Ladder Capital Corp (LADR) 2014 Q3 法說會逐字稿

Good evening. My name is Courtney and I will be your conference operator today. At this time I would like to welcome everyone to the Ladder Capital Corp third quarter 2014 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Pamela McCormack, Chief Strategy Officer and General Counsel, you may begin your conference.

Thank you, and good evening, everyone. I'd like to welcome you to Ladder Capital Corp's earnings call for the third quarter of 2014.

With me this evening 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 September 30, 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 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 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. Reconciliation 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 for listening to our earnings call today. During the third quarter, Ladder had core earnings of $49.2 million, core earnings per share of $0.31 per share, and GAAP earnings per share of $0.30 per share.

I'll start with an overview of the key financial highlights in the quarter. On the production side at Ladder, we originated $736 million of conduit loans, $347 million of bridge loans which we expect to hold on our balance sheet, and $29.4 million of mezzanine loans, also to be held on our balance sheet.

Total loan originations in the quarter were $1.1 billion. This is a pretty strong quarter for us in loan originations.

During the quarter, we participated in two CMBS securitizations, contributing a total of $680 million of loans and earning a profit of $23.3 million. This brings our year-to-date securitizations to seven in the first 9 months of 2014. Ladder has contributed loans with a face value of $2.34 billion in the year, generating a profit of $99.9 million year-to-date.

In our real estate segment, during the third quarter we acquired a total of $127 million of commercial real estate assets, comprised of $32.5 million of industrial property, $12.3 million of retail properties, and $82.2 million of office properties.

Of the $127 million in acquisitions, we invested a total of $29.7 million of our own equity and we borrowed a total of $97.3 million of 10-year fixed-rate non-recourse mortgages, approximately 76.5% of our purchase price.

During the quarter, we also sold four net lease retail properties and had ongoing sales at our condominium properties in Las Vegas and Miami. We realized gross proceeds from these sales of $38.6 million, and recognized a core gain of $7.2 million on these real estate sales in the quarter, representing a 23% core gain over our cost basis.

Turning now to securities, Ladder invested a total of $758.6 million in securities during the quarter. Of these investments, roughly two-thirds had an average life of less than 5 years. The balance was split roughly between securities with an average life between 5 and 7 years, and 7 to 10 years.

With respect to the right side of the balance sheet, I would categorize the quarter as one in which we took a step back and did a lot of required housekeeping and planning for the long term.

At the end of the third quarter, our total assets stood at $4.7 billion, up from $3.5 billion at the end of 2013. Total debt was $3.1 billion, representing 2.1 to 1 leverage. We consider ourselves to be conservatively levered, all the more so because almost 80% of our total assets are comprised of senior secured assets and cash.

During the third quarter, Ladder completed a $300 million unsecured corporate bond issuance with proceeds received in early August. The terms of this issue were 7 years non-callable for 3 years, at a rate of 5.875%. This compares with an issuance of $325 million of non-callable 5-year bonds issued 2 years earlier, at a rate of 7.375%. We are currently deploying the additional capital we raised in early August.

We also extended our maturity profile with respect to our FHLB financing. As a result of this extension, as well as our new 7-year bonds, and placing new 10-year mortgage debt on properties acquired during the quarter, our fixed interest cost rose by approximately $5 million per quarter.

Also in the quarter, the Federal Home Loan Bank regulator announced a request for comment on a new regulatory proposal relating to captive insurance company members of the Federal Home Loan Bank. The public comment period on the proposed changes has now been extended to January 12.

If the proposal is enacted in its current form, it would limit our Federal Home Loan Bank membership to 5 years from the date of enactment. Our captive insurance subsidiary remains a Federal Home Loan Bank member in good standing, and we continue to originate a significant volume of loans that are consistent with the FHLB's mission, including financing of urban workforce properties throughout the country.

As we begin the fourth quarter, I can report that we are currently in the market with our 8th securitization, to which we are contributing $293 million worth of loans. We also closed on a large loan last week for $450 million, secured by an apartment complex in San Francisco, California. The loan-to-value ratio on this asset is approximately 30%.

