Ladder Capital Corp (LADR) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Ladder Capital Corp. fourth quarter and full year 2014 earnings call. (Operator Instructions). I would now like to turn the conference over to your host Kelly Porcella the Associate General Counsel for Ladder Capital Corp. Thank you. You may begin

Thank you and good afternoon everyone. I would like to welcome you to Ladder Capital Corp. earning call for the fourth quarter 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 December 31, 2014. 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'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 may 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, 2014 for a more detailed discussion of the risk factors that could cause actual results to materially differ 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.

Thanks, Kelly, and thanks for joining us on our call today. I'm going to break up my discussion in to several parts. I will begin with a review of some highlights for the fourth quarter and for the full year 2014. I'll also mention some metrics on our loan originations and investments we made in the other products in our diversified product platform. We think you'll be impressed when you see how Ladder has grown from 2013 to 2014. Then I'll spend a little more time looking at our product lines hoping to illustrate for you how our dynamic business model allows us to change the emphasis amongst our investment products as market conditions change. 2014 was a year where you can see we actually did the things we told you we would do as the business cycle evolved. Then I'll wrap up with a discussion of some corporate milestones we hit during the year and I'll over lay that against market condition as we see them going forward.

First the financials. In the fourth quarter of 2014 Ladder produce core earnings of $52.9 million with core earnings per share of $0.32. For the full year core earnings were $219.3 million with core earnings per share of $1.36. Our return on average equity for the year was a solid 15.4%.

Also of great significance, I'm happy to report that our shareholders overwhelmingly supported our conversion to a REIT within an effective date of January 1, 2015. In connection with our REIT election I'm pleased to announce our intention to declare our first dividend later in this month. A $0.25 cash dividend per share payable on or about April 15. We are now operating as an internally managed REIT a structure that allows more of our earnings to flow directly to our shareholders.

Our balance sheet grew substantially during the year, and at year end our total assets were $5.8 billion up 66% from the end of 2013 when our assets were at $3.5 billion. In the fourth quarter we originated $1.3 billion of securitizable loans, $250 million of balance sheet loans including $23 million of mezzanine loans. We also acquired $871 million of securities and made $128 million of net lease and other real estate equity investments marking another strong quarter for us in terms of loan origination and investments.

During the last quarter we participating in three securitizations for a total contributed loan amount of $1.155 billion. We sold loans into two conduit securitizations and one single assets securitizations. The conduit securitizations earned a profit margin of approximately 3% on average, while the single assets sale of a loan with a 25% loan-to-value ratio earned 1.4% profit. In all of 2014 we sold loans into a total of ten securitizations contributing $3.5 billion in loans and earning an average profit margin of 3.6%. If we exclude our two single assets securitizations, our contribution in to eight multi borrower transactions was $2.7 billion with an average profit margin of 4.1%.

The real estate equity investments that we made in the quarter were all retail properties, 14 in total, with most assets being primarily occupied by grocers with long-term net leases in place. Our condominium sales effort continued to add to our core earnings. In the fourth quarter we sold 55 units for a gain of $5 million. For the full year we sold a total of 185 units resulting in a gain of $22 million. The strength of our diversed product platform was quite evident when we look an at how our income streams changed from 2013 to 2014 while general interest rates fell and competition in our conduit securitizations business became more intense. The conduit business generated $180 million of core earnings in 2013 or 59% of our total core earnings before corporate items such as bond interest expense and salaries. Then in 2014 this business contributed a still healthy $140 million to core earnings, but this only comprised 41% of our total. But remember we are not a mono-line company and have never relied solely on securitizations markets. As rates fell and competition increased, we allocated more capital in to our other products and the results were as we expected.

In 2014 our first mortgage balance sheet loans contributed $62 million of core earnings while this product delivered $31 million in 2013, a 100% increase year-over-year. In real estate equity our core earnings were $48 million in 2014 up from $27 million in 2013 a 78% increase. Our securities portfolio produced $74 million in 2014 core earnings, 39% higher than the $53 million in 2013. From these examples we can see that by investing in different real estate related products as market conditions changed we change would the market and we're able to increase our earnings year-over-year despite the effects of heightened competition and somewhat compressed profit margins in our securitizations program. In 2013 our core earnings were $200.3 million and in 2014 this figure increased approximately 9.5% to $219.3 million as stated earlier.

