Ladder Capital Corp (LADR) 2022 Q2 法說會逐字稿

Good afternoon, and welcome to Ladder Capital Corp's earnings call for the second quarter of 2022. As a reminder, today's call is being recorded.

This afternoon, Ladder released its financial results for the quarter ended June 30, 2022. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law.

In addition, Ladder will discuss certain non-GAAP financial measures on this call, which, management believes, are relevant to assessing the company's financial performance. 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. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the Investor Relations section of our website.

At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.

Thank you, and good evening, everyone.

For the second quarter of 2022, Ladder generated distributable earnings of $43.7 million or $0.34 per share. In June, following 5 successive quarters of earnings and portfolio growth, we increased our quarterly dividend by 10% to $0.22 per share. Rising rates continue to provide a strong tailwind to our earnings given our $4 billion predominantly floating rate loan portfolio and large component of long-term fixed-rate unsecured bonds in our liability structure. As Paul will discuss in more detail, our earnings in the quarter were again supplemented by real estate sales with our assets continuing to sell at a significant premium to undepreciated book value.

In the second quarter, we originated $371 million of loans, including 17 balance sheet loans totaling $365 million. More than 40% of those loans were made to repeat Ladder borrowers. 77% of our second quarter originations were either multifamily or manufactured housing, with our multifamily originations focused on newly constructed properties. Our balance sheet loan portfolio continues to be primarily comprised of lightly transitional middle market loans with a weighted average loan-to-value of 68%. Due to the significant loan payoffs we received and our recent focus on newly built multifamily assets, our hotel and retail concentration in the balance sheet loan portfolio ended the quarter at 5% and 6%, respectively.

Further, in July, we received an early repayment of our largest hotel loan of $57 million, reducing our hotel exposure to less than 4%. Our real estate portfolio continues to contribute meaningfully to distributable earnings by consistently producing double-digit returns on equity. The portfolio is primarily comprised of net lease properties with an investment-grade tenant and is financed with long-term non-mark-to-market debt. Our securities portfolio ended the quarter with a balance of $617 million.

On the asset and liability front, our balance sheet has never been stronger. The credit quality of our portfolio is very solid and 84% of our capital structure is comprised of equity, unsecured bonds and nonrecourse non-mark-to-market debt. Approximately 50% of our assets are unencumbered with 76% of those assets being comprised of cash and readily financeable senior secured first mortgage loans. Also in July, despite volatile market conditions and tightening credit standards, we successfully extended upsized and reduced the cost of our revolving credit facilities with our non-bank syndicate, which now stands at $324 million. With $2.9 billion of unencumbered assets, strong liquidity, a low 1.8x adjusted leverage ratio and 80% of our loan book now comprised of post-COVID originations, we are well positioned to continue to grow earnings by taking advantage of attractive opportunities in our space.

In conclusion, our multicylinder business model is working, and we are very pleased with our positioning from a credit, earnings and dividend perspective as we head into the second half of the year with the wind at our back in a rising interest rate environment.

With that, I'll turn the call over to Paul.

Thank you, Pamela.

As discussed in the second quarter, Ladder generated distributable earnings of $43.7 million or $0.34 per share. Our 3 segments continued to perform well during the second quarter. Our $4 billion balance sheet loan portfolio is primarily floating rate and diverse in terms of collateral and geography. During the second quarter, loan origination activity outpaced payoffs as we added a net $161 million in balance sheet loans. As Pamela discussed, approximately 80% of our balance sheet loan portfolio was originated in the last 15 months with floors set at the time of origination. Therefore, our interest income continues to rise from increases in rates. This benefit is complemented by our liability structure, of which over 50% is fixed rate, including $1.6 billion of unsecured corporate bonds with our nearest maturity in October of 2025.

Second quarter also included a $3.1 million reversal of previously recognized provision upon the successful resolution of a nonaccrual office loan in Delaware. Our $1 billion real estate portfolio also continues to perform well and includes 158 net lease properties, representing approximately 2/3 of the segment. Our net lease tenants are strong credits, primarily investment-grade rated that are committed to long-term leases with an average remaining lease term of 10 years. During the second quarter, we sold 2 properties, a multifamily property in Florida and a student housing property in Oklahoma, which produced a net gain of $15 million and were sold at an aggregate 30% premium to undepreciated book value.

