Ladder Capital Corp (LADR) 2016 Q4 法說會逐字稿

Greetings and welcome to Ladder Capital's fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kelly Porcella, General Counsel. Thank you, Ms. Porcella. You may begin.

Thank you, and good afternoon, everyone. I would like to welcome you to Ladder Capital Corp.'s earnings call for the fourth quarter of 2016. 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 year ended December 31, 2016. The earnings release is available in the investor relations section of the Company's website, and our annual report on Form 10-K will be filed with the SEC later this week.

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

I refer you to Ladder Capital Corp.'s Form 10-K for the year ended December 31, 2016, 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are contained in our earnings release, and are otherwise posted to our website, www.laddercapital.com. With that, I'll turn the call over to our Chief Executive Officer, Brian Harris.

Thank you, Kelly. I would like to start today by highlighting a few items from the fourth quarter of 2016. After that, I will recap the full year that just ended, and note some of the more important data points and trends as we look back, and then relate some of those to how we see things developing in the year ahead in 2017.

In the fourth quarter, Ladder reported core earnings, a non-GAAP measure, of $44.6 million, or $0.37 per share. During the quarter, we participated in three loan securitizations contributing $663.8 million of loans, producing a gain on sale of $18 million for a net profit margin of 2.71%. At the end of 2016, our undepreciated book value was $14.76 per share, while our GAAP book value was $13.57 per share. Our annualized after-tax core return on equity for the quarter was 10.8%, and for all of 2016 it was 10.7%.

At year end, our debt-to-equity ratio fell to 2.6 to 1, largely as a result of $607 million in securities either being paid off before their maturity date, or sold by us in the fourth quarter. This reduction in securities inventory has continued into the first quarter of 2017, with a further decrease of $324 million in the first six weeks of this year. So we have either sold or seen unscheduled payoffs of $931 million from our securities inventory over the last 4.5 months. As of last Friday, our debt-to-equity ratio had fallen to 2.5 to 1. We began to sell some of our securities in the fourth quarter in response to short-term interest rates rising and to enhance our liquidity as we approach April, when our more expensive corporate bond becomes callable.

Loan origination in the fourth quarter was skewed more towards balance sheet loans, with $438.4 million originated and $263.2 million in loans held for sale. This trend has continued into the first quarter of 2017 also, with $129.5 million in balance sheet loans closed through last Friday, and $45.6 million in loans held for sale.

I hesitate to draw too many conclusions from these production numbers over 4.5 months, given that we had an election result in November that surprised many market participants, accompanied by a robust rally in stocks, along with rising interest rates into the end of 2016. Also, let's not forget that new risk retention rules for issuers of securitizations went into effect in late December. Risk retention rules and how market participants interpret them have put the conduit business into a state of flux, and has already caused numerous originators of loans for securitization to exit this business line.

At Ladder, our overall permanent capital model positions us nicely to not only deal with the new changes, but to thrive under them. We have a solution to the new regulations. While the jury is still out on which risk retention model to use, we are favoring the so-called horizontal method, where we would retain the bottom 5% of the securitization. We are able to create pools of loans, where all of the loans in the pool have been originated by us, and we refer to this as the Ladder-only type of securitization.

While this process allows us to operate independently of securitization partners, we would note that this type of transaction would be in addition to, and not instead of, selling loans into deals with other loan originators like we have in the past. We like having the flexibility to securitize our loans under both formats.

Two of the great barriers to entry to investing in high-yielding horizontal B pieces on pools of loans are: one, due diligence costs, because investors are making relatively small investments in many different loans and need to evaluate each property associated with the various loans; and two, the need for permanent capital structures, given the requirement to hold these investments for five years. If Ladder retains all or part of the horizontal B piece, this may negate how we presently book gain on sale, because under accounting rules, we will not be given true sale treatment while we are holding the controlling class of bonds.

Interestingly enough, our quarterly gain-on-sale business has been difficult for analysts and investors to model from quarter to quarter, since constantly changing market forces impact this calculation in real time. By retaining the horizontal risk piece, we would then be creating high-yielding investments that would have predictable and sustainable cash flows that last for up to 10 years, rather than booking gain on sale as we securitize loans each quarter, thus making Ladder much easier to model from quarter to quarter.

