Ladder Capital Corp (LADR) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Ladder Capital Corporation Third Quarter 2017 earnings Call. (Operator Instructions) I would now like to turn the conference over to your host, Kelly Porcella. Thank you. You may begin.

Thank you, and good afternoon, everyone. I'd like to welcome you to Ladder Capital Corp's Earnings Call for the third quarter of 2017. With me this afternoon are Brian Harris, the company's Chief Executive Officer, Pamela McCormack, the company's President, and Marc Fox, the company's Chief Financial Officer.

This afternoon we released our financial results for the quarter ended September 30, 2017. The earnings release is available in the investor relations section of the company's website, and our quarterly report on Form 10-Q 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, 2016, and Form 10-Q for the quarter ended June 30, 2017 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.

With that, I'll turn the call over to our Chief Executive officer, Brian Harris.

Thank you, Kelly. Ladder had an all around strong third quarter with core earnings, a non-GAAP measure, of $35.6 million, or $0.35 per share. Our annualized after-tax return on average equity was 10.5% in the quarter, and our average over the first three quarters was 10.7%. Our debt-to-equity ratio at the end of the quarter was 2.9 to 1.

There were no gains on sale from securitization in the quarter. However, since the first quarter, we've seen substantial increases in revenue contribution from our balance sheet loan portfolio, and also from our inventory of owned real estate.

Capital markets activity in the quarter included a successful offering of $400 million of senior unsecured notes in September at an interest rate of 5.25%, and a term of 8 years. Six months earlier in the year, we successfully sold an additional $500 million of senior unsecured notes at a rate of 5.25% maturing in five years. These two bond offerings coupled with the upsizing of our corporate revolving credit facility to $241 million has put us in a very strong position to take advantage of rising interest rates should that happen, and we'll be able to grow our asset base safely with our new longer and stronger liability structure.

In the beginning of 2017, we had $564 million of corporate bonds outstanding with more than half of them coming due within one year. Today we have a total of $1.17 billion of unsecured notes outstanding and none of these are due over the next three years. With our longer maturity schedule we're at a much better position to leverage this upsized capital and this should lead to higher ROEs stemming from an increased asset base and because all of these obligations are fixed rate we've essentially rate locked capital with plans to make loans in a higher interest rate environment over the next few years.

I normally update loan origination statistics at this point in the call, but today I've asked our President, Pamela McCormack, to handle this part of the call since she is primarily responsible for managing our origination and underwriting efforts along with asset management and securitization.

I've also asked Pamela to give you a glimpse into activity in October, since there were two large hurricanes in the United States in September and these storms actually delayed some of our loan closings and pushed them into October. I'll leave you with my generally optimistic view about our business over the next few quarters. And after you hear what Pamela has to say, I think you'll agree. Our overall portfolio is performing very well, as we would expect, especially in a market where equity indices are at or near all time highs, unemployment is at all time lows, interest rates are generally low, and corporate profits seem to be holding up well.

With that, I'll now hand you off to Pamela.

Thank you, Brian. With regard to our lending business in the third quarter, we originated $630 million of loans, comprised of $307 million of floating rate bridge loans and $323 million of loans we intend to securitize. Our portfolio of balance sheet loans grew to over $2.8 billion at the end of the quarter. With this growth in our bridge loan portfolio and favorable market conditions, we decided to execute our first CLO in October. The timing for this transaction seemed right to us with pricing finally competitive with our existing financing sources. We contributed $457 million of bridge loans at an advance rate of 81.5%, and then all-in net cost of funds, assuming no credit losses, of Libor plus 192 to 232 basis points, depending on the timing of payoffs and extensions.

Ladder retained an $85 million interest in the CLO, which allows us to continue to provide optimal service to our borrowers by maintaining control over the special servicer and major decisions on the loan.

Our expected return on the retained position, assuming no credit losses, is 15.5% to 19.5%, again depending on the timing of payoffs and extensions. The transaction allowed us to further diversify our funding base with additional non-recourse, non-mark-to-market, matched term funding sourced from CLO debt investors, while also increasing our liquidity by almost $100 million.

In addition to the CLO, we have already contributed $431 million of loans into three CMBS securitizations in the fourth quarter. And we expect to participate in additional transactions through year-end. The results of the CMBS securitizations will be reflected as gains on sale in the fourth quarter. We continue to believe that having the ability to both execute our own securitizations and to contribute to partner deals, affords us maximum strategic and operational flexibility.