Turning to our securities portfolio. As of June 30, our $617 million portfolio was 85% AAA rated, 98% investment-grade rated with a weighted average duration of approximately 1 year. Moving to the right side of our balance sheet. Our capital structure remains anchored by a conservative combination of unsecured corporate bonds, nonrecourse CLOs and mortgage debt with the corporate credit rating one notch away from investment grade from 2 of the 3 rating agencies.

As of June 30, we had total liquidity of $483 million and our adjusted leverage ratio stood at 1.8x. As Pamela mentioned, in July, we successfully extended, upsized and reduced the cost of our revolving credit facility. The facility was extended for 5 years to July of 2027, upsized 22% from $266 million to $324 million. And furthermore, the interest rate was reduced to SOFR plus 250 basis points with further reductions upon achievement of investment-grade ratings. This upsize of our revolver adds an additional tool to our financial flexibility that complements our large pool of unencumbered assets. As of June 30, our unencumbered asset pool stood at $2.9 billion, and 76% of the pool was comprised of the first mortgage loans and cash.

During the quarter, we repurchased $6 million of our unsecured corporate bonds at an average price of 88.6% at par. Also during the second quarter, we repurchased 400,000 shares of our common stock at a weighted average price of $10.11. And in July, our Board of Directors increased the authorization level for our share buyback program to $50 million. Our undepreciated book value per share was $13.57 at quarter end, while GAAP book value per share was $11.84 based on 126.8 million shares outstanding from June 30.

Finally, as Pamela discussed, in the second quarter, we declared a $0.22 per share dividend, representing an increase of 10%, which was paid on July 15. For more details on our second quarter operating results, please refer to our earnings supplement, which is available on our website as well as our 10-Q, which we expect to file tomorrow.

With that, I will now turn the call over to Brian.

Thank you, Paul.

The second quarter was a continuation of what we've seen over the last 5 quarters. We produced strong earnings from different parts with our multicylinder business model and benefited from our carefully constructed capital structure after correctly forecasting the Federal Reserve's hawkish plans to battle soaring inflation. In our last call, we indicated that we felt the Fed would have little choice, but to raise rates into a slowing economy and that Ladder would benefit from aggressive rate hikes. So far this year, the Fed has increased the federal funds rate by 225 basis points and is likely to continue to hike rates through year end. Because our earnings are positively correlated to rising short-term rates, we are experiencing a tailwind in our distributable earnings.

I'd like to point out one item that illustrates one component of our earnings momentum. Over the last 12 months, our top line interest income has increased to $65.3 million in the second quarter of '22 from $37.6 million in the second quarter of '21. However, our interest expense actually has fallen over the same period from $45.2 million in 2021 to $42.7 million in the second quarter of 2022. This kind of operational efficiency is helping to drive our earnings, and we are very pleased to report an after-tax annualized return on average equity of 11.3% in a very volatile second quarter.

We expect the bulk of our earnings in the third and fourth quarters to come from growing net interest margin, from our loan and securities portfolio and net operating income from our real estate portfolio. Our highly curated real estate holdings are expected to continue to deliver strong returns in the years ahead. And as cap rates rise, we expect to add to our real estate holdings over the next couple of years.

For the second half of the year, we expect the market volatility to continue as the market wrestles with the inflation versus recession question that central bankers are trying to manage. As the Fed has raised rates and slowed the U.S. economy, they've also strengthened the U.S. dollar, making earnings more difficult for multinational companies. Ladder does not own any financial investments outside of the United States, so we don't need to manage any exchange rates.

As we look to the third and fourth quarters, we have Ladder on very firm footing with plenty of liquidity to deploy into a wide array of investment opportunities that invariably present themselves after a rapid rise in interest rates like we've experienced this year. We intend to take full advantage of market dislocations and feel very optimistic about our earnings in the quarters ahead. As the Fed cools the U.S. economy, our decades of experience will guide us in our lending efforts staying focused on job 1, always protect the principal column.

