Ladder Capital Corp (LADR) 2015 Q2 法說會逐字稿

Good afternoon and welcome to Ladder Capital Corp's Earnings Call for the Second Quarter of 2015. As a reminder, today's call is being recorded.

At this time, I would like to turn the conference call over to Ladder's Associate General Counsel, Ms. Kelly Porcella. Please go ahead, Ms. Porcella.

Thank you, and good afternoon, everyone. I'd like to welcome you to Ladder Capital Corp's earnings call for the second quarter of 2015. 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 June 30, 2015. The earnings release is available on the Investor Relations section of the Company's website and our quarterly report will be filed with the SEC later this week.

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, 2014 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 statement 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, Kelly. I'd like to take you through some of the highlights of the second quarter and then I'll turn you over to Marc for a more detailed discussion of our results. I'm pleased to report that our core earnings for the quarter were $52.1 million or $0.51 per share. This is an increase in core earnings per share of approximately 34% from last year's second quarter. Our annualized after-tax return on average equity was 13.2%, up from 12.6% in the first quarter up from 12.6% in the first quarter for an average in the first half of 2015 of 12.9%. Our return on equity is one of the statistics that we pay close attention to at Ladder. We also paid a cash dividend of $0.25 per share to holders of record on June 15. While we're on the topic of dividends, I'm also happy to report that we are increasing our regular quarterly cash dividend by 10% to $0.275 per share commencing in the third quarter. This change reflects the solid operating results we've been posting and our positive outlook for the future.

I also have some good news to report regarding the Federal Home Loan Bank borrowing capacity. In the second quarter, our maximum borrowing limit was raised to $2.25 billion from our previous limit of $1.9 billion. This borrowing increase of $350 million is a clear signal of our continued and growing relationship with the FHLB. The Federal Home Loan Bank's mission is to provide reliable liquidity to member institutions to support housing, finance and community investment. And we are pleased to be a part of their mission. This facility allows our member subsidiary to match fund many of our assets borrowing at relatively low, fixed and floating rate for both short and long-term maturities.

Now let's turn to some of our business lines. Our loan origination business in the second quarter was strong. As we closed over $1 billion of new loans, we originated $740 million of loans for securitization and $276 million in balance sheet loans. This pace continued into the third quarter as we closed on an additional $306 million of conduit loans and $121 million of balance sheet loans in the month of July.

Sales of loans we contributed into securitizations in the second quarter totaled $487 million and we are pleased to report a gain on sale profit margin of 4.6% or $22.6 million. As quarters go, the second quarter was a relatively difficult one for many mortgage lenders with spillover effects from the China equity meltdown, the most recent Greek financial crisis and the Federal Reserve consistent statements that they will raise short-term interest rates before year-end.

With all the capital markets turmoil, we are especially pleased with our strong results in the quarter. We have always prioritized profits rather than volume, and in the second quarter, we think this disciplined approach requiring a proper balance between risk and return served us well. Our balance sheet lending business has also been active with a June 30 portfolio of $1.7 billion in loans and I would like to note that $1.4 billion of these loans are floating-rate loans. Our weighted average spread to LIBOR for these loans is 618 basis points. This portfolio produces strong recurring net interest margin and positions us well for a rising interest rate environment when and if it comes. In our securities business, our deep credit culture has allowed us to curate a very high-quality portfolio of mostly AAA securities. This selection criteria along with our access to various funding sources has created a very dependable source of recurring earnings at Ladder. At the end of the second quarter, we owned an inventory of securities with a market value of $2.3 billion and a weighted average duration of just 3.6 years. The short duration of the portfolio reduces its price volatility, so rising interest rates are not particularly impactful on this match-funded portfolio. Our securities portfolio generated approximately $13.8 million in core earnings in the second quarter. Our last product line, real estate equity stood at $846 million at the end of the second quarter. We added 13 assets to our real estate portfolio in the quarter, 11 of which were properties with long-term net leases. Our cost was $37 million. We also sold three net leased properties for proceeds of $23 million resulting in a contribution to core earnings of $1.5 million. We also sold 49 condominium units in the second quarter for $18 million in sale proceeds, contributing a core gain of $5.1 million. Overall, I think we turned in a very impressive second quarter, our business model where we respond to actual market conditions and change the emphasis on products in which we invest in real time, has again delivered very attractive after-tax returns on our equity, 13.2% annualized for the second quarter while still remaining very conservative on credit risk and leverage. Our earnings have become increasingly consistent as we built up our re-qualified holdings that produce durable cash flows, as this quarter shows, we can produce solid earnings even when our securitization volumes are light. Since going public 18 months ago, we have delivered six quarters of consistent core earnings ranging from $48 million to $62 million with a quarterly average of $53 million. In total, we have produced $320 million of core earnings in the six quarters since going public last year. One final item I would like to mention before I turn you over to Marc is that our Board of Directors has authorized a stock repurchase of up to $50 million. Marc, I'll turn it over to you now.