Let me now briefly discuss market conditions during the third quarter, and what we're seeing thus far into the fourth quarter. The third quarter saw the credit markets experience several instances of increased volatility. In early August the Russia/Ukraine conflict intensified; the US resumed air strikes in Iraq in an attempt to address problems relating to ISIS, while the Israeli/Palestinian conflict flared up.

Liquidity was also seasonally affected as the summer came to a close, and markets were quite thin, and market moves were somewhat exaggerated.

In our own securitizations, we saw credit spreads on AAA 10-year securities widen from 78 basis points in June to 90 basis points in August, with the widest levels on non-Ladder transactions at about 93 basis points in August.

On BBB tranches, prices fell by several percentage points. These wider spreads made profit margins thinner. Our second securitization of the quarter in September saw AAA 10-year credit spreads improve to 83 basis points over 10-year swaps, so there was some marginal improvement as volatility fell.

This fluctuation in spreads is normal and expected. We believe these normal fluctuations provide healthy discipline to the industry. Quarterly results will vary, but we view the origination to securitization business as a long-term business with high ROEs and significant barriers to entry.

Competitive pressure on margins continues in a more persistent and -- in a more consistent manner than we expected, but we think the business may shake out some of the weaker participants in the years ahead. One of the catalysts to these changes could be the recently released and long-awaited risk retention rules as they apply to commercial mortgage securitizations.

Ladder, with its permanent equity structure, is well-positioned to take advantage of its status as both a seasoned loan originator and acquirer of securities. We believe we should be readily able to comply with the risk retention rules that will take effect in 2 years, while others may not be.

Another factor that causes headwinds in profit margins is a flattening of the yield curve. A flat yield curve is not a welcome sight to any bank or mortgage lender. In the beginning of 2014, the Treasury bond was yielding a little over 3%, having moved up rapidly in the second half of 2013 after Ben Bernanke said the word taper in late May.

Today, now with the taper completed and done with, the 10-year yield sits near a decidedly lower 2.3%. So, the interest rate curve has flattened quite a bit during 2014, and this hurts profitability. A recovering US economy can turn this flattening trend around, but we will watch this closely and price new loans accordingly.

While credit spreads widen and competitive pressures exist, we're still happy to report that even during difficult market conditions, we were still originating loans at a very robust pace, with over $1.1 billion in the third quarter alone, albeit at somewhat lower but still acceptable profit margins, with our actual production for the first 9 months of 2014 on pace with our expectations.

With that, I'll turn you over to Marc Fox, our Chief Financial Officer, who will review our financial results for the third quarter in more detail.

Thank you, Brian. I will now review Ladder Capital's financial results for the quarter ended September 30, 2014. The $49.2 million of core earnings for the third quarter reflects the impact of strong origination volumes and asset growth, offset by compressed securitization margins and higher interest rate -- interest charges related to the August issuance of $300 million of 7-year unsecured corporate bonds, and the extension of other debt maturities.

For the first 9 months of the year, core earnings were $166.4 million. Based on an average shareholder's equity balance of approximately $1.4 billion, this result reflects a 15.8% year-to-date return on average equity.

GAAP net income was $37.2 million and $85.8 million for the 3 and 9 months ended September 30, 2014 respectively. This compares to $21.2 million and $169 million for the comparable periods in 2013 respectively.

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.

The computations of historic core earnings were recently revisited, and it was determined that core earnings should be adjusted downward by just under 1% for the 2013 calendar year, and by approximately 1.7% downward for the first 6 months of 2014. Additional information regarding these adjustments can be found in the press release and Form 10-Q.

During the third quarter, Ladder's investment activities focused on loan origination and securitization. In addition, Ladder completed its first real estate acquisitions of the year. During the 3 months ended September 30, we originated $1.1 billion of loans, bringing year-to-date loan production to 2.98 billion, or 65% more than we originated in all of 2013.

The relatively low balance of commercial mortgage loans held for sale at the end of the quarter, was attributable to the securitization of $403.9 million of loans that settled in September.