Finally, as Brian mentioned earlier, a number of our loan closings were delayed in the third quarter due to the severe weather. Consequently, we are experiencing an active fourth quarter for loan closings as well. In the month of October, we closed $589 million of loans, including $215 million we intend to hold on balance sheet.

With that said, I'll turn you over to our CFO, Marc Fox.

Thank you, Pamela. I will now review Ladder Capital's financial results for the quarter and nine months ended September 30, 2017. Core earnings in the third quarter of 2017 were $35.6 million. This amount compares to $44.5 million in the same quarter of 2016. Core earnings in the first nine months of 2017 were $118.4 million, compared to $113.6 million for the first three quarters of the prior year.

Core EPS for the third quarter of 2017 was $0.35 per share, compared to $0.40 per share for the same quarter last year. Core EPS for the first nine months of 2017 was $1.08 per share compared to $1.10 per share earned in the comparable period in 2016.

On an after-tax core basis, Ladder generated a 10.5% return on average equity during the third quarter, and a 10.7% return over the first nine months of 2017. This is based on an average equity balance excluding non-controlling interest of consolidated JVs of approximately $1.5 billion.

During the third quarter of 2017, core earnings were primarily derived from net interest income generated by Ladder securities and held for investment loan portfolios and net rental income from our real estate portfolio. These lines of business generate a recurring income in excess of Ladder's total corporate expenses. There were no securitization transactions in the third quarter, and the largest GAAP to core earnings adjustment in the quarter related to real estate depreciation.

On a GAAP basis, Ladder generated net income before taxes of $30.1 million for the three months ended September 30, 2017, and $60.3 million year-to-date. These results compare to net income before taxes of $58.3 million and $47.6 million reported in the three and nine months ended September 30, 2016.

Ladder reported more favorable net results of derivative transactions in the first three quarters of 2017, reflecting the impact on hedge positions and the substantial decline in interest rates experienced early last year.

I will now review a few highlights from Ladder's income statement and balance sheet. Where relevant and meaningful, these statistics exclude the impact of any assets securitized in Ladder only securitization transactions and their related liabilities that are currently being consolidated under GAAP.

Net interest income was $30.2 million in the third quarter. This income amount is comparable to net interest income earned in prior quarters and was primarily derived from Ladder's held for investment loan portfolio. Ladder's portfolio of loans held for investment or balance sheet loans has increased by $1.2 billion, or 73%, over the past year. As Pamela noted, loan origination volume has remained steady over the past year and has been accelerating in recent months. Ladder's portfolio of loans held for sale stood at $523 million at the end of the third quarter, while Ladder's portfolio of loans held for investment was over $2.8 billion.

Net rental income, which includes operating lease income and tenant recoveries net of real estate operating expenses, was $16 million in the third quarter, up $3.3 million from the third quarter of the prior year, which reflects the growth of Ladder's real estate portfolio, which stood at $1 billion at September 30, 2017.

In the third quarter, Ladder made $48.6 million of net lease and other equity investments.

Ladder's portfolio of CMBS and U.S. agency securities investment has decreased by approximately $1.5 billion over the course of the past 12 months, and it stood at $1.2 billion at the end of the third quarter as we continue to reallocate equity capital toward attractive balance sheet loan and real estate equity investments.

In terms of key balance sheet metrics, as of September 30, 2017, 96.5% of our debt investments was senior secured, including first mortgage loans and commercial mortgage backed securities secured by first mortgage loans, which is consistent with the senior secured focus of the company. Senior secured assets plus cash comprised 76% of our total asset base. Excluding loans transferred but not sold to GAAP, Ladder ended the quarter with total assets of $5.8 billion and total equity of $1.5 billion. Our core debt-to-equity ratio increased slightly during the quarter to 2.9 to 1.

Total unencumbered assets, including cash, were $1.6 billion at quarter end. The quarter-over-quarter increase in unencumbered assets exceeded the increase in our unsecured debt, which now includes the newly issued $400 million of corporate bonds, bringing our unencumbered assets to unsecured debt ratio to 1.39 to 1, as of September 30, 2017.

The average coupon on loans held for sale originated in the third quarter was 4.55%, while the average coupon on loans held for investment originated during the quarter reflected a weighted average spread of approximately 5.95% over one month Libor. The weighted average loan to value ratio of the commercial real estate loans on our balance sheet at quarter end was approximately 64.4%, which is in line with the weighted average LTVs in recent quarters.