Thank you, Brian, and good afternoon. I will now review Ladder Capital's financial results for the quarter ended June 30, 2015. For the second quarter, core earnings were $52.1 million compared to $61.8 million in the second quarter of 2014. Core earnings for the six months ended June 30, 2015 were $100.1 million. These results reflect a 13.9% pre-tax return on average equity for the quarter ended June 30, 2015 based on an average shareholders' equity down to approximately $1.5 billion. Core EPS for the quarter was $0.51 per share compared to $0.38 per share in the second quarter of 2014.

For the six months of 2015, core EPS was $0.99 per share versus $0.73 per share in the same period last year. GAAP net income for the three and six months ended June 30, 2015 was $68.7 million and $86.7 million respectively. This compares to $30.2 million and $48.6 million for the comparable periods in 2014. The largest gap to core earnings adjustments related to timing of the recognition of hedge results to coincide with the realization of gains and losses on a disposition of hedged assets and real estate depreciation. Brian covered many data points related to our investment activities. I'm going to focus on a few key elements and themes found in our results that are worthy of note. Core earnings is a pre-tax measure and was $52.1 million for the quarter, $9.7 million less than earned in Q2 2014. In both quarters, we executed two multi-borrower securitizations. But in Q2 of last year, we also executed a $350 million single-borrower securitization on which we earned a net securitization profit of over $11 million.

Although we have not completed a large single-asset securitization yet this year, they are still part of our plan, but they tend to occur on an irregular schedule. The incremental income earned on the single transaction last year is more than the year-over-year difference in total quarterly core earnings. Looking more closely, we can see a number of important trends reflected in the year-over-year comparisons. First, our move to deploy proceeds from the $300 million unsecured bond issuance last August into REIT eligible assets that generate recurring net interest and net rental income is evident as interest income from balance sheet loans was $14.9 million or 75% higher, reflecting a portfolio that averaged $823 million higher than the same period in the prior year.

Interest income from our securities portfolio was $2 million or 11.8% higher in Q2 2015, reflecting a portfolio that was on average $676 million larger than in Q2 2014 despite declining market yields during this period. Net rental income from real estate investments was $5.75 million or 75.4% higher, reflecting a real estate portfolio that grew by just over 50% to $846.3 million over the preceding 12 months. And of course, interest expense also rose as Q2 2015 includes $4.4 million of interest expense related to the new bonds and incremental interest expense related to the long-term non-recourse mortgage debt used to finance the growth in our real estate portfolio. Nonetheless, net interest income shows a positive trend on a year-over-year basis.

Another key theme at Ladder can be seen on the expense side, where we continue to maintain a direct relationship between the achievement of tangible results and compensation. As a result, salaries, bonuses and employee benefits were $10.5 million lower than in Q2 2014, largely due to lower bonus accruals reflecting the year versus year difference in overall profitability and the mix of income sources.

On the balance sheet, Ladder has always maintained a focus on senior secured investments and the application of leverage on a moderate basis. At the end of the quarter, approximately 94% of our debt investment assets were senior secured including first mortgage loans and CMBS secured by first mortgage loans. Senior secured assets plus cash comprised 77% of our asset base. Total unencumbered assets including cash was $768.5 million at quarter end, reflecting a 1.11 to 1 ratio to unsecured debt outstanding, which totaled $694.6 million at June 30.