Now let's turn to market conditions. Looking back on 2014, we saw a somewhat surprising flattening of the yield curve as the ten year U.S. Treasury Bond began the year at just over 3% and ended the year at 2.2%. Volatility also played a hand in reeking havoc in fixed income markets. On October 15th we saw the ten year Treasury rate fall 33 basis points in about ten minutes to 1.86% in what is now referred to as the flash crash of 2014. We also saw the price of oil drop from $89 per barrel on September 30 to $54 per barrel at year end an astonishing drop in price of 39% in just three months. This kind of unwelcome volatility caused market participants to turn cautious going into year end. Falling oil prices had knock on effects on other markets too causing the collapse of the Russian ruble and a sell off in the high yield market impacting CMBS spreads negatively at year end.

The impact of this fourth quarter volatility is easily observed in the news releases of most of the large U.S. banks. As the sell off in high yield markets caused investor to raise liquidity, we took advantage of this situation too. And acquired $5.4 million of our outstanding unsecured bonds due in 2017 at what we believe were opportunistic prices. Against that backdrop we are very pleased with our 15.4% pretax ROE for the year.

After our IPO at $17 per share in February 2014, we were also happy to see our stock price at $19.61 at year end. Up 15.3% in our first 11 months. We also took advantage of lower rates and favorable pricing in the bond market in the summer of 2014 by issuing a new $300 seven year unsecured corporate bond in August. The rate on these bonds was 150 basis points lower than the rate on our first bond issue a five year issued in 2012.

As we begin 2015 operating now as an internal managed REIT we are continuing to execute our business strategy across all of our complimentary business lines. REIT qualified businesses now make up almost 60% of our core earnings before corporate items up from 40% in 2013. We now house our conduit operation within a taxable REIT subsidiary where we will be able to recycle equity and retain capital. We will continue to operate all of our business lines in the same way as we always have with a focus on a credit driven investment process across complimentary commercial real estate classes.

We intentionally set a dividend with a conservative pay out ratio of about 50%. This policy allows us to increase the dividend overtime if warranted and achieves the right long-term balance between payouts to shareholders and retention of capital to drive internally generated growth. We believe this approach should allow to play offense during market disruption and throughout market cycles as we have in the past and reduces or delays the needs for new primary share issuance to fund the growth of our businesses. Our goal is to deliver an attractive risk adjusted total return for our shareholders through a well balanced combination of cash dividends and internally generated growth while maintaining the credit discipline for which Ladder is known and we believe we are well positioned to do just that.

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

Thank you, and good evening. I will now expand upon Brian's comments regarding Ladder Capital's financial results for the quarter and year ended December 31, 2014.

Looking back over the fourth quarter our results reflect a strong origination volume and assets growth offset by compressed lending yields and securitizations margins. The $1.57 billion of total loan originations in the fourth quarter was all almost 25% greater than Ladder's previous high for quarterly loan originations. This amount including $1.3 billion of conduit originations also a new quarterly high for Ladder. Partially offsetting this favorable trend our declining lending assets yields. Excluding a large loan originated and securitized in the fourth quarter the average coupon on the loans held for sale originated during the quarter was approximately 4.5% compared to over 5.5% in the fourth quarter of 2013. The average coupon on the loan held for investment originated in the quarter reflected weighted average spread of approximately 6.5% over one month LIBOR.

Securitizations activities reflected similar trends in Q4. The $1.155 billion volume of loans securitized was also a new quarterly high for Ladder. The $1.15 billion assets base expansion during the quarter represents an increase of almost 25% from September 30 an as we continue to deploy the proceeds from the August bond issuance. Our securities portfolio grew 29% or $638 million during the quarter. Our balance sheet loan portfolio grew 15% and our real estate portfolio expanded by almost 18% to $769 million by year end.