As noted, in August, Ladder completed its second issuance of unsecured corporate bonds. The 7-year bonds can be called after 3 years and carry a coupon that is 1.5% lower than the coupon Ladder pays on the 5-year bonds it issued 2 years ago.

After receiving the bond proceeds on August 1, Ladder proceeded to commence deployment of new funds. The most expedient, accretive way to deploy the funding was via the acquisition of securities.

During the third quarter the securities portfolio was expanded by $342.1 million net. Securities transactions during the quarter included purchases of $758.6 million, offset by $335.2 million in securities sales and $43 million of proceeds from the repayment of securities, resulting in an increase in our securities portfolio to $2.2 billion by the end of the quarter.

While securities purchases are expedient, Ladder's longer-term investment plan will ultimately result in portions of the incremental liquidity capacity created by the bond issuance, being used to increase Ladder's investments in balance sheet loans, and real estate as well. During the quarter, Ladder originated $376.1 million of balance sheet loans, and the portfolio increased by $297 million to $1.3 billion.

After 2 quarters in which Ladder executed no real estate transactions, Ladder acquired five properties with a total purchase price of $127.3 million. The acquired properties were discussed earlier, and increased the total square footage of our portfolio to 5.4 million square feet. We also continued the sales of condominium inventory at solid profit margins. The net result was, real estate investments grew by $91.4 million, or 16.3% net during the quarter.

In a review of the trends reflected in the third quarter income statement, a number of items stand out. Consistent with past quarters, Ladder maintained a steady stream of net interest income. We've continued to expand our base of interest-bearing investments to approximately $3.71 billion at the end of the quarter, 25% higher than the level at the end of the prior quarter.

The Firm has also maintained a steady stream of operating lease income from its real estate investments. Operating lease income was $12.8 million for the quarter, unchanged from the prior quarter.

Securitization activity in the third quarter of 2014 resulted in income statement gains of $20.4 million from the sale of securitized loans, net, after factoring in related hedging results, the sale of servicing income and deal expenses, the net economic benefit was $23.3 million, or 3.43% of the $680 million of loans contributed.

Expenses for the quarter were $42.2 million, $3.1 million less than in the second quarter, reflecting lower compensation expense tied to lower-than-planned profitability.

Our income tax provision for the third quarter was $10.3 million, reflecting an effective combined rate of 21.69%. This represents the tax provision on the 51.9% of Ladder's income attributable to Class A shareholders of Ladder Capital Corp.

The 51.9% ownership is up slightly as the result of the conversion of approximately 874,000 [apartment] units into Class -- shares of Class A common stock by Ladder partners.

In terms of key balance sheet metrics, as of September 30, 2014, total assets were approximately $4.7 billion after peaking at approximately $5 billion in September, and up almost $1 billion from the $3.8 billion at the end of the prior quarter.

At the end of the quarter, approximately 96% of our debt investment assets were 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 79% of our total asset base.

Total unencumbered assets, including cash, were $1.2 billion at quarter end, reflecting a 1.8 to 1 ratio to unsecured debt outstanding, which increased from $325 million to $625 million during the quarter.

Turning to the right side of the balance sheet, total equity capital was $1.5 billion at quarter end, and the debt to equity ratio was 2.1 times, up from 1.5 times at the end of the second quarter, reflecting the impact of the bond issuance and growth of the asset base.

During the quarter we issued long-term bonds, increased our 10-year non-recourse mortgage debt, and added other maturities of long-term secured debt. The result is that the weighted average term to maturity of Ladder's debt increased by 9 months to 3.4 years.

Although Ladder will incur incremental interest expense of approximately $5 million per quarter as a result of this financing, we value the mitigate of debt rollover, interest rate and a variety of other liquidity-related risks that this funding provides.

I'll now move to a discussion of our investment activities during the quarter. We previously referenced our loan production securitization volumes. In terms of asset yields, the average coupon on the loans held for sale that were originated in the third quarter was approximately 4.7%, and the average coupon on the loans that were held for investment originated in the quarter, reflected a weighted average spread of approximately 6.2% over one month LIBOR.