With regard to leverage, at June 30, 2014, Ladder's debt equity ratio stood at 1.5 times, below the bottom of the two to three times range we have historically targeted. Today, we have a balance sheet that is almost 50% larger and are levered at 2.7 times. Another ongoing theme is that our emphasis on solid credit and underwriting practices has allowed us to maintain our record of having zero loan defaults to date. Finally, our plan to reduce income tax and earn higher after-tax returns for our investors is proving out. Our second quarter 2015 income tax provision was $5.2 million reflecting an effective combined rate of 4.73% in comparison to the 40.84% rate prevailing in Q2 2014. The tax savings have helped us to fund the quarterly dividends initiated in the first quarter. Ladder's core EPS, an after-tax measure, was $0.51 per share, 34% higher than it was in the same quarter a year ago, while after-tax ROE was 13.2% in Q2 2015 versus 10.1% in Q2 2014. It's also worth noting that the expectations we had regarding market and competitive conditions et cetera were very different last year than for 2015. As we entered 2015, we expected lower securitization profit margins than in prior years. We expected more competition for loans, particularly conduit loans. We expected to stay committed to our triangle of commercial real estate investments including conduit and balance sheet loans, securities and real estate. And finally, we expected to incur less tax expense as a result of our election to be taxed as a REIT effective January 1, 2015. Based on those expectations, we target a core earnings of $50.3 million for this quarter. So the Q2 core earnings results reported today actually exceeded our expectations by $1.8 million based on the market and business parameters we expected to avail in the quarter when we prepared our annual budget. I'll now move to a discussion of some key investment activities metrics during the second quarter. We previously referenced our loan production and securitization volumes. In terms of asset yields, the average coupon on loans held for sale that were originated in the second quarter was approximately 4.74% versus 4.51% in the comparable quarter of the prior year. The average coupon on the loans held for investment originated in the quarter reflected a weighted average spread of approximately 8.01% over one month LIBOR versus a 6.01% spread in the second quarter of 2014. The weighted average loan to value ratio of the commercial real estate loans on our balance sheet was approximately 65%, up from 63% as of December 31, 2014, but still at the lower end of our range in recent quarters. 83% 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 3.6 years or 43 months as of June 30 , 2015, down from 49 months at 12/31/2014 and from 52 months one year prior. 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 June 30, 2015, we had $4.1 billion of debt outstanding and committed financing availability of over $1.5 billion for additional investments. During the quarter, we increased our borrowing capacity under the one committed bank line from $250 million to $400 million and increased our FHLB capacity by $325 million to over $2.25 billion. In the second quarter of 2015, we increased our borrowings at the FHLB to $1.6 billion.

As of June 30,2015, $635 million of funds borrowed from the FHLB have remaining terms of over one year. In conclusion, we're pleased to turn in a profitable quarter in which we exercise the firm's operating flexibility to rotate between our complementary commercial real estate products to position Ladder for success in the future quarters. And with that, I'll turn it over to question and answers. Thank you.

Thank you. We'll now be conducting a question and answer section. (Operator instructions) Steven DeLaney, JMP Securities.

Good evening, everyone, and congratulations on another strong quarter. We noticed that your real estate held for sale increased to about $49 million at June from $22 million at the end of the third quarter. I was just curious if you could comment on with that property, what you're looking to do there in terms of what type of property you are looking to sell and reposition that capital?

Hi, Steve. This is Brian. I think we purchased one of the net leased properties with a short lease and we were anticipating that the lease might be longer. So when you see that on held for sale, it's really moved over into the TRS whereas Marc is looking at me funny. So, go ahead Marc.

Yes, I think that was a case in one of cases by I think in this particular business, this is the properties that we have for sale that we have under agreement and it's a joint venture property and so we have it under agreement and we're expecting to sell it.

Hi, Steve, my thought there. That's a property that is for sale with a hard deposit that should close in the third quarter.