Fourth quarter core earnings were also impacted by higher interest charges related to the August issuance of $300 million of seven year unsecured corporate bond and the extension of other debt maturities as Ladder continued to enhance the durability of its funding base. In review of trends reflected in the fourth quarter income statement a number of items stand out. Consistent with past quarters, Ladder maintained a steady stream of net interest income reaching $30.9 million in the fourth quarter almost 77% higher than in the same quarter a years ago. During the fourth quarter we have continued to expand our base of interest bearing assets to approximately $4.8 billion. Reflecting the impact of acquisitions in the second half of the year the firm also increased our stream of operating lease income to $17.8 million for the quarter an increase of 39.1% compared to $12.8 million in the third quarter of 2014. Expenses for the quarter were $48 million, $5.8 million more than in the third quarter reflecting an increase in professional fees related to electing REIT status. Because these expenses are nonrecurring, they are excluded from the calculation of core earnings.

Our income tax profession for the fourth quarter was $2.8 million reflecting an effective combined rate of 19%. This represents a tax provision on the 51.9% of Ladder's income attributable to Class A shareholders of Ladder Capital Corp. In terms of balance sheet metrics, as of December 31, 2014, approximately 96.6% of our debt investments were senior secured, which is consistent with the senior secured focus of the Company. Our senior secured assets plus cash comprised 80.9% of our total assets base. 81% of our security positions were rated AAA or backed by agencies of the U.S. Government, 98.4% were rated investment grade. The weighted average loan to value ratio of the commercial real estate loans on our balance sheet was approximately 63% down from 69% in the prior quarter. Total unencumbered assets including cash was $734.1 million at year end reflecting a 1.1 to one ratio to unsecured debt outstanding. The debt equity ratio was 2.8 times up from 2.1 times at the end of the third quarter and 1.9 times at the end of the 2013 reflecting the deployment of the proceeds from the August bond issuance and the resulting assets base growth.

With regard to financing 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 12/31, we had $4.2 billion of debt outstanding committing financing availability of $1.1 billion for additional investments. In the fourth quarter of 2014 we increased our FHLB borrowings to $1.6 billion compared to $1.3 billion at the end of the prior quarter. The increase in FHLB borrowings was required to support the growth in Ladder's securities and loan portfolios. As of the end of the year $739 million of the funds borrowed from the Federal Home Loan Bank had remaining terms of over one year. To date we have financed over $1.2 billion of multi family mortgage loans via the FHLB.

During the quarter we added almost $50 million of long-term nonrecourse mortgage debt on our real estate and we extended the maturity date of one of our loan repurchase facilities. We also increased its maximum borrowing capacity from $300 million to $450 million.

So looking back on 2014, Ladder achieved a number of objective that position the firm to be even more capable, more competitive and more profitable in 2015. To some extent Ladder started to realize the related benefits in 2014 but the impact should be greater as they continue to be realized over the course of a full year. Ladder established itself as a high volume originator of commercial mortgage loans. The $4.5 billion of 2014 originations reflect add 82% increase over the prior year in a market that did not expand to the same degree. Ladder established itself as a competitive reliable originator of large size commercial mortgage loans. As it originated five loans that exceeded $100 million in size and totaled $1.23 billion in 2014. Ladder demonstrated an ability to access the securitizations markets on a much more frequent basis and on a higher volume than ever before with (Inaudible) ten transactions during the year and securitizing almost $3.5 billion of loans. Ladder demonstrated that it could operate at this higher level of volume without compromising its credit standards.

Ladder accessed the capital markets and strengthen its funding basis twice in 2014 for the IPO. In February we raised over a quarter of a billion dollars of new equity and the $300 million long-term bond issuance. In addition to the seven year bonds, Ladder extended the maturities of its bank facilities, added long-term nonrecourse mortgage debt on its real estate investments and expanded its usage and maturity profile of its FHLB borrowings. Effective 1/1/15, we implemented the REIT there by creating a more efficient financial structure for our shareholders while allowing the Company to retain sufficient capital to serve our investment needs.

Finally the flexible strength of Ladder's business model was again confirmed with Ladder shifting its focus between the corners of its strategic triangle businesses as market conditions changed. Allowing the Company to realize a year-over-year increase in core earnings despite narrow profit margins in some of its key businesses. As we entered 2015 we have a much more capable and competitive firm than we did a year. With an even stronger capital base financial more efficient REIT based structure all of which was built with only modest additional staffing. We feel well positioned to benefit from improvements in market conditions as well as from uncertainty that may develop in those same markets.

In conclusion we are pleased to turn in a profitable quarter in which we continue to build up our predominantly senior secured assets base to position Ladder for success in future quarters. And with that, all turn it over to questions and answers.