The weighted average loan-to-value ratio of the commercial real estate loans on our balance sheet was approximately 69%, unchanged from the prior quarter. 84% of our securities positions were rated AAA or were backed by agencies of the US government. 98% were rated investment grade. The weighted average duration of our securities portfolio was 3.8 years as of September 30, slightly lower than the average duration at the end of the prior quarter.

Finally, I'd like to discuss our financing highlights for the -- from the quarter. We've 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 September 30, we had $3.1 billion of debt outstanding, a committed financing availability of over $1.6 billion of additional investments. In the third quarter of 2014, we increased our FHLB borrowings to almost $1.3 billion compared to $903 million at the end of the second quarter. The increase in FHLB borrowings was required to support the growth in Ladder's securities and loan portfolios during the latter part of the quarter.

As of September 30, 2014, $790 million of the funds borrowed from the Federal Home Loan Bank have remaining terms of over 1 year. We continue to follow developments regarding the proposed rule-making by the Federal Housing Finance Administration, the FHLB's regulator.

Since our subsidiary FHLB member has been a member for over 2 years, we have been able to continue to participate as an FHLB member in the same manner as we have historically.

Based on the Notice of Proposed Rulemaking, we expect to be able to continue to do so for at least 5 years. In the meantime, we continue to originate loans that are supportive of the FHLB's mission to support housing finance in the US, and to date we have financed over $1 billion of multi-family mortgage loans via the FHLB.

Long-term non-recourse mortgage loan financing increased by $84 million during the quarter to $398.3 million as a result of the securitization of inter-company mortgage loans originated by Ladder to its real estate special purpose entities during the quarter.

In conclusion, we are pleased to turn in a profitable quarter in which we solidified our borrowing base with the addition of $300 million of 7-year unsecured bonds and other longer-term FHLB borrowings and mortgage debt, as we continue to build up our predominantly senior secured asset base to position Ladder for success in future quarters.

With that, I'll turn it over to questions and answers.

(Operator Instructions). Steve DeLaney, JMP.

Brian, you cited a loan closed last week -- I guess, the late October $450 million. Should we assume -- is this going to be a conduit loan, is the first part of the question; and if so, is it possible that you'll look to do a single borrower execution, similar to what you did with your New York office loan in the second quarter? Thanks.

It's not -- I don't think I would call it a conduit loan, because we would have to break it up into probably seven pieces of --

Got it.

But in all likelihood there's -- a very likely scenario is a single asset securitization. But, given that it's a 5-year loan, there's also a possibility we could hang onto it for a while. So, we have an -- undetermined [edges] at this point.

Okay. And the third quarter origination volume -- obviously fine. You commented on the margins. Seasonally, fourth quarter is usually a big quarter for commercial real estate lenders. Do -- can you make any general comments as to your expectations for how total fourth quarter volume may compare to the third quarter?

I guess -- fourth quarter typically is a very active quarter, usually driven by tax deadlines. People are trying to get transactions completed before year-end for tax reasons. It's a little early for that right now, although it should -- the funds should start pretty soon.

I will tell you that interest rates have been low, and lower than where they are right now. If you took a look at where the 10-year was, I don't know, maybe about 6 weeks or so ago, it was probably around 2.5%, and then it went down to 1.90% for about 5 minutes on October 15, and now it's back up there again, so -- around 2.30% or so.

So, I think that, unless it's tax-motivated, I would not expect any extraordinary activity. I can also comment that the September activity in the CMBS world was extraordinary. I'm not quite sure why that is, but I will tell you, that was an unusually heavy calendar of issuance, and -- I guess because people just didn't want to do the transactions in August, with the thin staff on the financial desks.

But I think that typically it's a pretty big quarter, but I'm not seeing any unusual activity just yet; but nor would I expect to, in the early part of November.

Are you concerned that September could have pulled forward something -- pulled some business forward, maybe, that normally would have just been -- because September was so big, it may impact 4Q.