If we retain 100% of a 5% horizontal strip, off of $2 billion worth of loans each year, we would hold about $100 million of investments in these risk retention tranches per year, and we would keep these positions for several years under the new regulations. This creates a long-term hold position, but the annual yield associated with these types of investments is currently over 15% before risk adjusting for potential losses. Ladder's uncompromising credit standards, along with our permanent equity capital base, along with the fact that all of our due diligence costs are covered by our borrowers when we originate the loans, positions us well for the currently regulated investment environment.

The last detail I will mention regarding the fourth-quarter activity is in our real estate portfolio. We continued to see positive momentum at the property level. In Michigan, we saw a large tenant extend an expiring lease for 130,000 square feet for five years. And in Virginia, our JV partner was successful in leasing a recently vacated 135,000 square foot building to a very strong credit for a term of just over 11 years on an as-is basis.

Looking back over 2016, we are reminded of what a difference a year makes. You might remember in our earnings call for the fourth quarter of 2015, we were reporting strong core earnings of over $50 million. But as 2016 began, the US stock market was off to its worst start on record. Our stock price had temporarily fallen to about 65% of book value, credit spreads were widening, and the freefall in energy prices was causing tremendous volatility in the high-yield bond market, and several MLPs were cutting their dividends, causing knock-on negative effects in the REIT space.

This volatility impacted the securitization market, as money managers were raising cash to deal with margin calls, causing us to greatly scale back our plans to sell loans via securitization. Evidence of this interruption is clearly seen as we look back, with our securitization business contributing just $3.7 million in the first half of 2016, only to rebound in the second half to $34.6 million in core earnings, for a total 2016 contribution of $38.4 million.

We have indicated to you in the past that the conduit business can seize up at times, stressing that it should be looked at year over year and not quarter over quarter. We try to respond to these volatile episodes in an offensive manner. We showed this again in the first half of 2016 when we repurchased $5 million of our stock, limited by average daily volume rules, and over $50 million of our corporate bonds that had fallen in value with the rest of the credit markets. Ladder corporate bonds due in 2021 were bought at a price near 84, and have since rebounded to a price near par.

While we generally rotate around our investment triangle favoring the purchase of existing mortgage-backed securities with investment-grade ratings, rather than creating new ones that need to be sold, in this case our triangle became a square for about a month, while we purchased Ladder debt and equity instruments, feeling that our shares and bonds were at exceptionally low prices. At this time last year, I disclosed to all of you our three largest CUSIP holdings, given the deep discount to book value that our stock was trading at. On that call, I mentioned that two of the three holdings were expected to pay off at par within one year, even though both had years to go until maturity. Today I can report that the two expected payoffs both took place within the estimated 12-month time period, while the third holding was then, and is still now, expected to pay off in November of 2018.

Before I turn you over to Marc, I just wanted to point out some interesting changes over a longer time period to the component contribution to earnings at Ladder. In 2013, our overall lending business contributed about 73% of our earnings, made up 59% from securitization, 10% from first mortgage balance sheet loans, and 4% from mezzanine loans. Four years later, in 2016, after going public in 2014 and becoming a REIT in 2015, securitization contributed 20%. Bridge loans made up 38% and mezzanine loans 9%, for a total of 67% of our earnings.

In addition, securities contribution dropped from 17% in 2013 to 14% in 2016, while the component of earnings from real estate increased from 8% to 19% over the same period. As we move ahead in 2017, by complying with risk retention rules, our balance sheet lending and real estate owned should continue to increase their respective contribution percentages as we increase net interest margin and lease income while relying less on the gain-on sale model.

Lastly, I will remind you once again that Ladder is an internally managed REIT with inside ownership of 12% of outstanding shares. In December, we increased our quarterly cash dividend by 9% to $0.30 per share. And in a year where we barely had any income from our securitization program in the first six months, our core earnings covered the current $1.20 per share cash dividend rate by a healthy 123%.

We will continue to try to increase our average daily volume, making our shares a more suitable investment to larger portfolio managers, as we did in December when some original investors sold 11.5 million shares in a secondary offering. With that, I will now turn you over to Marc Fox.