Thank you. (Operator Instructions). Our first question comes from Steve DeLaney with JMP. Please proceed with your questions. Your line is live.

Good, thanks. Good evening everyone. How are you? Brian, appreciate the detail commentary on the conduit activity in the fourth quarter. We had seen some lower margins because of the volatility that you referenced. You gave us the margins but could you can confirm or mark -- I'm backing in took your full year net gains effected for hedges but I don't think in the press release you actually gave a fourth quarter. I'm coming up with $27.7 million in 4Q for net gains. Does that sound accurate?

That's correct.

Okay, great. And then bigger picture, Brian, this was obviously a big year in lending. But just within the conduit business it looks like the volume was up about 60% in 2014 to $3.5 billion. As you see the market and you look out for this year can you give us a sense whether you feel that same volume or possibly something larger is achievable in 2015 on had the conduit side?

Sure, Steve. I think that it is always hard to tell because it is a function really of interest rates, but given our size now after the public offering and the bond deal, we can certainly now do numerous larger transactions than we were able to do prior to that. So we can ramp up volume pretty quickly, but I tried to point out that the single assets securitizations especially when they are very low leverage transaction and there are a few once in a while they don't make quite as much as the conduit business does. But I would say probably in the neighborhood of about the same to slightly higher I would expect. We're a little bit concerned about credit quality right now. And I think we have made a concerted effort to avoid transaction that look problematic even if it is just from the standpoint of credit but also from the standpoint of we're just not making enough of a margin to trance act if we can deploy that capital in to other type of business lines than that's what we'll do. So we're not overly concerned around volume we suspect it will be slightly higher than it was, but again it is not a statistics that we chase.

Okay. And I think Marc mentioned that of the ten securitizations in 2014, two were single assets. Do you have the dollar amount of those? I guess (Inaudible) said was $450 million but I can't recall. I think the other was the New York office that we're not --

You're correct. It was $350 million.

$350 million and $450 million?

That's correct.

So $800 million of the $3.5 billion. A little over 25%. Should we -- and I know this is like we're just trying to really finesse this but if we were going to -- would you think that the single -- are you seeing more single assets opportunity and should we factor in even if you did 3.5 billion dollars or $4 billion would it be wise for us to factor in the possibility of more single assets deals compared to this past year?

There $300 million, $400 million, $500 million each so if you miss one, you can miss this number by a mile which is why I hesitate to get over speculative and you could also double it pretty quickly too. We have being seeing some -- you have to remember too there are a lot of transaction that take place in the single assets market that we really don't see. Some of the very large hotel deals that are being finance over at Blackstone I think. We generally don't participate in this those. They have lines to borrow to banks that they like to take care of. We can participate in them in some fashion. I think we've got tremendous strength when it is a single assets to a Company that wants to borrow for five years at low leverage. When the are B pieces and mezzanine and preferred equity tranchs we tend to be less effective. But I would say the number I keep in my head and I have no way of knowing this is about $750 million in single assets securitizations I think we'll do this year.

Okay, great. Appreciate the color. It is very helpful.

Sure.

Our next question comes from Dan Altscher with FBR Capital Markets. Please proceed.

Good afternoon everyone. Appreciate you taking my call. A little bit of a different gear as opposed to the conduit business, securitizations. (Inaudible) purchased a lot opportunistically. Just get a little sense of what you bought out of the rating, the tenor, what you're expected return on (Inaudible) was there? Thanks.

I would break our securities purchases in to two themes. One, is when we have a lot of cash around we will many times invest in short-term securities, the one and two year, maybe three year AAA bonds. And those are not really intended to make money on a sale but they're really designed more in a better than cash model. Rather than earning zero we'll go in and lever those at the Federal Home Loan Bank very effectively. We try to get a levered return of about ten percent on average. I would say the vast majority of everything we buy is AAA. It is probably as 97%, 98%. And the other part of the theme there is once in a while we just see transactions that look cheap. We won't buy things that we think are cheap because the credit is mispriced. We'll occasionally buy large pieces of securitizations when we think that the market is just too thin or not understanding the transaction. So I think in November the floating rate market got very messy and what happened was the floating rate (Inaudible) is really designed to be sold AAA to banks because they are LIBOR floaters but there were several transaction with large hotel concentrations that the banks really wouldn't buy and we participated in the purchase of those as they progressively cheaper as the marketing effort went on. That was a particular bad time and those are the only floaters that we've really bought.