Great and we noticed that you continue to acquire and rotate in and out of that, I was just kind of curious about the -- you've been doing more acquisition, I guess, in sales at least with that asset class. That was really a lead into my big question, Brian, and reading a lot out there and I think any time people start talking about interest rates going higher, they start talking about where the bubbles or some asset price is toppy, we always come back to commercial real estate. You're old enough to have been to a few cycles and I was just curious if you would give us your thoughts on maybe what inning you think we're in in terms of the commercial real estate property cycle in terms of both prices and investment activity?

Sure. I think we are going through a secular change in some real estate products. So for instance, I know one of my concerns is the very high-end residential condominium market in places like New York city and San Francisco. I think that those -- I'm not sure they are really residential properties that people plan to live in or rent, but I think sometimes they function as safe deposit boxes for foreigners. So I've seen in New York City that it slowed down quite a bit and I think that probably runs concurrent with the troubles that've taken place in some of the commodity economies, Russia, Brazil, and I know China has certainly backed off a little bit. So we have some concerns there. I've got some deep concerns about certain regional malls, mainly because of the effects of Amazon, but grocery-anchored drug stores and shopping centers, I'm not terribly concerned about, I think apartments are doing great. Many of the formerly unemployed college graduates are now moving out of their parents' homes and finding apartments. So I think apartments are doing quite well. So I don't think you can really broad-brush and pick an inning here, you have to pick what product the high-end market in New York City on hotels. I think there is some interruption going on with Airbnb and a lot of units are available for rental that perhaps not even legally. So we are kind of after -- if you recall 2007, 2008 the teeth of the crisis, we're probably coming up towards the second half of the game for sure, but I think that pricing power in certain sectors is just going to be different this time, you know that office-based people are using much less with more employees and I think that for instance in New York, I will focus on New York because I'm here all the time, they are building the World Trade Center, the Hudson rail yards, Park Avenue has left a lot of space open, as the financial services have shrunk. So I think pricing power is kind of difficult in some of these markets, but that doesn't mean they are about to go and take a header either. I think that there is limitations on how much higher they can go though.

Appreciate the color. Thanks.

Jade Rahmani, KBW

Hi, thanks for taking my question. Your team, yourself as well are considered amongst the best in the CMBS business. So I was wondering if you could provide your sense of what's driving volatility in the CMBS market. Obviously, there is a range of factors, but maybe if you could touch on spread widening trends and conduit margins as well as pushback from AAA buyers and also B-piece buyers on things like cool shaping and increased loan kick-outs. I think it would be helpful to get your perspectives.

Sure, happy to try. I think one of the biggest problems that occurs and these will -- mortgage lenders historically do this everyone once in a while. They will originate quite a bit of loans and they get very aggressive especially when interest rates are low in the beginning of the year, because they are quite attractive from a carry perspective and they have a long time to get out of the transaction going into December. So they put the carry trades on big inventories in the first quarter and then they figure they have got nine months to work out of them except when something like this year happens. And what I think you are experiencing right now as we sit here there is simply too much supply for the middle of August in this type of the market. So while I don't see anything in particular wrong with the AAAs that we are seeing anyway, we are seeing some extraordinarily wide spreads associated with clearing some of these. And so we are purchasing some of them. We have become a buyer of some of these transactions. We think that they have gotten very, very cheap and we will say going into this the second quarter that we are talking about, we were a little concerned about that supply that we saw and we sold quite a bit of our [10-year] of longer duration products. And there were two reasons for that. One is we felt that spreads would widen on the longer duration product, we were concerned about having interest rate hedges on those products if China was going to melt down or Greece was going to be exiting Euro, so we got out of a lot of them and I think I mentioned in my call that our portfolio of 3.6 years is very short. And most of this match fund is at the Federal Home Loan Banks. So we don't have those hedging concerns against interest rates, nor do we have the volatility concerns with longer duration. If you look at the mortgage REITs in the residential space, I think you're seeing some real losses in book value and that's exactly what it's from, that's the extension criteria, when mortgage rates go up like that, prepayments slow down and what used to be a 7-year hold is now a 12-year hold. So that's a very tricky product and that's one of the reasons we're in commercials. So I've tried to answer you there, but I think that the credit quality is okay in most of these transactions, although given that the liquidity and I think I stressed that in our last call, the liquidity out there is really very thin and it's exacerbated further by being in August and same thing happened going into the July 4. It happens every year. So there's just not as many bond buyers out there as there were in the old cycle. So when people talk about the maturity wall and how much origination is going to get done, people forget to look at the buy side of this business and it's much, much much smaller and there is less leverage in it. You don't have the SIV, you don't have the long-term capital, so you have the giant bank funding books that are almost at zero now. So, I think that this market of originators continuously overestimate their ability to sell high-supply pieces of paper. And I think that you're feeling that now.