With regard to securities, 78.5% of our securities positions were rated AAA or backed by agencies of the U.S. government as of quarter end. Almost all of our CMBS positions were rated investment grade.

The weighted average duration of our securities portfolio was 38 months, consistent with the average duration of 38 months prevailing during the same quarter at the end of--during 2016 and at the end of the second quarter in 2017 as well.

On the financing side, we continued to enhance our maturity profile, while maintaining a diverse set of funding sources. As of September 30, 2017, we had $4.3 billion of core debt outstanding, and committed financing ability of over $1.9 billion for additional investments. Our FHLB borrowing stood at $1.46 billion at the end of the quarter.

During the quarter, Moody's Investor Service revised its outlook for Ladder's ratings to positive from stable, and S&P global ratings raised its long term issuer credit rating on Ladder to BB from BB minus. At the same time, S&P raised their ratings on the company's senior unsecured notes to BB minus from B plus.

As we approach the end of 2017, in a market characterized by a good set of attractive investment opportunities, we intend to continue to strengthen the core financial foundation of our firm by emphasizing the addition of more committed funding that is longer term, unsecured, or secured but non-recourse. In that regard, we have issued $900 million of unsecured corporate bonds with terms of five years and eight years. We have more than tripled the size of our unsecured revolving credit facility over the past 20 months, growing it from five major banks providing $75 million of funding to eight major banks providing over $240 million today, while also extending the final maturity date to 2021.

We have also issued $372.3 million of non-recourse, non-mark to market, matched funded debt in October when we successfully executed our initial CLO financing as we securitize the pool of $456.9 million of floating rate loans. As has been our historic practice, we continue to utilize long term, non-recourse, fixed rate, assignable mortgage debt to finance our real estate that is leased on a long term basis to creditworthy tenants. And we continue to maintain the discipline of extending the maturities of already committed loan and securities repurchased facilities. So we typically have at least two and sometimes as many as five years remaining until final maturity.

When combined with a disciplined approach to corporate leverage, where we target two to three times debt-to-equity ratio, our commitment to operating within our triangle of CRE financed business lines and a credit centric investment approach, Ladder is well positioned for 2018 and beyond.

So summing up, in the third quarter Ladder generated $35.6 million of core earnings and a core after-tax return on average equity of 10.5%, and we also earned $118.4 million and a 10.7% return on average equity for the first nine months of the year. Ladder continued to maintain solid dividend coverage in each of the first three quarters of the year. We benefited from a credit rating upgrade from Standard and Poor's and a move to positive ratings outlook by Moody's. We issued $400 million of 5.25% unsecured senior notes due in 2025, and the proceeds we used in part to pay off outstanding secured debt. And we continued to apply a disciplined approach to the use of leverage, the allocation of capital, and the base of the risk we encounter, and for the selection of longer term investments in loans and real estate.

At this point, it's time to open the line for questions and answers.

Thank you. (Operator Instructions) Steve Delaney, JMP Securities.

Good evening, everyone, and thank you for taking the questions. So my first question is something of a history question. Stocks appear to be trading today based on how the market perceives the companies will perform in a higher interest rate environment. I think we could all agree with that. It's been a while since we had a higher interest rate environment or a rising rate environment. But in '03, the average 10-year was 402. In 2006 it was 479. So we went up 75 basis points during that period. Obviously, there were other things going on in that period with respect to underwriting, et cetera.

But Brian, or Pamela, I was just wondering, a question I get often is how will CMBS volumes hold up if the 10-year moves to 3% or higher than that? I'm just curious, any--you guys have been around the business for a pretty good while, so any thoughts you have about borrower behavior in a rising interest rate environment. Thank you.

Sure, Steve. The only thing that really gets affected--well, there's two forms of loan production and it's really refinance and it's acquisition. The refinanced pipeline is not impacted at all because the maturity date comes whether rates are high or rates are low. Prepayments, where people are able to refinance at lower proceeds on those refinances--I'm sorry, higher proceeds fall to the wayside because rates go higher. But the acquisition side of the business, where a person is acquiring a property and then borrowing money against it, often times there's a little bit of a delay because as interest rates go up, the seller of the real estate doesn't want to understand that he owns an instrument that's more like a bond than anything else.