The other are just when we see things that look like their mispriced and we were buying some ten year securities AAA in the 90s and 100. We saw some five year bonds at 100 over at one point also. Those are historically very wide margins. We didn't think the was anything fundamentally wrong with the market. We just felt like there was too many securities for sale for too little receivers of paper at that time, so we stocked up on those. I think largely what is going on right now some of the transaction that are being placed in the market with the insurance companies with new allocations you may have seen the ETFs are picking up a lot of cash. So we're feeling like there is more demand now. When you get towards the end of the year especially in a year like last year some funny mechanics can take place. So we try to take advantage of those and like I said are very opportunistic. We believe that rather than trying to create yield through buying securities that are liquid and high risk we would rather buy AAA and take advantage of our financing lines to leverage those comfortable in to high rate returns. So we try to get about ten percent return on AAA.

That is great. I appreciate that. I guess switching gears back to conduit business. I think anyone is going to deny the business -- certainly there is a robust amount of volume but the margins are challenging. Am I still right to think that this is probably still the best use of your capital when it comes all in. I mean if you can turn five, six, seven securitizations a year (Inaudible) best use of your capital regardless, right?

That's true. From an ROE standpoint certainly. We participated in ten securitizations if you run the numbers on that even at 2.5 points you're making close to a 50 ROE so it is a very attractive business. From our standpoint we suffer more when we don't match terms of other lenders because we are consider about the principal column. It isn't so much the REIT column that bothers us it is when assets are being over leveraged or structured poorly that we try to avoid them. So I think there is a limit to how much we'll sign up just because of our credit skills. Sometime we like to say we're burden by common sense. So to the extent that borrowers are borrowing money with reasonable credit standards applied and there are plenty of them don't want to be over levered than I think we'll be very active. It is absolutely the highest ROE product we own.

Okay. And then one final one from me. Now your a REIT year I imagine shifting more incremental capital in to REIT business REIT qualified business would make a lot of sense. Over the last two quarters we have seen a lot more actual hard assets real estate purchases into net lease. We think about capital deployment going forward in to those REIT businesses should we think about real estate as really being the primary or still on balance sheet loan originations?

I think it will be a split between those. I think when we purchase net lease properties there have to be a few dynamics that exist regarding how we can finance them, the quality of the tenant in the space, the real estate profile has to make sense from a dollar per foot standpoint. To the extent you lose a tenant you don't want to lose large amounts of principal invested. So we're pretty sticky around the credit we will finance. It is not necessarily rated credits but it is credits that we're comfortable with. And it is the jux position of the cap rate, the interest rates we fund at and how much we can export in to the CMBS market when we securitize those debt instruments. So I think as you see a flat yield curve, I think you could see us very active in net lease space because what happens is the property cap rates don't come down as much as the prevailing interest rates in the mortgage market. On the other hand, the bridge loan market is a business that is still just not terribly competitive on an isolated basis. And I think that is largely as a result of the banks not being terribly involved in those businesses because they are often times building that have challenged cash flow and I think from a regulatory standpoint they don't like it. So I would expect to continue to see us we'll always look to put durable, sustainable, high quality cash flow on our balance sheet. In the REIT format, yes, you're correct you saw us picking up those businesses in the last couple of quarters in anticipation of conversion and the markets despite the fact that the debt market from the conduit standpoint got a little bit aggressive and difficult those are exactly the markets you want to borrow money in because as a lender you don't like lending money there because you feel like it is a little uncomfortable, but as a borrower you certainly enjoy that. So we take good pains to eval ourselves to both products.

Thanks for all the comments, Brian. I appreciate it.

Sure.

Our next question comes from [Steven Won] of Deutsche Bank .

Hi good afternoon. I think the conduit questions have been covered. To follow-up on your owned balance sheet, REIT portfolio is there a leverage level you target for given high quality assets we should think about as your portfolio ramping to that leverage number or how should we think about that balance sheet portfolio growth over the balance of this year?