I'll now go to Q&A.

(Operator Instructions) Our first question is from Steve Delaney with JMP Securities.

Congrats on the great quarter and the progress on the balance sheet. As always, I think it's important that we look at your earnings and try to at least identify the gain revenue because clients will always ask us that. It's great that you have it. But the $0.34, it looks like the -- there were gains on real estate of about $0.12. So let's call it down to $0.22, but then you had some loss on your investment securities, it looked like about $0.02. So something in the -- Paul, with something in the $0.24, $0.25 is if we were to look at your earnings ex gains, is that a number that you feel is reasonable?

Yes. I don't -- we didn't have any losses on securities this quarter. I think you might be looking at our mark-to-market on our loan -- loans held for sale, that really should be looked at offset by our hedging gains. But...

You're absolutely right. It was the sale of loans, it's not your securities.

There's some G&A to be net off those numbers. We did have a reversal of a provision when we resolved the nonaccrual loan at a gain effectively. So I think you're in the ballpark, Steve, maybe slightly lower from a run rate.

Okay. Well, that's very helpful. We'll try to clarify that in a note. And then I guess, Brian, this thing cuts both ways on the interplay between interest rates and cap rates. I'm curious -- well, obviously, you mentioned on your real estate side, and you're obviously still finding some gains and your timing may have been earlier in the quarter before everything blew out as it has. But it sounds like you still think you will realize some and on the other hand, you may be opportunistic and if things get really crazy with cap rates and buy more. On your loan portfolio, are you starting to see any signs that borrowers who have projects that are completed -- reasonably completed and may be considering an investment sale process are just deciding to extend their loan with you and ride this out? And I guess the question is there, could there be less turnover in your portfolio, which I would think would be something of a benefit on really good, almost fully developed properties?

Yes, Steve, we're not really -- we're not running into too many extensions right now because that 80% of the portfolio is new. If you remember, it's probably -- we started it in the second quarter of 2021. So we're not even near the first maturity date on 80% of the portfolio. That said, I can speak generally, and I think what's going on right now is properties that were purchased a long time ago, in particular apartment buildings, those rent increases have been attractive enough that they're keeping everybody in the game and regardless of rate it probably doesn't matter. What have gotten into trouble are (inaudible) the 3 and 4 caps in the last 12 months and anticipating we're going to have a period of rehab and maybe a Class C going to a Class B apartment building and raising rent, 30%, 40%. I think that portion of the population when you (inaudible) and yes, just general inflation within (inaudible), I think there's a limit to how far you can push those rents.

Well, (inaudible) perhaps a problem, but I do think some of the equity numbers are not penciling out on the recent purchases where people were paying up. And what really happened is when the Fed lowered rates effectively for 10 years, financial assets inflated. And it's important to realize that what you're witnessing right now when you said everything blew up, all you're seeing is the Fed trying to slow down the economy and the economy is slowing down. So it's the opposite of them lowering rates and creating all kinds of liquidity and pumping up financial assets, now you're seeing the opposite.

But this feels very much like a constructive situation, it doesn't feel like (inaudible) you can fix this, this feels like exactly what they want to happen, housing prices are getting a little crazy. If they really want us -- if it's going too slow for the more corporate pace of decline in the economy is too fast, they can easily slow things down and sell less mortgage-backed securities and do lots of other things. So I think pretty healthy economy, and this is -- this should be a shallow recession as it is very much under control at this point.

I think the question, they waited too long, but since they've acted aggressively, the 10-year has come down 80-some basis points from a top of 315 -- excuse me, 3.50 on June 14 to where we are today at 2.67. So you got to give the Fed some props for that.

And Steve, if you don't mind, I would just add also, I know that we talked about how credit spreads got really wide, especially in the CLO business. I think that was a function of a technical, and I think we've talked about this, where the 2 year was just galloping higher and LIBOR wasn't moving. I know at the end of the day, the 2 year at 286 and 3-month LIBOR that 78. So all those spread widening, I think, that you saw, which (inaudible) technical reasons, they would see too far low the 2 years, I think you're going to see a sharp reversal and the tightening spreads here.