And so, eventually what happens is you do see some cap widening because invariability the buyers are the ones who have the raw material costs of the interest embedded in their models. But then, I think there's a second part of it, too, because if it's accompanied by--typically what makes interest rates go up is growth and inflation. And typically, when stock markets are plumbing all time highs like they are now with low interest rates--relatively low interest rates, invariably some people pull money out of the stock market because they think it's getting toppy, and they find their way into real estate eventually. And we are seeing that.

All right. That's helpful for that perspective for sure. And then, the second point is--don't know if you can comment on this, but we've been trying to keep up with these Form 4's that are coming through. And I was wondering if Marc or someone there is tracking sort of on a week to week basis with the current percentage of shares of Ladders--total shares that are currently held by GI or TowerBrook. I believe it's all public record. But it's kind of hard to keep up with it.

Yes. I think that when you look at we've got four major shareholders here - GI, TowerBrook, Aimco, and Ulmers. And they are part of our original partner group and everything else.

Right. Sure.

Today--as of the end of October, they owned between them 27.7 million shares, which was about 25% of the shares. To give you a reference point, prior to the IPO they controlled about 61% of the shares. After--right after the IPO when we issued about 15% of the shares they would have owned 53%. So we're--more than half.

Rick Shane, JPMorgan.

Sure. Thanks for taking the question. And it actually sort of follows along with Steve's question. Brian, we're in an environment now where spreads are tight, rates are ticking higher. I am curious, you mentioned that you have contributed I want to say it was $417 million to conduit securitizations this quarter. Curious what we should be thinking about in terms of gain on sale margin and just the dynamics given the rate environment we're in that we should think about going forward.

Sure, Rick. I think what you--what we--we actually disclosed a little bit into October, too, as Pamela said, because of the hurricanes in September, which ultimately pushed a lot of closings back a little bit. So if I look at the origination platform right now in bridge as well as conduit through the third quarter and into the fourth quarter, these have been some of--four of the strongest months I can recall in quite a while. And I think some of that has to do with the belief that interest rates are going to rise, so you have this fence sitter mentality where a lot of times people think rates may go down. But I think the third quarter pretty much convinced them after listening to the Fed that the bottoms were in and rates were probably going to go a little bit higher.

And what this sometimes has the effect of doing--it has it in residential real estate also, where call them the fence sitters, they kind of jump in and refinance everything very quickly. So sometimes you have--despite interest rates rising, you have an unnatural amount of loan origination because people--it's sort of like the train's leaving the station so there's a fair amount of demand that takes place at that point.

In a mortgage origination business, especially a gain on sale business, which would be part of what we do here, the best thing you could have is spreads tightening while rates are rising. And the reason why is because you are hedged against the interest rate, so you ultimately own loans at lower than par because you're making money on a treasury hedge as rates go up. And this gets rid of the IO component in the pricing. And ultimately most of the dollars that you--the income streams that you fill are sold into the AAA and AA classes without an IO component. So profit margins actually expand from what you were thinking.

So we always price to make a certain amount of money on a given risk that we'll take by originating a loan. And more often than not in a rising rate environment like we saw over the last three months or so, you will wind up making a little more than you thought. And that's not always intuitive because often times when rates fall dramatically, people think you're making a lot of money because you have high rates. But you really own those loans at 102 and 103, and often times when rates are falling dramatically in a short period of time it's not because people want to buy bonds. It's because people are buying government bonds and credit spreads are widening.

So third quarter and into October have been a very mortgage environment for those that originate loans.

Jade Rahmani, KBW.

Thanks very much. Just looking at stock performance of late and since the IPO, I was wondering what are your top priorities in terms of creating shareholder value. Is it getting securitization activity to be on a more regular pace of issuance, which it clearly sounds like it is? Is it monetizing real estate assets to generate gains, or perhaps increasing transparency so that investors could better underwrite net asset value?

That's a lot. So I would tell you, Jade, that some of the steps that we took in the capital markets are really a prelude to running a bigger balance sheet, frankly. And as we said in the call, at the end of last year we had some unsecured debt, more than half of which was due within a year. So there's not much you can do with that. You really have to stay very liquid because if you are unable to refinance those corporate bonds in the market, you have to sell assets and obviously want to remain liquid.