Sure, Steve. Our bridge loan portfolio which is definitional is not just real estate but it is also the endorsement of a business plan because you're expecting that borrower to do something not just sit there and collect rents. So we underwrite the borrower closely. And as a result of the lack of the liquidity in that space most of the Lets are much lower than they would be in the conduit space. I would tell you we generally target about 65% but we can sometimes go to 85% also. I don't see us chasing the market to do that. We'll usually do that when we feel like there is a great opportunity for us to have equity like returns as opposed to normal standard debt returns. And the other thing we do to try to create good value is an often times we'll relax prepayment penalties because we feel like when we do that we get the funds out of the business because the funds deploy capital and it has to be out for a period of time otherwise when it pays off they have to return it to their investors. So sometimes we'll create options for the borrower and what we're really trying to do generally is to convert that loan into a conduit loan that is a very efficient execution for us. If something comes in to our balance sheet for a year or a year and a half and then converts to a fix rate loan that is where the ROE really gets turned up at Ladder.

Great. And for your equity investments specifically the multi family down in Florida and investments in Nevada can you give us an update there on those properties and cash flows and any sales that have taken place.

Sure. I may ask Marc Fox to help me there. I generally know how there going and there going right along schedule. But Marc you have some specifics that you want to give them to him.

Sure. We have two complexes as you know. In Las Vegas we have Veer Tower. Veer Tower in the quarter we sold 17 units and for the year we sold 113 units. The gains we had on those units at Veer Tower were $2.7 million and on a core earnings basis and through the full year there was $17.9 million.

I think you're asking about dollar per foot aren't you, Steve?

Yes, valuation of dollar per foot would be a great way to look at it.

Do you have it, Marc?

Yes, absolutely. Our remaining investment basis is $306 a square feet. When we started out it was $296 a square feet we have pretty much been in that kind of range. We have 220 units left at Veer Tower. We have been selling the units recently for approximately anywhere between $482 a square feet to over $5000 square feet.

The Las Vegas property is appreciating rapidly and those prices have been increasing. Whereas the Florida it is very basic housing. They are all the same size, there is no pent houses. SO the profit margins are fine but everything prices the same way. I believe in Florida we own them at $225 a square foot we tend to be selling them at $315 to $330 a square foot. Whereas in Nevada we picked them up at $190 a square foot originally and I know I have seen some sales go by at over $600 square feet but at the margin I think they're probably $450 to $500 in Las Vegas.

That is great color. I appreciate it. Finally id you could just talk about what you are hearing on the FHLB. Clearly the Sunset provision for REITs over five year. I know they are in process I think they have been in the process of receiving comments or letters on the topic. Can you talk about what you're hearing and your views of how that may play out going forward.

I won't speculate. We hear things all the time, but often times they are turned around in just a few days. I can tell you as of now we have been able to in the year increase our size limit with the Federal Home Loan Bank. I think our limit now is $1.9 billion and we primarily use it for securities as well as first mortgages that we are going to secure ties. As far as the political end of things I don't hear anything other than the common period has ended. The five year Sunset situation is something we certainly view as a possibility also it does seem as though it is less urgent for some reason. We don't quite hear as much about it at all. On the other hand, it is one of our sources of financing and obviously we have bank lines we have unsecured debt also. It is just one of the things we use and we are hopeful and we have been borrowing by the way very comfortably in excess of five years. So if that were to happen I suspect it is a situation not problematic but it will have to be dealt with over a five year period of time and I think there is a reasonable possibility that nothing changes.

Great, appreciate the comments there. Thanks for taking my questions. Have a good evening.

Our next question comes from Jade Rahmani with KBW.

Thanks for taking the questions. I wanted to ask about your views regarding the current business mix and whether you are considering avenues to further diversify the Company beyond bridge loans and at least. For example, do you think that the BP spying and special servicing business is attractive. And also I would be curious about the GSE multi family lending business, which also would generate conduit income.

I'll try to parch those, jade, in one by one. We're always looking for other alternatives where we can build out the product suite and diversify our income streams. We do have a lot of expertise in the building on residential real estate as well as multi family as well as B pieces. I think there all very different products. The GSEs are clearly trying to become more active. I don't see us getting into that business in an aggressive way. Keep mind we operate from the standpoint of an investor not from the standpoint of a competitor tor. So to me when you've got a Government guarantee that is not even implicit it is explicit at this point I think for the private sector to try to compete With that, would be a little bit crazy. If we wanted to get into the lending business where we deliver to those parties that is a very high volume business. And it probably does dove tail nicely with owning a servicer which we do not presently. So we'll always look at things like that. There is nothing on the horizon right now.