Thank you, Brian. I will now review Ladder Capital's financial results for the quarter and year ended December 31, 2016. Core earnings in the fourth quarter of 2016 were $44.6 million. This compares to $50.1 million in the fourth quarter of 2015. Core earnings were $158.2 million for the full year compared to $191.5 million in 2015.

In the fourth quarter of 2016, core EPS was $0.37 per share compared to $0.45 per share for the fourth quarter of the prior year. For the year ended December 31, 2016, core EPS was $1.48 compared to $1.85 earned in 2015.

On an after-tax core basis, Ladder generated a 10.8% return on average equity during the fourth quarter and a 10.7% return over the full year. This is based on average equity, excluding NCI's of consolidated JVs, of approximately $1.5 billion.

Major sources of core earnings in the fourth quarter included net interest income generated by Ladder's loan and securities portfolios, and net rental income from our real estate portfolio, which together total $42.7 million, in addition to gains on the sale of securitized loans net of hedging of $18 million.

GAAP net income before taxes for the fourth quarter was $72.4 million, and $120 million for the calendar-year 2016. These results compared to GAAP net income before taxes of $67.1 million for the fourth quarter of 2015 and $160.7 million for the full year ended December 31, 2015. The largest GAAP to core earnings adjustments in both 2016 and 2015 related to depreciation on our real estate portfolio.

Looking back on the year, loan origination securitization volume increased significantly in the second half of 2016. Ladder originated $701.6 million of loans during the fourth quarter of 2016, bringing total loan originations during the second half to $1.55 billion compared to $551 million in loan originations during the first half. Securitization volume was even more heavily weighted toward the second half, as the $1.08 billion of loans securitized in the third and fourth quarters was more than 4 times the securitization volume in the first half of the year.

I will now review Ladder's income statement and balance sheet. Interest income was $60.7 million in the fourth quarter, and $236.4 million for the year ended December 31, 2016. This compares to $62.9 million and $241.5 million for the three months and year ended December 31, 2015, respectively. Net interest income earned during the fourth quarter is comparable to net interest income earned during recent quarters.

Net rental income, which includes operating lease income and tenant recoveries, net of real estate operating expenses, was $14.2 million in the fourth quarter and $53.3 million for the full year. Both amounts are comparable to a net rental income earned during the same periods in 2015.

Ladder's portfolio of loans held for sale stood at $357.9 million at the end of the fourth quarter compared to $784.2 million at the end of the third quarter. This is a direct result of the increase in securitization volume in the fourth quarter to $663.8 million, which exceeded Q4 conduit loan originations of $263.2 million.

As of December 31, 2016, Ladder's portfolio of loans held for investment stood at $2 billion, up almost 15% from the end of 2015. During the fourth quarter of 2016, Ladder's portfolio of CMBS investments decreased, as Ladder sold a total of $230.9 million of securities, and experienced amortization and prepayments of $376.3 million, while purchasing $124.1 million of securities.

In terms of real estate, our total real estate portfolio as of the end of the year stood at $822.3 million. During 2016, Ladder acquired 22 properties, bringing our total square footage of real estate up to 7.2 million square feet.

In terms of key balance sheet metrics, as of December 31, 2016, 96.2% of our debt investment assets were senior secured, including first mortgage loans and commercial mortgage-backed securities secured by first mortgage loans. This is consistent with the senior secured focus of the Company. Our senior secured assets plus cash comprised 78% of our total asset base.

The average coupon on loans held for sale that were originated in the fourth quarter of 2016 was approximately 4.81%. And the average coupon on the loans held for investment originated in the quarter reflected a weighted average spread of approximately 5.67% over one-month LIBOR. The weighted average loan-to-value ratio of the commercial real estate loans on our balance sheet was approximately 64.8%, slightly lower than the weighted average LTVs in prior quarters.

With regard to securities, 83.2% of our securities positions were rated AAA or were backed by agencies of the US government as of December 31, 2016. All of our CMBS positions were rated investment grade. The weighted average duration of our securities portfolio was 43 months, or 3.6 years, slightly higher than the duration figures of recent quarters, and reflecting the repayment of some of the larger shorter-duration CMBS positions Brian has referenced in today's call and on prior occasions.