With the two refinances that we did in the--one refinance and one new issue in the corporate bond market in March and September, we raised $900 million in unsecured debt, none of which was--five to eight years were the numbers. And interestingly enough, the rate was the same to give you an idea of what happened with corporate market spreads. 5.25% was the rate on both. So this really positions us with a very large amount of unsecured non-mark to market noncallable capital that we can leverage. So that will support a bigger balance sheet and higher earning assets. So the key for really--at least from the plumbing side of the business was to be able to comfortably carry a bigger asset base. Because our return on equity is fine. We're very comfortable with that. But I think we were uncomfortable carrying bigger balances with that much debt coming due within a year. With the new administration, we didn't know what would happen. Ultimately, it all worked out to our benefit. But of course, we didn't have that hindsight back in January.

But if you look at the loan growth and the transition we've made out of securities, which we've always maintained was a liquidity vehicle that just had a high ROE, our leverage went down because we sold $1 billion in securities. And if you just look from the end of December through the end of September here, I think our balance sheet loan portfolio is up close to $1 billion. Our securities portfolio is down $1 billion. And that actually creates less leverage because we don't leverage the balance sheet loans as much. And the other add-on was the real estate portfolio where I think we're up about 25% from year-end.

So those are durable earnings streams. They are quite dependable. And you saw we made--in a quarter where we had no securitizations at all, very similar to the first quarter actually, we made quite a bit more money because of the earning asset base. And it's--we're able to easily cover our dividend without any activity at all from the securitization platform.

Now we have seen some activity going into the fourth quarter. So yes, we would always like to ramp up the securitization business. But that's not a business that we control. And so, when the markets are healthy we'll be participating in them as often as possible, but we'll often times skip a quarter if we're not comfortable with the way that feels.

So the value proposition is certainly more conduit, which we've always maintained we make about a 9% or a 10% ROE if we don't do anything except make loans. We have a couple of products that allow us to punch above our weight in that area, and that's the conduit business where we have gain on sale. And in addition to that, we now have the real estate portfolio, which now that it's mostly over two years old, we may very well begin to take advantage of the gains that are imputed in that portfolio.

We probably have to do a better job of putting an identity on our real estate portfolio. We've been speaking to quite a few people. And when you talk to Vornado you know what they own. When you talk to Simon you know what they own. When you talk to Ladder most people don't know what we own. And the reality is what we own is cheap real estate. And there is a pattern underneath it all. But if we're capable of making loans across product classes, we really ought to be able to spot cheap assets also.

So in the last quarter I think we spent $48 million on real estate investments. The lion's share of that was a multi-family apartment complex in Miami. It was not net lease properties. We sometimes do that. But so, we want to add the conduit. We want to realize monetization of the real estate portfolio here and there. It's a very dependable source of income.

NAV is a topic we're talking about. How do we explain to the market and be more transparent, so that the market understands what we own in real estate and why we own it? We think that will be a very positive scenario.

And lastly, as I said when I began to answer the long-winded question here was that we expect to run a bigger balance sheet. And we're now positioned for the next three to four years to do that. And with our fixed costs covered, there should be quite a bit of income falling to the bottom line. The ROE profile of Ladder got a lot better in the last six months.

And in terms of the net effect of the capital markets activities, are you comfortable saying whether you anticipate the quarterly cash dividend to be on a positive trajectory for potential increases? I mean, it sounds like with the ROE and the October CLO in the 15% to 20% range that should be the case.

Well, mathematically, I can confirm that we have plenty of room in it. We do review this in December with our Board. And we are preparing a discussion with the Board and to the extent that everything continues along plan, my guess is I would be a fan of doing something in that direction. But of course, it would have to be approved and declared by the Board.

And in terms of gains generated by the TRS, would the intention be to retain that capital?

Yes, I think so. The TRS--we don't necessarily separate it quite that much. But we are required to pay out a certain amount of our income and we're generally conservative in our dividend policy. So wherever we can retain capital to prevent us from issuing any equity in the markets as an internally managed company, that's a plus for us. We would do that. So my guess is any dividend increase would primarily come from REIT-eligible assets.

In terms of the loan book, I was wondering if you could comment on repayments. We've seen an acceleration from some of your peers in repayment activity. And I do have some worries about adverse selection. If they're getting the best quality assets or refinancing away from them, and they're having to replace that in a spread compressing environment you could be swapping high quality assets for low quality. You guys have been disciplined in being able to maintain yield and I know don't compete as aggressively in the really large loan space. So I was wondering if you could comment on repayment activity and maybe just overall--the lending environment overall.