It's possible. I think that the bigger problem, if there is one in the market right now, is really this flat yield curve. And in that, 5-year and 10-year rates are pretty similar.

So, how all mortgage lenders work -- and, I mean, there is some component of short-term financing against longer-term assets. And right now that [poor] -- that component of profitability is suffering.

And in addition to that, though, I do generally feel -- I don't have any evidence to support it, but I generally feel that, because of what went on in the early part of -- in the middle of October there, with that little crash that took place when oil fell, I think that there's a lot of money in fixed income that has not been deployed yet. Because I think a lot of money fled the stock markets and, unfortunately, as retail tends to do, it fled at the wrong time.

But oftentimes we will see a pickup after a stock market downturn like that, because a lot of money finds the fixed income markets. But I -- we're not seeing any difficulty in selling bonds right now, although they're -- I don't see any extraordinary demand that's causing spreads to tighten either.

Okay. Got it. Thanks. And just lastly, to close out, Brian, a lot of investors are focused on the Ladder structure and how that might change to make the Company more tax-efficient, but -- considering the $10 million in taxes that Marc referenced.

Should we assume at this point -- you haven't made any comments as to that, that if there is going to be any news, that you would possibly just schedule another conference call to handle that before the end of the year?

I think that would be a good assumption. It's -- there is clearly a large component of our asset base that could be handled in a more tax-efficient manner, and that certainly is not lost on us.

However, it's not just that simple to make these decisions, and the Company is certainly looking into all of that right now, and we've always targeted a year-end likelihood when we would make a decision to that effect. And I think that's probably the case now also.

Thanks for the comments, Brian.

Jade Rahmani, KBW.

Thanks very much for taking the question. Brian, on that last point, I was wondering if you could comment on how you would view the limitations of the REIT structure on Ladder's opportunistic strategy. I mean, I think this quarter highlighted some of the opportunistic gains that were taken, whether it's on the securities side or the real estate side. So, is the REIT structure really viable for the Ladder strategy?

Sure. What -- we think about this quite a bit. And as I said, the decision doesn't simply get made in a vacuum regarding tax efficiency. It's not the only component of it. You touch on something that I think about all the time.

You have to remember, the Company was set up as a C corp, and the hardwiring of the organization is really built for safety. And we actually like to go on offense during periods of rough weather in markets. And REITs don't intuitively set up comfortably for that, if you were to pursue that in a tax strategy.

So, I think -- what I struggle with sometimes is, it certainly would limit some of our flexibility, but the real question is, do we have to go to a much more inflexible model or could we have, instead of a black-and-white situation where one day we're a C corp and the next day we're more tax-efficient 100%; or, is there not a transition period -- call it a gray period, where we're probably not -- we're more tax-efficient than we are now, but not quite as tax-efficient as we could be.

And then, as time goes by, after we [reduce] some retained earnings -- and we're still living in a very volatile market. You can see this periodically. It flares up. And many of the problems are the same problems that flared up 2 years ago and 6 years ago.

So, I think we're still a little cautious around volatility, and we certainly like to be very well-capitalized. I think we probably issued our second corporate debt issuance in the summer, maybe a little bit earlier than we might have, although market conditions seemed pretty favorable.

And so, as a result of that, if we made a mistake there, we probably made the mistake of taking $300 million at a time where we weren't quite ready to deploy it, but we felt that for a 7-year scenario we were going to be well-served over the long term there.

So, I don't know if I've answered your question there. But I think you have to keep in mind, from our perspective it's not likely that we'll try to convert to the lowest possible tax rate available. I think we're thinking more along the lines of an optimal tax rate. And that would entail something probably that would allow us to continue to build book value as well as having plenty cash on hand.

Okay. Great. That's helpful. Just turning to the volatility that you just cited, d'you think there's -- have you seen an abatement, quarter to date?

And also, has any of the volatility caused some of these smaller, newer entrants in the conduit market -- less liquid players than yourselves, or players with less access to capital than yourselves -- has it caused any of those players to retreat somewhat?

And in addition, have you changed any of your indicated loan yields on some of the loans planned for securitization?