I think if I had to name some things that are sort of interesting but I don't want to indicate to you that these are likely to happen Europe is certainly a more attractive column in the things that you're naming. B pieces are something that we feel very well suited for to invest in. They are still a very cyclical instrument and in addition to that with the new retention rules these B pieces are going to get larger so the may be room for us to play almost in a senior capacity in the B piece market. Sounds like it like that doesn't make sense but I think that we may very well team up with some B piece buyers because we do have permanent capital. And if we were to do that, we might very well get into the special servicing business which acts as a very nice hedge during a downturn in your stream of cash flow. But I don't have any of those on the front burner right now. And lastly I think the world of assets management always pops up on our radar. Often times we are asked to manage money for people and we haven't done that just yet expect in some small private accounts, some side cars but we generally don't want to create a situation where we have any competition with those investment vehicles. So if we were to create a side car that invested in B pieces or mezzanine loans, then we would probably put all of our B pieces and mezzanine loans into that fund along with those investors. I think that is a possibility down the road and we might do it.

Great. Really appreciate that. Looks like you bought back some debt during the quarter and I wanted to see if that is something you think you might continue to do?

Well, there was unusual moment in time you remember when the high yield market got into some free fall specifically related to the petroleum bill and the gas makers. So what happened were those bonds were dropping dramatically in price and some high yield players were getting margin calls on those so they were selling assets that were trading at nice prices. Given that the bonds that we bought are five year bonds that were done in 2012, so they're going to be refinance or bought back in 2017 anyway. They spread to a two year which is the way we looked at it was very wide and we felt like Ladder was a very comfortable credit. I don't think anybody was selling it because they thought we were having a problem. I think they were raising money because of something that was going in the oil patch. So we are rather agonistic as to our investments if we can make the right rate of return so we acquired $5.5 million of those. Would we buy more, sure. I would be happy to. We have to refinance them all anyway one day. But if we are able to deploy capital at acceptable levels obviously we would not do that.

Okay. With respect to equity issuance you guys have been extremely disciplined in my view since going public. I wanted to see if you could provide your views around barometers you use in deciding whether the company might issue equity or issue equity linked capital.

I think it is really a function of what's available to us from a capital standpoint and what's the opportunity available to us. I think if you just look at your cash position it might indicate to you that at some point we're going to need some more capital. But keep in mind we have a very large portfolio of securities many of which are very short in duration so we would probably sell those before we would go to try to raise more equity in the capital markets. The debt market is also an alternative to us. We're at 2.8 times leverage presently. But we don't generally like it. We prefer to avoid it if we can. We're going to try to grow this Company for as long as we can with acceptable returns organically. But we don't have any plans right now for issuance, but should we have a need for additional capital it is certainly one of the things we would consider. But I think you do know that management as well as many of our Board members are significant shareholders in this Company so for the very same reason that shareholders don't like when you continuously issue we feel the same way about that. I think you also have to I think you have to take in to account that -- I'm trying to think of the right way to say this. The short story is I don't see that in the very near future.

Okay. Thanks for that. And your comments on credit quality I wanted to see if you could elaborate. What do you think the greatest area of slippage is? Do you think it is in the credit metrics such as LTV debt service cover ratios or do you think it is to do with the actual underlying real estate being of a lesser quality?

I think it is all of the above. I think the automatic default stance for most originator right now is lets give the borrower an interest only period. Many of the loans that did not get in to trouble in the last downturn, were really as result of the amortization associated with some of those loans. I don't feel like hotels are terribly over leveraged. But I do see some retail products that are a little scary to me. I think that the consumer is doing okay, not great, and I think gasoline prices really do matter especially in retail. But we are seeing some pretty stretched LTVs, we are seeing interest only periods where the borrower is barely covering his debt service now so we think about what happens when it is 5%, 6% rates if he can't grow the rents how do you get out of the loan and I think that is a concern. So if I had to tell you a place that I'm more concerned than others it is in retail (Inaudible) than apartments.