Sure. Well, I'll let Marc answer the question on what the repayments were in the quarter. But they're not that aggressive as far as bad news goes anyway. What was the number we--?

--Yes. For our balance sheet loan portfolio last quarter it was just under--amortization repayments were just under $90 million. And to put that into perspective for you, for the last three quarters prior to that--so the second quarter it was $87 million, the quarter before that it was $68 million, the quarter before that, which is the fourth quarter of last year, it was $88 million.

So we're not experiencing--the net inflows are exceeding the out--the payoffs are lower than the originations, which is kind of what you want to be doing. Again, I think we told you we were going to focus more on bridge loans toward the end of last year. And I think we've increased that loan book from $2 billion to almost $3 billion. So our portfolio is expanding. It's expanding in a couple of ways though that may not be as obvious. With the opening of the CLO market and getting the cost of funds through a CLO execution in line with our other alternative, that we've elected to enter the CLO market. We have no objection to holding pieces of them, especially when they yield 17% in a base case scenario. We never sacrifice credit. We don't care what the price is, we don't do it. And so, as a result of that, we're pretty comfortable in the quality of our portfolio. We don't have any problems anywhere in the organization.

We had one single tenant property go into bankruptcy when A and P went bankrupt. That space leased immediately to an investment grade company for many years. So it's 100% occupied. So the real estate we underwrote was fine. And so--and another question that we get sometimes, and I took a look at this before we got on the call. Next year, if all we do is get paid off on the loans that are maturing, where there are no further extensions, we have $780 million coming due over the next 15 months. So that's the fourth quarter and the 12 months in 2018. That's a very manageable number. Anything else that prepays in advance of that will come with prepayment penalties.

And so, that--while we would hate to see them go, part of the lending business is getting paid back. So we're okay with that. Our pace of originations because of the CLO business has really picked up quite a bit because we're reaching a little bit more into where other people were lending into more cash flowing loans. Whereas in the past, we probably had a little bit more transitional nature where lease up was required or repositioning. And we're very comfortable doing that at that part of the real estate cycle. Now we're getting towards the back end of the real estate cycle and I think you have to be a little bit more cautious around cash flow increases that you might be perceiving that are coming online. Because while your property is coming online, there's a lot of other properties coming online too, because loan growth is now in.

There's a lot money been raised in the bridge loan area. So unfortunately, while the bridge loan market today is very attractive to us, we don't believe it will stay in that condition. We think it will start to become a little bit of a credit challenge. Right now, it's just about interest rates and how--what is the spread you are charging. And I think Marc mentioned our spread on a close to $3 billion portfolio is 595. Probably one of the higher ones in the business. But we won't do anything to try to defend that margin if we feel the principal column is at risk.

And so, we're getting a little bit safer I would say. And I think our average spread is coming down, but it's not coming down due to pressure from competitors. It's coming down because we're electing to do more cash flowing loans that rating agencies and CLO buyers like better. Whereas, we kind of avoided those in the past. We kind of let them go to the other players in the business.

And what was the blended interest rate on 3Q balance sheet originations?

On the balance sheet originations, actually--it was the 595, the price.

I'm sorry. What was the portfolio at?

So the portfolio--I'm not sure what the portfolio is right now, Brian.

Okay. Sorry. We originated a fair amount of business and we have a big pipeline, too. So in an environment where unemployment is low, interest rates are low, stock markets are at all time highs, and you've got global growth, that's the formula really where you'll see a lot of real estate acquisitions. And I expect the loan business to be very attractive over the next 12 months. And ultimately, it will turn into a proceeds conversation. But in this time around in the cycle, banks can't participate because they are not really that involved in the bridge lending business.

The House Tax Reform proposal. Just wondering if you had any initial thoughts. I know it's far off from--there's a lot of puts and takes and it will go through multiple permutations. But any kind of initial reactions, whether it be to the actual impact on commercial real estate or even your decision to be a REIT since the corporate tax rate could potentially materially decline?

I'm going to hold off on that one, because I only took a brief look at it within the last hour or so. I will just tell you that as a citizen, I would think the U-Haul company is going to be busy in New York and California.

And then, just lastly, the NAV question. Would you be willing to share some insight into the magnitude of what you think you're sitting on in terms of real estate gains?