Ladder ended the quarter with total assets of $5.6 billion and total equity of $1.5 billion. Ladder reduced its leverage to 2.6 to 1, from 3 to 1 during the quarter, reflecting the net paydowns of secured debt as we shifted capital from more levered investments in CMBS to less levered, first mortgage balance sheet loans.

With regard to financing, we continue to enhance our maturity profile, while maintaining a diverse set of funding sources. As of December 31, 2016, we had $3.9 billion of debt outstanding, and committed financing availability of over $1.7 billion for additional investments. We continue to execute advances with the federal home loan bank in the ordinary course of business. Our FHLB borrowings comprised $1.66 billion of Ladder's total debt outstanding as of the end of the year.

During the quarter, Ladder executed a new uncommitted securities repurchase facility, and extended the final maturity date of one of our committed loan repurchase facilities. We continue to negotiate facility expansions and additional financing sources for our loan and securities portfolio.

Summing up, in 2016 Ladder generated $158.2 million of core earnings, and core after-tax return on average equity of 10.7%. We declared total dividends of $1.285 per share of class A common stock and raised the cash component of the quarterly dividend by 9.1% to $0.30 per share per quarter. Originated approximately $2.1 billion and securitized $1.3 billion of loans, as Ladder finished the year strongly with almost three-quarters of total originations and over 80% of total securitizations occurring in the second half of the year. Continued to apply disciplined approaches to the use of leverage on our balance sheet and our lending activities, to the credit review process applied to every investment decision, and to the management of interest rate, counterparty, and liquidity risk. Finally, we continued to maintain a solid dividend coverage in each of the quarters of the year. At this point, it is time to open the lines for questions and answers.

Thank you.

(Operator Instructions).

Our first question comes from the line of Jade Rahmani with KBW; please proceed with your question.

Thank you, very much for taking the questions. I just wanted a big picture question. How would you characterize your tone towards the coming year? Are you cautiously optimistic? Are you more cautious? Or are you bullish about current investment opportunities in the environment?

Hello, Jade. This is Brian. I'm pretty optimistic generally. We were getting toward the tail end of the credit cycle there. And now with the new administration, if they really do cut corporate taxes and repatriate money, that could add a couple of years to what was a recovery that might have been slowing down a bit. So I feel pretty optimistic about it.

Ultimately, the risk retention rules that are in place today have really curtailed a lot of the competitive influences that we were dealing with, especially the smaller loan players. And it really favors companies like ours with permanent capital. So I'm pretty optimistic about it.

The true-sales statement they you were referring to, is that in the case of both the Ladder-sponsored securitizations and contributions to future deals with other sponsors in the horizontal strip case?

No, It's really one of each. In the horizontal format, which we are favoring at this point if we do a Ladder transaction, when I say Ladder I mean we have all the loans in the deal, we will not get a true sale treatment because we are holding a controlling class of bonds so as a result of that what we'll have is a very high yielding BP's for lack of a better term. And that will throw off cash flows over a ten-year period of time, getting rid of the gain on sale associated with that securitization in that quarter.

If you go the other way and securitized with you know the normal route, I would call it, where you pool your loans with other people, if the banks hold the vertical strip, then the gain on sale comes back into play for the contributors of the loans. So that's why we like having both options available.

And just on the CMBS fund that [do long flats quarter], are you getting any traction on that? Can you say how much the AUM is currently?

The AUM on that is about $12.5 million. But I would point out that we are deliberately keeping that on, what I would call, the down low. Not because there's anything wrong with it, as you heard in the call, we are generally sellers of securities right now. We sold over 900 million or have been paid off on them.

So I would not -- that the Ladder select mutual fund will do very well during periods of high volatility. But during periods of low production and tighter spreads, I don't think that, that would be a vehicle that we would try to invest a lot of capital into or raise a lot of capital in. So just because it is not a huge fund right now, most of the inflows into that fund will take place during periods of high volatility.

Just on the condos, I was wondering if you could touch on the sales pace, particularly in the Miami project? It seems like it remained at a pretty healthy pace quarter over quarter, and the aggregate gains as a percentage of what you brought in was pretty high.

Yes, Jade, it is Marc Fox. That's correct. In Miami we sold 16 units. We had a core gain there of about $650,000 on those units. In Vegas, we sold 15 units, and we had a gain there of about $3.7 million.