Our next question is from Jade Rahmani with KBW.

Brian, where are you seeing the best relative value? You noted that as cap rates increase, you think you'll -- Ladder would be looking to buy more real estate. In the past, you've also bought back bonds, and I think that some of the mortgage REIT bonds might be attractive. Where would you look to incrementally allocate capital?

It's a target-rich environment right now. It is hard to find things that are not very attractive at this point because a lot of the steam has been taken out of some of the prices. So I'll go in order, I think, like in short term, when we purchased some of those bonds, we have some corporate bonds outstanding. The short bond that is due in '25 for us. We're purchasing that between 91% and 92%. The 2027 was around 82%. And the 2029 was actually around 78%. There was a follow of 2029 trading in the low 70s at one point. And these weren't trading at those discounts because anybody thinks that the companies are having it from, that's just where BBs are trading with 8 years of duration or 7 or 8 years left on them. So we took a little advantage of that.

However, the yields that we were looking at on all 3 of those were really around 8 to 9 and as I said, we had an 11.3% return this year on assets in the quarter, rather. And we're not having any trouble hitting a double-digit number across the board. I think in the short term, one of the easiest places to add will be in the static CLO portfolios of A class bonds because you know what the collateral is. It's not going to change. And I think we saw in the last week, we're a complete multifamily deal traded, the AAAs priced with at 275 of LIBOR or the DM of 275. That levers to about a 24% return. And it is 90% levered if you can lower that if you do like it. But yes, in those deals is about 85% levered. So it's clearly an attractive buy.

The other one that I like in particular and where we've been trying to find them we have done a few lately, are the AS bonds from 2019 because they have the A class in one of them paying off or else it's very little left. And in some of those cases, the subordination level is in the 70s. So they're effectively insulated from credit losses, but they're still under locked because they have office buildings and a few hotels and some industrial properties. So -- but we're looking for those and we really like them. In the long term, I would say the stretch you see in our business is going to come back, meaning a lot of the deals that are getting done today are 65%, 70% leveraged. It's just -- it is the right thing to do when you've got declining rents or any form of liquidity disruption.

But yes, I think that when they come up with a refi or another little hidden land mine in a lot of these deals is the LIBOR cap, LIBOR caps but a lot of them -- LIBOR moves so fast that a lot of the caps from 2020 are at 1.5%. And if they come up for an extension and LIBOR is at 3%, when they have to buy a 1.5% cap, these get extraordinarily expensive. So I think that there's going to be opportunities there. We actually had a situation where we sold one of our properties and the cap that we had put in place just a year earlier was worth 20% of the gain that we took when we unwound the contract. So it's a little wonky, but there are plenty of opportunities out there. And I think, unfortunately, I think the least attractive one is the actual loan origination process, but I think that's going to correct itself very quickly because I do think these -- I don't think you're going to see A classes on static or A classes on CLO deals at 275. I think that's going to stand in pretty hard.

So putting that in context with respect to Ladder, should we expect the company to be buying more securities? Should we expect the company to slow originations, pivot that way? What do you think this bodes for Ladder's plans for the rest of the year?

Well, I think we did slow origination a little bit inadvertently. We didn't do it on purpose. What happened was rates moved up so quickly that some transactions just fell out because the yields were falling apart on the equity side. Others did get to the finish line, but still had slightly lower prices. But no, I think we're going to pick up in our origination because we believe it's spread to go to tightening the CLO. And so we're pretty comfortable with that and so we're going to move our spreads in origination. And as far as security, I would love to add a lot of securities where they'd be pricing in the last months, but I don't think we're going to be able to, I get $100 million to $200 million, but I don't think we're going to be able to buy a large amount of AAA bonds that are yielding 21%.

Okay. And in terms of the real estate portfolio, do you anticipate continued sales for the rest of this year or steady state? What's realistic to expect?