I have a very good idea of what I think that is. But I'm going to--I think we're going to roll that out really in a more transparent format where we kind of explain to people what we own and why we own it. Because I just don't think the market fully understands how we go about acquiring real estate assets. And I think, frankly, I haven't done a great job of that. So we're going to spend a little bit more time on that. I think we over the last couple of years have spent a lot of time talking about securities and large holdings of those things. Whereas, that's a much more diminished part of our business now.

And so, I think we have to put a little bit more of an identity on our real estate holdings. And it should--it actually should become quite clear what's going on. Everybody knows we have a whole lot of condominiums that we sold and made a lot of money on. And everybody's wondering if we can do it again. Owning real estate and selling it at a profit is no different to us than underwriting securities and selling those at a profit. And no different to making loans and doing a CLO or doing a CMBS securitization. They are simply various phases of liquidity and they take a little bit longer to sell a $100 million building. But the mechanics of identifying inexpensive, mispriced cash flows, and then realizing the gains on them, is actually the exact same playbook that the other disciplines are.

This is a real estate business that involves various phases of real estate and debt instruments around it. But all of the decisions on valuation work the same way.

Jessica Levi-Ribner, B. Riley-FBR.

Good evening, guys. Thanks so much for taking my questions. When you're thinking about contributing loans through securities and versus doing one off your own--of your own securitizations, how does--how do you think about that and what are the considerations? And what's driving you to contribute loans (inaudible) rather than doing your own?

Hi, Jessica. It's Pamela. I think it's more of an art than a science. A lot of it depends on what's going on with our partners and market activity and availability on shelves, and how we feel about the market. So I would say that it's a little less by design than you might think. We are always prepared. We write every loan with the intention of holding it. And we aggregate loans and we intend to do our own securitization. But if an opportunity comes across to us that we can participate and provide additional liquidity (inaudible) sell the loans so that we can make more loans--and as Brian mentioned, it's a turbo driver for ROE, we'll take advantage of that.

But I would say the way I think of building the portfolio, we close loans with the intention of holding them to maturity and securitizing them and doing a Ladder only deal. And if the opportunity is there with the partners to take advantage of it, and we feel the market and timing is right, we'll participate in securitizations. In this last fourth quarter, that has been the case.

Yes. And Jessica, this is Brian. I think the one thing about adding--there are some positives to working with partners. But like anything with partners, they take more coordination. So unfortunately, if you want to contribute $100 million or $150 million in loans to a securitization and you want to do it three to four times in three to four weeks, that's a very nice way to turn your inventory over and you recycle your capital very quickly. And definitionally, you're always in the market.

The problem is it requires a lot of other people to be doing things in tandem with you--your other partners. Your BP (inaudible), your rating agencies, as well as your sales forces. And you have to watch your calendar, too, to make sure that you're not walking into a pile up at the end of the quarter. So while we certainly went out and showed ourselves and the market I think that we can do our own securitizations, there's added risk to having that much security in your execution in that you aggregate for longer, you--but you control the process. And as a result of that, you don't need the partner cooperation.

And so, depending on liquidity markets, spreads, and just general quality of the portfolio, I think that dictates it. Right now, we're still sort of in the experimental phase. We did an L structure on the Ladder only deal. The last three securitizations we participated in in October were all gain on sale where we're not holding anything. And that has its own level of attractiveness too. But it really--you have to judge not only the portfolio, the market, and where you think spreads are going, but also where a series of partners/competitors are that are working in tandem with you.

So it's a little bit confused, but right now we--through Pamela, we're executing rapid fire in the small contribution to various deals manner, which is a little exhausting for some of the people that go on these road shows when you're only selling $150 million. But it's a very attractive way to go about it, too.

Okay. And can you give us an idea of what the gain on sale looks like in the fourth quarter?

Jessica, I'm sorry. We're not sharing that information at this time because we didn't prepare for that. But I will just say, I think you will see a consistent gain in the fourth quarter.

George Bahamondes, Deutsche Bank.

Hi, guys. I had questions on the CLO and the securitization details you mentioned in your prepared remarks. But I'll just ask those offline. No questions on my end.

Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back over to management for closing remarks.

I just want to thank everybody for getting on the call with us tonight. And as I mentioned, we are pretty optimistic about the go forward here. Hopefully, these attractive market conditions last. So we will--it will be a little while till we talk to you again because of year-end audit. But look forward to catching up with you next time. Thank you.

This concludes tonight's teleconference. You may disconnect your lines at this time, and thank you for your participation.