So Jade, we have been raising prices, as is happening around the country when you hear the Case-Shiller numbers come out. The Miami property, anyone who was in Miami in January during the [Cressie] conference. Miami is a little over built right now. But we have one of the lowest cost price points on the market.

We don't have a beach front condominium complex there, everything is about the same price and you can get into the unit for under $400,000. So it is not the high-end beach front properties that I notice are slowing down more.

In Las Vegas, we did see a slowdown in the first quarter, but that had more to do with just in general what went on with the economy as far as to interest rates when they moved up after the election. So we don't have a lot of units left in Las Vegas and Miami is doing pretty well.

Thank you, very much for taking the questions.

Sure.

Our next question comes from the line of Steven DeLaney with JMP Securities; please go ahead.

Thank you, good evening, everyone. Brian, thank you for the heads up on the bond maturity, that would look to be the 7 3/8 notes [about] $300 million. I guess looking at that, are you approaching it that you want to run above average liquidity just in case the bond market -- how your market is not open to you to refinance that, if you will or just to float another issue, take out the maturing issue. And I'm just curious if that maturity is in any way affecting your appetite for putting new loans on it at this point? Thank you.

Sure. The answer to the first part of your question Stephen is, yes, we were raising liquidity in the fourth quarter heading toward that call date of April 1 of the more expensive bond. And in December of last year I probably thought we would float at $300 million, $350 million bond issue and pay that bond off.

(Multiple speakers) kind of changed? Yes.

Yes, things changed, felt like things got a little bit more favorable. So we may find ourselves in a position where we are able to do that issuance in larger size, and ultimately be faced with having little too much liquidity fourth quarter. But we will call that country [club] problem.

That is a high quality problem here for sure (multiple speakers). I'm getting the impression that (multiple speakers).

The second part of your question is, is it causing us not to make loans and no, that's not the case. What its causing us to do is sell a lot of securities. So we have plenty of firepower left for lending. And that's really where our focus is right now. We've always telegraphed that we would go to the securities book as an ATM if we needed cash to do anything.

Great. And when you think about a Ladder-only securitization, should we assume that the size of that would need to be in the $800 million-$1 billion range for you to get an execution?

And that really depends on the size of the loans and the diversity scores that you get from the rating agencies. So you can certainly get a $600-million transaction as long as you didn't have a lot of big loans in the pool. But I would think that really for the purposes of handling expenses over a bigger unit, that we were probably shoot for $800 million to $1 billion. You also want to (multiple speakers) that's about 5%.

Yes, and this financing versus sale treatment that I'm sure Marc is lecturing everyone about, I want to just mentioned that you know this was, prior to the crisis, this is the way Redwood Trust ran their prime jumbo securitization business for what, 10 years or so? And it was very attractive as a long-term investment program. So one of the issues that you may have to face though is gain on sale provides you with immediate cash revenue. I guess you are going to have to rethink some originator compensation programs, aren't you? If, in fact, you are converting an immediate income revenue stream into a 10-year income stream, how does that work out?

You sound like one of us. That's exactly right. But I do think we are able to handle the originator portion of the compensations but you can really treat a loan origination as a commission and you can estimate what you think the gain is at the time of the loan. Probably the other thing that from an analyst standpoint you have to keep in mind here is that our aggregation period will be longer.

So instead of pulling the trigger with $300 million or $400 million into a pool, if we are going to go to market with $800 million or $1 billion, we could be having less frequency. Now that is why in the past it has always been hard for you guys to model how much we are making on gain on sale margin, and while we talked to many investors who said that volatility in the conduit that we don't really like, because we can't quite figured it out. This will get rid of that in the Ladder-only portion but what the analyst will have to do is figure out how to estimate a gain on sale when we are in a pool with other parties with the vertical tranche.

So just a little more bifurcated, but not undoable. Oddly enough, I tend to like holding the BPs portion as you described. That have been done previously by Redwood. What it creates is long lasting very stable cash flows. So try to imagine if you did $1 billion securitization and you held a $15 million piece, that's 15%, you can readily figure out, assuming no defaults what the next 10 years look like there. So in the first year you have nothing and at the end of five years, if you do $10 billion you have quite a bit of cash flow coming in every year.

