market share on our first-quarter 2013 to first-quarter 2014 level has increased. Our profit margins probably slipped a little bit, but still very acceptable, as we saw.

So we are very selective around the business that we will and won't do, and part of that selection criteria does involve profit margin. It's not just a question of can we say yes to this loan, because we think it's a good credit, it also has to entail Ladder Capital making a fair compensation for it.

So we get a little picky during pricing pressures, and when that happens, we'll turn to our balance sheet where it's a lot less competitive, and we'll add assets there that we think, hopefully, in the most efficient process from our standpoint, we have balance sheets that turn into securitizable loans later. And you're seeing -- that's what we're doing a lot of lately.

Okay. Thank you.

As far as competitors in the space that you mentioned, somebody had mentioned to me at one point that there were 37 conduit lenders, there may be. I don't think I could name 15 of them.

And oftentimes in these securitized deals, you have lenders that have one or two loans in them. I don't really look at that as a terribly competitive situation. From our perspective, we look at who do we lose to a regular basis and I don't think that that list of names has grown in the last 12 months.

Okay, yes, a number that was thrown out to me was in the 40s. So in the 30s is a good number. Go ahead.

I would just think if you take the top 10 or 12 producers -- and you can find that in some of the industry rags -- if you take the top 10 or 12, you probably have 90% to 95% of the volume.

Got it.

And if we just look back at some of the characteristics of Ladder loans that come in at a premium in the securitization market, a lot of that was diversification that the smaller loans provided. Now that you're making a move up in loan size, do you believe that that's going to have any meaningful impact in terms of the margins that we should be modeling going forward?

Is there an ample enough pricing power given the large loan size that you can make up for that or just so we don't have any surprises on the gains out of the equation?

Yes, you have to look at that question as two different questions. When you are making a large loan at a low LTV to an institutional owner in a portfolio of millions of square feet of real estate, those margins are not -- it's effectively the wholesale market versus the retail market when you're making $10 million loans. So when you have a borrower who is in the markets borrowing money every quarter, quarter after quarter, that's a lot different than the conversation you're having with the borrower who has one or two loans that he's going to do in his lifetime.

So it really is a bifurcated situation there and there are fixed costs involved in originating a loan. So we don't want to write loans that are too small, where there's too many costs involved in originating the loan. We want to keep the process uniform so that all the loans are originated in the same way under the same criteria.

But in all likelihood, you will probably see the more large loans we do, unless they're coming right off of our balance sheet out of a refinance program. Then I would imagine that the average margin is acceptable that we've modeled, however, you will see some large loans that will not meet that average.

Okay. And maybe lastly from me, you've seen a lot of the competition in the mortgage REITs pivot toward your -- I don't believe you've got plans to do that. Do you see this -- the domestic market, whether that be on balance sheet or through your conduit activities, do you think it's going to turn out to be maybe better than what you were thinking just three months ago, or is there any change in your general view of market conditions today, in terms of both -- maybe just from the volume standpoint? You've already discussed the margin side?

The securitized business is what it is and I don't really see many changes to that going on presently other than the credit curve is flattening as yield is [chased]. But on the REITs that you mentioned that are filling the space really of the banks that used to hold loans on their balance sheet that no longer do, we're probably the entrant into that market that may be annoying them at this point, because we have extraordinary financing abilities, and also we have the abilities to do lower-cost businesses also with those very same borrowers.

So we can not only provide bridge loans on large transitional assets, but we can also provided the take out. Most of those conduit businesses do not involve themselves in the securitization activities. So we're well positioned because we do both of those things.

And in addition to that, most of those REITs have a dividend payment that we understand what it is, so we also understand how they finance activities, and so when we know that a competitor -- if we know who the competitor is -- we probably have a general idea of where we can tap them out if we want to on the competitive process because we know when it becomes non-accretive to them. So that extra information, which we would not normally have when a bank is writing a loan is actually an advantage to us.

Interesting. Okay. That does it. Thank you very much. And we'll talk to you soon.

(Operator Instructions)

The next question is from Charles [Lumbad]. Your line is open

Good afternoon, and thank you for taking my question.

My question is regarding financing. Looking at the $1.9 billion in available financing, can you give us a sense of how much relates to the FHLB membership?

Sure. We have $1.405 billion in capacity, and we were borrowing $933 million at the end of the quarter.

Okay. And you had discussed in the past the possibility of potentially upsizing that membership. Could you give us an update on that? If that's been done already or if that's something that's in the works right now?