Thanks, that's helpful. Just based on current spreads and your view of the market view, are you anticipating a pick-up in the pace of securitization?

No, I think it would slow down if rates go higher. You've now got AAA spreads in the low 100s for conduit businesses and sometimes into the not so low 100s for single-asset securitizations. So that can cause some difficulty. Those are historically pretty wide spreads. And so I would imagine that if there is any rate rise here from the Fed, I think that should slow things down a little bit, I think there was a bit of a rush to the door thinking that the Fed was going to move in September. And that's another reason for the outsized supply that we're experiencing in the market.

And just in terms of Ladder's own volumes, which came in a little lighter than where they've recently been running, do you anticipate a pick-up?

Well, we originated over a billion dollars in conduit loans in four months and again we'll do that when we think spreads are wide as we've indicated, you know that we think spreads are wide when we are buying securities. So we were a little hesitant and it comes down to if you've got spreads on AAA let's say again I don't want to get into bond math with too many people, but if you're selling AAAs at 85 over and they go to 100, you'll lose a point, and if they go to 70, you will make a point, I would tell you the probability of it going down to set them, down 15 as a lot higher now than it was three months ago. So that's one of the reasons we will bulk up on our inventory, because we feel like there is a higher probability that spreads will tighten going into year-end, because I think you've got supply destruction as spreads widen and rates rise. Was that too bondy, sorry if it (multiple speakers).

No, no. That's really helpful. And then just lastly, a smaller commercial mortgage rate took a large writedown on Puerto Rico mezzanine loan. I just want to see if you could touch on whether you guys have any exposure in Puerto Rico?

Sure. I actually saw that and I believe it was on a hospitality property, right?

Yes.

Okay. Yes, Puerto Rico, we do have some exposure in Puerto Rico, it's very limited. We have a $15 million mezzanine loan on four shopping centers in four different cities that were lightly occupied four years ago when we made that loan. They are 100% occupied now and the NOI has gone up. So we're very comfortable with it, also not just on a leased standpoint, because there is a lot of lease terms. We actually thought that one of the properties would be leased by a major retailer in the United States and that's exactly what did happen. So we've enjoyed four years of very attractive rates. We have 11% rate on that for five years and then it goes to 12% rate in the next five years. So no, we're not expecting any problems there, the dollars per foot is very reasonable, especially for Puerto Rico, it's very difficult to build in Puerto Rico, because it's a volcanic island. So there is very few flat spots. So retail is very expensive. So this is performing just fine and we have seen no problems, even though we've seen some population decrease in Puerto Rico. But we're not concerned about that. The other Puerto Rico asset we had is one of our net leased deals. We actually just purchased it this quarter. I think we closed it two or three days ago and it's a net leased drug store and the lease is guaranteed by Walgreens for 22 years, the US entity in Illinois. So, we're assuming they'll solve their problems in Puerto Rico in the next 22 years.

Great.

That's our only exposure there.

Dan Altscher, FBR Capital Markets.

Hey, good afternoon, everybody. Just want to clarify a question on the dividend since your dividend mix, I guess, is a little bit different than others in terms of having a cash and a stock component, increasing the cash dividend is pretty clear, but is that coming at a reduction of an expected stock standpoint or has it come -- the way to think about it is as an all-in increase to the dividend, meaning the stock portion is what it is and now the cash portion is higher and a bit incremental.