The comment regarding the other players in the market -- the smaller ones -- I really don't know. We're not generally an aggregator of names like that. We tend to be one of the contributors to a loan portfolio that gets securitized, and we tend to be much larger than some of the smaller names.

But I don't think that any bout of volatility makes anybody more comfortable when you're smaller-sized. So, intuitively, it makes sense to me. I don't think anybody welcomes those situations, when you're undersized. I don't even welcome them when we're at our size.

But as far as our loan yields go, we -- I think our major component of what we think about when we think about a loan yield when we're lending to somebody, isn't so much where the execution is presently. We try to look forward and try to figure out where we think spreads will be when we come to market.

We were also looking at the midterm elections last night. There is a scenario there where corporate taxes could be a little bit friendlier. I don't know that that'll happen, but we'll see. But these are all things that come into play.

But we're really dealing in 90- to 120-day short-term cycles. And we have a view that we are historically on the wide side of spreads right now. And so, we're originating accordingly. You'll see scenarios with us where you'll, instead of making 3 points and change, you'll see us make 5 1/2 points. Those are the times where we originated, thinking spreads might tighten, and they did.

You might see us on the lower end of the spectrum when we think spreads are going to tighten, and they don't, or they widen. And I would argue that's arguably what happened in this quarter.

Great. Thanks very much for taking the questions.

Dan Altscher, FBR Capital Markets.

I appreciate you taking my questions. I was wondering if you can maybe help quantify a little bit of how much the volatility and spreads contributed to the gain on sale. In other words, is it possible to parse out, if spreads had not changed, what the gain on sale may have actually looked like?

Sure, Dan. We actually tried to detail some of that in the verbal part of the announcement today, in that, in general -- and I don't want to get too deep in the weeds here with the callers, but if you consider 15 basis points in spread equal to 1% of profit, you -- I showed you that spreads widen from 78 to -- I think it was 80 -- or 90, at one point, and 86 in the second securitization.

I would think -- shotgun math -- about a point on the quarter. And so, call it $700 million. Probably we did a point less than we had been hoping for.

As you know, we target the number that's just north of 4 points. We try to, anyway. And it didn't work out exactly as we had planned, but the fact that that's generally what we try to do, is to -- that when spreads widen, we don't go into the loss column; we go into the less profitable column.

That's perfect. That's exactly the -- kind of, the metric or the color I was looking for. So, that's really helpful.

Maybe switching to a new -- a different topic, with risk retention (inaudible) still 2 years away, and there's a lot of preparations that probably need to be done, is there any expectations at this point that there could be maybe a rush or a flurry of new issuance activity ahead of that, where people are trying to get grandfathered in before that maybe happening?

Yes -- I've been asked this -- we asked this question today in the office. I don't think so, although I will tell you I'm in the minority in the room.

But I think that the biggest of -- impact of risk retention is really going to show up in, there's going to be a cost component, because the so-called B-piece, our first loss piece, is a -- is going to become 40% to 50% larger. So, there's going to be some BBs in that first loss piece now. And the first loss piece can trade at 15%, so -- whereas BBs are not nearly that wide.

So, I think the overall effect will be, costs to borrowers will go up because of that component; and I also think that from a bank standpoint it's a difficult asset to hold. I think credit is going to become paramount. Because, let's take an example -- well, I'll talk about us, because it's the one I know about.

If we were able to team up with a bank and contribute 50% of the assets to a pool, and they contributed 50% of the assets, we could acquire that first loss piece, that risk retention requirement, and with our permanent equity base able -- we are able to hold it for 5 years.

So, I think that we become a more strategic partner. Now, this also entails us rendering an opinion on our partner's collateral. Because those are loans that we didn't originate, and that we're going to have to understand them basically from a first loss perspective, if this is a business we choose to follow. I think this is an option for Ladder.

I don't think this is an option for a lot of people, because I don't think a lot of the participants in the space are designed to hold first loss risk for 5 years, because of their capital base and the way it's structured.