We're in the process of applying for that at this point in time.

Okay. And if I could take a step back and follow up with one of Ken's questions regarding the overall CMBS market, heading into this year, the expectation was for overall issuances maybe 10% or so in excess of the 2013 total.

With four months into the year, given the expectation of volatility, do you still -- how do you think about that expectation? Has your expectation changed in terms of overall issuance for the whole year?

I don't get overly involved in guessing what I think the issuance will be. It's a growing business that isn't anywhere near where it had been in 2006 and 2007. So directionally, I still feel like it's up, but the large single asset securitizations can really distort these figures. But intuitively, interest rates are low, the banks are still being harassed on one level or another about writing loans and holding them on their balance sheet. So that's why the REITs are so active in the space, and they have filled that gap, and companies like ours have plenty of head room here to grow.

But the big surprise here in the first four months of the year is that interest rates are as low as they are with unemployment dropping. I think that probably has caught a lot of people off-guard. I think that going into the end of the year last, there was a bit of a rush to the door because people thought rates were going up and that's one of the reasons I think the first quarter was a little bit muted in the single asset side of things.

So it's very -- the profit margins don't depend on where interest rates are generally. It's always easier to lend people money at lower rates because they're happier, but at higher rates, transactions need to be refinanced also.

So it's not -- and we made this distinction one other time, where the residential mortgage market is very different from the commercial mortgage market, in that commercial real estate is locked out. So even though people see rates that are very low, they may not be able to act on them.

So what you now have, actually, is the first class of the 3.0 era of loans coming from 2010, ultimately coming up for refinancing here. So you do see some of that activity coming on board also, but most importantly, there's an enormous class of legacy assets from the pre-crisis era, where the loans are performing well enough to be current, but not well enough to be refinanced. And the combination of securitization, senior, and a mezzanine will be a very common business tactic taken over the next few years, and we're positioned where we can provide both of those transactions to a borrower and meet their needs.

Okay, thank you, I appreciate the color.

Sure.

The next question is from Rick Shane.

Hey, guys, thanks for taking my questions. Ultimately, you guys had a lot of questions about volumes, about loan spreads, about competition, and how that impacts your view on potential volume, and potential gain on sale. There have been two securitizations that have been conduit deals that have been done this the quarter. AAA spreads are a little bit tighter, but subordination levels on the AAAs are also up.

When you're thinking about your originations for conduit securitization, how do you factor that in? Historically -- and Ken had talked about the diversification you bring to the pools in terms of loan size -- but one of the other contributors is that you tend to do some higher yield and [juicier] loans. In this environment, do you think that, that continues to drive the same value?

The answer is yes, it does continue to drive that value. The increase in some subordination levels or certain rating agencies being preferred on certain bond classes, it is probably as a result of, what I would -- what you hear oftentimes referred to as a deterioration in credit underwriting standards. We see most of that, so called, deterioration taking place in the form of IO, as opposed to amortization on loans.

I don't really see anything that I would call reckless going on anywhere, certainly not here, but anywhere else either. The only thing that really does surprise me at times is where I see organizations putting risk on their balance sheet at very low returns. And I'm a little surprised by that. That may be an outgrowth of how the banks are paying some of their people these days, maybe an unintended consequence of that.

But as far as the diversification, that's always going to be in vogue. It's always helpful to have high-quality credit underwriting. And when we do some of the more structured products at Ladder, it's a benefit, because oftentimes we're holding a mezzanine behind those loans that are securitized, and that often time gives comfort to investors.

What we can't see when we're originating loans is the partner that we're going to securitize with. So we actually have to build a portfolio that stands on its own, and then we have to evaluate what the partner's inventory looks like and how the mix all works together.

So only part of that is visible when we're writing a loan. So what we do is we don't necessarily -- we never abandon our credit standards. We always look to securitization with a partner, but we always have to originate loans as if we're holding them. Because if that partner doesn't materialize or the business gets very disrupted because there is a lack of responsibility in lending, we will not securitize in a transaction we don't think is going to hold up, so at that point we would just hang onto our assets.

So it's easy to say but hard to do credit, I don't think, ever goes out of style and we approach every day the same way as far as that goes, in that we don't react to how the markets or rating agencies or where AAAs are trading.

Okay. Great. Thank you, Brian.

(Operator Instructions)

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. That wraps it up on our end. And thanks for everybody for getting on. Does anybody--? That's it. Thanks very much. Goodbye.

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