And you can sleep at night knowing that your credits that you cooked in your own kitchen?

Yes, it becomes a very credit-sensitive business. Under the old model where we had gain on sale the risk was removed from the building. Now it stays, but that has never really been a big concern of ours.

Thank you for the comments, and congrats, good solid quarter in a very volatile rate environment. Good job.

Than you.

Our next question comes from the line of Jessica Levi-Ribner with FBR & Co; please go ahead.

Thank you, so much for taking my question. We've heard of two of the larger commercial-arm REITs that there's a lot of opportunity in the construction space. Is that something you guys are seeing as well? And if so, or if not, how are you guys thinking about that?

There is a lot of opportunity in the construction space, because the banks are making that very, very difficult. And so as a result there's a bit of a void there. I don't consider construction lending a core strength of our origination sales force or our asset management group. Having said that, when I say construction, I mean ground-up construction.

We don't usually pour foundations; we have in the past. But it is not something that would like to do often. We don't particularly like long-tail businesses, because when you make a loan on a shopping center and you sell it 90 days later, you know it is in the community sometimes for 40 years, and you know who goes there.

But when you are building -- oftentimes new construction is the best way to own them is the second time around. And as a lender, the worst thing you ever want to be faced with is a construction loan on half-built building where the sponsor has run out of money. Because, especially inside of a REIT, if you have a $200 million or $300 million construction loan that defaulted, that is a lot of capital, that is no longer on a financing line and you have to go finish the building in a business that distributes 90% of its capital. So I don't like the fit inside of a REIT.

Okay, fair enough. Just turning back toward ACT policy and maybe some of the changes we could be expecting. Do you think that from what we understand now, and I know that it is a big outline but how do you think about that impacting the commercial real estate market as a whole?

I honestly don't know. Most of what I have heard, I hesitate to comment on it. Because whatever is being discussed now, I don't think is going to come that way when if you do expense an entire cost of a building on the day of the purchase, you are going to see a lot of buildings purchased and the tax receivables will fall dramatically. So it is just intuitively a little uncomfortable to think that is going to go through that way.

But that the administration will certainly help balancing features, and to try to interpret it in advance, I don't know I don't see it. And obviously mortgage interest deductibility, that's a lot of people. So, I guess, I'm hesitant to think that we really have the final version of what is coming out.

Okay, I just thought I would try to ask anyway, thank you so much.

Sure.

(Operator Instructions)

Our next question comes from the line of Charles Nabhan with Wells Fargo; please go ahead.

Hello, guys. Brian, in the past you talked about underwriting within the conduit business to a gain on sale margin of roughly 3% to 4%. You talked about a 15 bp change in spreads roughly impacting that gain on sale by 1% or so. I was wondering if there been any changes to that benchmark under risk retention?

Under risk retention, again, there are two forms of it. Under the portion where we would hold our own BPs and be the only contributor, I don't think it has changed. However, where it has changed perhaps is you don't have the risk of a BP's buyer taking a loan out, because you are the BP's buyer.

In the scenario where you are contributing with other loan contributors, and a bank is holding a vertical strip, there's probably a cost associated with having that bank tie up their capital for that many years. So I would say the expenses have gone up, in all likelihood. But the 15 basis points on a 10-year, that's just math. But you might have to build a little more expense cushion when securitizing with other people. And again, you still run the risk of whoever that BP's buyer is having a heavy-handed approach toward some of your loans. So 15 basis points is about right.

Got it. Just as a follow-up a quick high-level question. Can you talk about what you are seeing in terms of underwriting trends? Specifically if your seeing any changes in behavior in terms of issuers kicking out loans and the type of loans they've been kicking out over the past quarter or so?

We have not attempted to get involved in any securitizations in a little while with other parties because we felt like the path was cloudy, and we couldn't figure out -- we had various discussions with issuers about what it would cost for us to put in pools. So we decided to stress a little bit more onto the bridge loan portfolio, the first mortgage held for balance sheet. And that's where I will tell you something that is an interesting phenomenon that we see going on. But it has nothing do with underwriting, it has to do with borrower or preferences.