Okay. And maybe just one other one. It's regarding the FHLB line. [A], I'm sorry if I missed before, about how much capacity is still available on the facility. And then secondly, while we're kind of in this gray period of unknown rule changes, are you kind of locked out from expanding that line any further, or can you still pledge new collateral to upsize that -- the advances there?

Yes. We're able to continue to borrow from the FHLB, as we have historically. We've got a limit that's equal to the lesser of $1.9 billion or 33% of Ladder's total assets. So, we've got plenty of capacity, considering we were at $1.29 billion of borrowings at the end of the third quarter. The -- in terms of future size expansion, that's going to depend on a variety of factors. But right now, for the foreseeable future, I feel like we've got adequate capacity.

And I'd -- let me just add one thing there. The lines at the Federal Home Loan Bank presently are operating quite normally. We currently have excess capacity. I think presently, as of today anyway, we have about $1.3 billion drawn. And as Marc said, we have up to about $1.9 billion available, to meet some tests.

But I think what might be important to note is that we're -- there's a discussion -- the current change that's being contemplated is a sunset provision where captives would be phased out from borrowing over a 5-year period of time. And so, we currently have, and have recently extended our maturities, well past 5 years.

So, I don't think that anything is contemplated where we would have to pay off any advances that have been made that have 8 or 9 or 10 years in tenor. But I think that if that were to -- if the rule were to hold the way it is, then we probably from that day forward wouldn't be allowed to borrow past 5 years in maturity.

However, we have many dollars borrowed longer than 5 years presently, and that's actually one of the things that added to our fixed interest costs in the quarter. Not only did we add $1.5 million per month in the corporate bond area on the $300 million we borrowed, but we also extended our maturities at the Federal Home Loan Bank, and that's probably going to cost us another few $100,000 per month also.

But we think that, long term -- well worth it. Short-term, interest rates fell immediately. So, probably wasn't the happiest moment to do it. But over a long period of time, over an 8-year period of time, I think we're going to be happy with it.

Okay. Great. Thanks for all the color, Brian and Marc. I really appreciate it.

(Operator Instructions). Charles Nabhan, Wells Fargo.

Thanks for taking my question. I was wondering if you could comment on the competitive environment, specifically as it pertains to CMBS issuance. Would you attribute the pickup in activity during September to a pullback on the part of insurance companies and banks?

And also, are you -- you had commented last quarter on some borderline irrational underwriting that you're seeing from maybe some of the non-bank financials. And I was wondering if you're still seeing those trends in the transitional space.

In the transitional space, we're not seeing it. That's a balance sheet item that's usually held and vetted pretty closely.

I also would say that I am seeing -- we are experiencing what I would consider to be a bit of a turn here in the credit cycle, in that some -- whereas I think the initial phase of that was that people were putting a lot of capital at risk without any intention of making a lot of profit. It was making loans instead of making money.

And I think that -- as I said in the past, I think that's really an unintended consequences of regulation, and how banks pay people. However, I would point out, I would not limit the sloppy underwriting to non-banks. There are plenty of banks that are making loans that are clearly made for sale as opposed for -- as opposed to, for balance sheet. But I'm not really seeing too much in the transitional phase as a problem.

But -- and I do think the -- in the competitive space generally, it's quite competitive right now. And I've been scratching my head as to why some of the larger players are doing some of the transactions they're doing. And I think it has to do with the fact that so many of the banks' products that have traditionally made money during this part of a cycle, are not really available to them any more.

So, as a result of that, even though these transactions don't make that much money, they do make some money. And from an ROE perspective, I wouldn't be surprised if they're some of the best products in the bank.

But I do think this risk retention rule is going to be impactful. Because I think it's going to turn into a very credit-sensitive business. It's no longer going to be big pools going to the rating agencies with eight originators in the deal.

I think it's going to be a lot tighter on the number of originators in the deal, and I think there's -- it's going to be a deeply personal relationship between the partners in the transaction, because the risk is going to be moving to probably one of them. I don't know if that helps.

Yes. No, I appreciate the color. Thank you very much.

(Operator Instructions). There are no further questions at this time. This concludes today's conference call. You may now disconnect.