No, I think it's a swap of stock for cash, it seems like our investors wanted to -- we have been looking at our coverage of our dividend and we think that most of our investors would rather see cash than stock. So it will be a swap. It's not an actual increase, it's an increase in the cash component.

Okay, got it. The other piece of news I thought was maybe underemphasized with the authorization of a buyback, $50 million is not necessarily an insignificant amount, but I guess how are you thinking about the actual ability or practicality of using that, I mean what are you weighing as the risk and rewards of that versus reinvesting the capital back into the parts of the balance sheet business?

Well, I think one of the things we have learned as a fairly new public company is we have got relatively thin float, even though it's a reasonably large market cap. We really don't have a lot of shares outstanding. So we have got some exaggerated movements when there are determined sellers or determined buyers in the marketplace. So I think if we standby and we watch our stock price drop by 25%, we are a million shares traded, when you feel like you're having a pretty good quarter, that's a little bit frustrating while you are on the sidelines. So I think this was simply an opportunity for us rather than trying to figure this out later on, really just to prepare us at any point to step into the market and start acquiring our own stock. Keeping in mind that it has to be attractive from our standpoint, because we can't leverage that stock anymore, right? Because $1 million worth of cash, we can usually buy $4 million worth of assets with. And if we buy $1 million worth of stock, that million dollars is gone and retired. So it'll have a slight impact on our earnings per share, but keep in mind one of our problems here is the float. And so to go in and buy a whole lot of shares isn't necessarily something we necessarily want to do, but at some point if we feel like the value is there and it's better than alternative investments, we will step in.

I shall standby on that, I guess. Just one other point also, I mean the gain on sale margin was really strong this quarter and probably defied all of our expectations generally and I guess [you guys also see] spread widening and that's been ensuing and continues to ensue. The same logic would suggest that for the securitization just completed would have a little bit of a negative impact or a little bit more of a challenging impact on the gain on sale, but your key comment around that will provide us a little bit of help there, I mean because again you kind of did (inaudible) even with spread widening this quarter as well?

Yes. You are on the right track for sure. I think that we always say our best defense is a good basis. So from our perspective, I think the last transaction that we priced was in that context of the low 100s on the AAA 10 years whereas the transaction that we did before that we priced AAA 10 years at 92 overswaps instead of low 100s. So by the same math I gave you before, you can anticipate that that hadn't gone as well as we had hoped, but I'm very comfortable telling you it was in the black.

I think another note I might want to make to you there just to help you understand better is when we look back over -- let's go back to last August of 2014, we participated in I think nine securitizations since then. And last August, we were selling AAA 10 years at plus 90, this August we sold them at a little over 100. So these are historically reasonably wide spreads then there was a little dip-down in the middle of March or so when rates were falling if you remember in the first quarter. But this business has not really had a tailwind anywhere in sight. And I think you're probably seeing that from the other companies you cover. So we have elected to increase our production and we certainly got acceptable margins built in and we are hopeful that after the supply glut clears that going into year-end when people seasonally go on the diet and they don't carry their real estate portfolios over year-end, they sell everything. So we are anticipating that and hopeful that spreads will catch a tailwind and tighten a bit.

Okay. Thanks. That's good. And then just one other quickie. I think you guys have the ability to measure what the gain on sale was on each individual loan that's going into accrual, just the ones that were sold in the quarter, was there anything that was like individually outsized that carried a very large kind of weighted average or was it kind of chunky or was it kind of generally all around pretty good turnout on an individual loan basis?