With retail are you referring more to strip malls and that sort of thing rather than actual shopping centers or do you group those together?

I think is very specific, real estate is very local. I think that there are certain tenants that we have more concern about than others seem to. We do believe there could be some bankruptcies coming and in some tenants that are fairly large occupants in some of these shopping centers and as a result we are a little cautious around that. We don't generally tell people what we think those names are. But you saw in our net lease portfolio we were buying a lot of grocery anchors we like necessity retail as opposed to discretionary retail.

Thanks very much for taking the questions.

Sure.

(Operator Instructions). Our next question comes from Joel Houck of Wells Fargo.

Good evening. Could you talk about the spread widening we saw in December and the impact if any that had on commercial bank activity in the CMBS market that spilled over into 2015?

My observations, Joel, were I'm a little surprised at what I saw. We saw transactions, there was frankly too much supply going into year end. And I think that combination along with what was going on with oil prices the high yield market was causing spreads to widen unnaturally I would say into December. The market seemed to be originating loans anticipating a tightening of spreads in to the new year, into 2015. The market was right, they seemed to have tightened. And I think it was an over supply problem not necessarily a credit problem anywhere. On the other hand I think at Ladder you add the way that impacts us is if we think AAA are going to tighten and that's most of the capital stack in a securitizations we don't write loans that we think are going to tighten and we have to be ripe for 120 days when we securitize them we'll simply buy the AAAs and that's what we did. So we would just express that view a little differently than some lone originators. But we did see loan originators pricing loans at extraordinarily in the profit margins based on where transactions were taking place at the time. Did that answer you?

That makes sense. That's very helpful. Thank you, Brian. . If we could switch gears a little I don't know if you gave the exact percentage of floating rate loans within the on balance sheet portfolio, but I guess more broadly how should we think about Ladder's interest rates sensitivity if we do see Fed increases in 2015?

I'll let Marc answer on what we're holding in inventory. But I think you have heard probably from some other mortgage REITs that there is a view that the floating rate assets will increase cash flows because the interest rates will go up. That is one of those double edge swords, you don't want interest rates to go up to the point where you're having a problem refinancing it because the rates are too high. But I think at Ladder we generally have LIBOR based floaters with a floor which is fixed rate. And for I think our rates would not start increasing until LIBOR went up by 50 basis points because we put a little bit of room into where LIBOR is presently for it to move up without changing the rate. But if LIBOR were to get up around 1.5% or 2% we would certainly see an increase in cash flow and net interest margins for sure. So, Marc, if you want to talk about the coupon or the volume, how big is our position in.

First mortgage balance sheet loans are $1.358 billion at the end of the quarter and the mezzanine loans are $162 million. And on those rates as we mentioned during the call as we have been originating, the ones we have been originating have been a spread of about 6.5 points over LIBOR. I don't know what else you want.

The mezzanine position has a rate between 10% and 12%..

6.5 is the weighted average (Inaudible).

That's all I need. Okay. And then lastly the timing of your CMBS purchase are due in Q4 resulting spread tightening (Inaudible) you can quantify any positive impact to book value thus far in Q1?

We bought them two different ways. We bought short-term floaters and five year AAAs. We bought an occasional group of single assets securitizations that we felt were pretty attractive in the 90s. But keep in mind we also owned a very large portfolio of loans at the time so they probably moved back out to where we bought them way back when. So I would say it certainly has been a positive impact in the first few month of 2015. But given the large portion of our assets are five years and lower. I don't think it is a very volatility number. I would say up, but not up significantly.

Okay. And I apologize. One last clarification, I think earlier on the prepared remarks you mentioned a payout ratio of 50%, and I assume that is on the total core EPS not just the taxable portion of your estimated earners for 2015.

What we were focused on was on the core and also factoring the fact that it is our intention as we discussed on our REIT announcement call to pay out $100 million worth of dividends over the course of the year in cash and the remainder in stock

Okay. Thank you very much.

At this time I would like to turn the floor back over to Brian Harris for closing comments.

That's it from our end. I appreciate you taking the time to hear us today. And we look forward to operating as an internally managed REIT going forward and picking up what we hope to be is a group of shareholders that we haven't met yet. Thank you.

Thank you. Ladies and gentlemen, this conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.