We've seen an unusual amount of loans that want to be financed for two years instead of five or 10. And they are stabilized, they're occupied, they are full, and I don't really have a good reason for you as to why they would want to go into a two-year loan, other than they plan to sell the building and they don't want to be locked out for an extended period of time. And when I tell you that, that phenomenon has been almost 50% of the loans we are writing.

So as you look out as the quarters tick by, you're assuming this continues, you are going to see probably higher coverage in our bridge loan portfolio, and it is becoming far less transitional. And this is the one of the reasons you are seeing the volume of the conduit securitized businesses down so much. And it may be because borrowers are finally back from 2007 and they feel like they are finally back to where there buildings were at the time, and they want to not go into another downturn or else it's this unnatural fear, in my opinion of interest rates rising. And they don't want to be in the situation where they have an extended period of time on a fixed asset that will have to be financed later on at much higher rates.

There's something going on in the psyche of borrowers that is causing them to actually pay higher rates for shorter terms, because they are valuing the prepayment option as much more valuable than it was since we started the Company.

I guess, just as a follow-up to that comment. What is -- and I know the pricing varies from deal to deal, but generally speaking, what is the difference in -- can you talk about the difference in spread between those transactions you were referring to as opposed to your more traditional loans you've been underwriting over the past couple of years?

I don't; I can give you general commentary. I don't want you to read too much into the numbers, because Marc referenced that our average coupon was 580 over LIBOR?

It's actually 567 over LIBOR. On newly originated [sub caps].

Okay so that would be 6.5% rate on newly originated loans. I would think it's a little bifurcated, it is a 5.5% for half the book and 7.5% for the other half of that book. But a 5.5% rate on a two-year bridge loan on a conduit-eligible loan that could easily get a 4.5% rate if the borrower took lockout is a little surprising, but that flexibility seems to be viewed as paramount right now.

Great. Okay, thank you for the color, guys.

Sure.

Our next question is a follow-up from Jade Rahmani; please go ahead.

Thank you very much. Just two quick ones. I wanted to see if you expect to do any securitization in the first quarter based on your current visibility? And also, how do you think about M&A in the specialty-finance space? If is that something that you're not focused on?

Sure, I will take it in pieces. The first part of your question, do I see a securitization the first quarter? I will tell you that we have a pool of short maturity loans a little bit over $1 billion that we could securitize right now. And what we are wrestling with a little bit -- we were going to originally do this into our first horizontal risk retention piece.

And what we liked about it was since it is two years to three years in maturity, we would not have to hold it for five years. We will get the book to gain over 24 to 36 month period. So it would actually be a way to, not short-circuit it but, not tail end all of the profitability. Because the coupons would be paying in very quickly.

We are going to chamber that bullet for a minute, because it would cost us about $5 million in expenses to do that transaction. And when you expense that $5 million over a two-year period of time, effectively what happens is let's say the loans are 6%, which they are. So we get $60 million in interest from those assets in the year and in the first year we would make $55 million.

So it's not a big costs associated with it and it would produce some add liquidity because our leverage has gone down significantly since we've only been selling securities these portfolios our leveraged maybe 55% to 60%. So the securitization business would effectively finance us up to 70% to 75%. So we were thinking about doing that. Again, that was in a backup to Steve Delaney's question earlier.

You saw us shoring up our liquidity into year end by selling securities as we are approaching a call date on a 7 3/8 corporate bond. Another place we were looking to liquidity would be for that securitization, to effectively upsize the leverage on the bridge loan portfolio, that would have created probably another $100 million worth of cash to us. However, as long as the bond market appears to be opened, and it looks like we are going to be able to do a transaction the easily finances that bond issuance comfortably, then there is really no need for us to sell down and absorb that $5 million cost. A long-winded answer there, but it should make sense to you.

And the second part was M&A. I find M&A in the REIT space to be very difficult mainly because everyone wants to sell their companies above book value, and very few REITs trade above book value. So as a result to that, you pretty much have to overpay for things.

Having said that, I do think there are a lot of small REITs out there. And the ones under $600 million, that probably would have material expense savings if they would consolidate. So it will happen one day, but I don't see any catalyst for it just yet.

Thanks, appreciate it.

Sure.

There are no further questions at this time. I will turn the call back over to management for any final remarks.

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