It was overall pretty -- we tend to originate in a rather granular fashion. Most of our -- you don't usually see us in the top 10 loans and securitizations. But I would say that occasionally we see some unique value, some uncommon value that we feel that will be appreciated more by the rating agencies than what the model spits out. For instance, I'll give you a quick example, years ago, we did a loan on 909 Third Avenue, which had the post office in the [reco]. It's a full city block with a post office, I think, pays $3 a foot. We thought that was worth more than a $9 cap on $3 a foot. So we went and just ignored the cap rate analysis and just said here's what I think it's worth and we explained that to investors and rating agencies and by and large they went along with us. So we're not just model driven. If you put the numbers into a machine, it comes out and it would tell you that full city block on Third Avenue was probably worth about $280,000, which I mean that's an absurd commentary I realize, but on some version, we do see that sometimes that people will sometimes just become a little too model driven and we will step in and see something that's pretty comfortable for us. Keep in mind too if we believe that where we understand it and it just doesn't work out that way, we're also quite happy to hold these things where we're credit driven. So if rating agencies don't agree with us, that's okay too.

Great. Thanks so much, Brian. Appreciate it.

Sure.

(Operator instructions) Joel Houck, Wells Fargo.

Thanks. Wondering there's kind of two countervailing themes here, one is with what's going to happen at year-end and perhaps tightening spreads, but then on the other hand potential Fed increase could widen spread and I guess one may happen before the other, but the question I guess is given kind of the recent spread widening we've seen in the CMBS and the potential those were happening with the Fed, if that were to continue, what's the appetite for increasing the on-balance-sheet portfolio as well as buying seasoned CMBS with wider spreads and then on the flip side of that kind of a longer-term outlook for the conduit pipeline as well as gain on sale into next year?

Sure. Let me take that in pieces, but I think that you have to believe that there were certain amount of buyers that buy these securities from these lenders. And that's usually in the world of money managers and insurance companies. Insurance companies don't hedge. They're just asset/liability matchers, maybe some of them do, I don't mean to paint them all with a brush, but insurance companies when they think rates are going to go higher, they'll sit on cash and hope to invest their money later at the higher rates, whereas the money manager hedges interest rate. So it doesn't really matter where interest rates are, what he is generally interested in is where he can leverage his position and what is the differential between his cost of funds and his coupon that he is earning. So if there is a belief that rates are rising or going higher and which we are experiencing right now, I think that that's a common sentiment. You are seeing some of the insurance companies sit down and that's why some of these single-asset securitizations there on very high-quality buildings are not doing well, because they don't want to hedge those positions. So ultimately, when they take these high-quality assets and they put them out there at certain prices, they are really dealing with money managers rather than insurance companies and that causes widening. There is also -- in the longer-term picture, we've got a large amount of maturities that I think everyone on this call is probably pretty familiar with on some level, that are simply going to mature whether interest rates are higher or not. So there is a natural demand for lending products, but I think that you've got to get the equilibrium between the supply side and the demand side straightened out and I think that there has been a fairly consistent mismatch there between lenders that are too aggressive on spreads and don't really think things can widen and the demand side of the equation. So I think that we were very shy around origination here at Ladder in the fourth quarter and the first quarter, because as I am sure I said on these calls that a lot of lenders weren't necessarily making bad loans, they were just making loans that did not appear to be designed to have too much of a profit margin or let me not say profit margin, let me say cushion of error. So I think that a lot of that pain is being taken right now, but if spreads were to go to 160 and interest rates will go to 5.5%, the business still works. I think that what you have is lower prices, because people -- interest is just raw material and a purchase. And when you have to pay more interest, you have less available cash flow for investment. So as interest rates rise, you would expect to see some prices fall, but as a distributor of those cash flows, it's always easier in lower interest rate environments than higher, but it works just fine in higher interest rate environments also. Our Company, our balance sheet business, which is much bigger than our conduit business, about $1.4 billion of $1.7 billion is LIBOR plus 618 was a floor of some number, call it, 7% or 8%. So we are not terribly exposed to interest rate movements and we have a short securities book, which we feel won't be impacted by it, and if we wanted to sell those securities, they are very short, very easy and that is what insurance companies will buy now, because it doesn't have any duration to it and we think that we can raise cash that way and then go invest on the longer end of the curve when the appropriate spreads are there. And we feel like they are there now.

Thank you. We have no other questions in the queue at this time. I'd now like to turn the call back over to management for any closing comments.

All right. Thanks, everybody. I appreciate you being on the call with us today and look forward to the next one. Bye bye.

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