Things are for sale at Ladder often. If people want to buy something, again, it's the 10/31 market sometimes pricing. But we felt that cap rates were quite low and interest rates were very low. So we put out the portfolio in places, especially in some of the high dollars per foot assets that we own. But the way we look at -- we like cap rates wider when we're acquiring, but we also have to have an accompanying low interest rate in order to create the right spread to lever the return. So I think we will be adding because I think cap rates have just been higher. And I don't know that, that has to do. I don't know if I -- if the stretch thing here is a lot of people are writing 65% loans, and we will too. But if you want to write a 75% loan, we could do a 65% senior and a 10% mezz and just push it together into a first mortgage. And I think we've got that kind of flexibility. So I think that's another really good opportunity. It's not for everybody, but it's going to be, yes, on best credits, I think we'll do that.

And then in terms of credit across the portfolio and a looming potential or probable recession, what's been the company's approach? Are you buckling down in terms of asset management, making sure that credits across the portfolio look good? How do you feel about the credit standpoint?

I think with the credits in shape right now, and I think you have to go back 18 months to see like how we got there. We had originated some loans that were not in the multifamily area because we thought they were very attractive and nobody was making those loans. And we got most of those into 2 CLOs that we did last year. And those are financed for a long time, so it's match-funded in that regard. Around November, we felt that multifamily was -- a lot of people thought that spread widening was a year-end phenomenon, we did not believe that. So we moved to focus on new apartment buildings that were coming off construction loans, and we would take the lease at risk. And I would say if you'd asked this question in March, I would have told you that the 2 property types I'm pretty comfortable with are apartments because housing prices -- the whole days exchange, housing prices got crazy, people could not have the down payments to purchase that loan -- the property at a newer price.

So what happened is they stayed in their apartment and then the 2 graduating classes of college kids because before nobody moved in because of the pandemic, this year, they all graduated so you had a lot of demand going on. And then people who sold their homes because they were paying at such high prices, they also moved into apartments. So the apartment market is -- was and is very, very attractive. And rents will go higher, I think, at the lower end of the apartments, it's going to be harder because the income is being zapped by gasoline prices, food prices and rent. I don't know higher in though, I think there's a lot of room where people can afford those things. And even in the senior housing area, the cost of living adjustment is going to be very high this year. And most of those cost of living adjustments on social security are going to be pass-through to rents, I think.

So how are we reporting for it? We started preparing for it last November. When we move to newer multifamily, today, we're going to see less proceeds because rates are higher. And -- but we're very comfortable. And as Pamela mentioned, we had 3 payoffs in the end of the quarter and in the first week of July, where we had a modified total loan for $57 million, and that's paid off a year early. It was not levered. We had -- they build our office building, which had been a defaulted loan that we have been managing, and we wound up reversing $3.5 million there. And in addition to that, we got to pay off on a mall, which was up $28 million that was also unlevered. So we took in $112 million of cash a couple of weeks and while that hurts a little bit on your back, we think it's gradually replaced as we (inaudible) condo assets.

Our next question is from Ricardo Chinchilla with Deutsche Bank.

I was wondering if you could comment on how you feel your liquidity position is for a recession at this point in time and try to compare your position and your strategy towards this next recession versus the prior recession? And maybe what policies have you implemented to be prepared? Or what lessons did you learned from the last recession that you are thinking about applying into this next recession, particularly when looking for opportunities were to make incremental gains?

I don't like any is the last recession you're talking about?

The big recession, the last recession, 2008, maybe.

2008. Well, in 2008 they were, I'll call it the Great Recession where effectively residential homes were overlevered. We were -- I was running the global commercial real estate group at UBS. And my team and I had been backing down the portfolio for 1.5 years at that point. So we -- when we left UBS, we left around June of 2008, we're actually up close to $200 million. And so -- and that wasn't because we were making that much, but because we were selling everything. So (inaudible) last recession, I thought it didn't really -- anybody. You saw (inaudible) defaults on subprime mortgages (inaudible) 20% the first month.

I always question the wisdom of making the loans to individuals that the only thing you know about them is they don't usually pay their bills. So we avoided that, and we will get out of that pretty clean for the most part. I wouldn't say all the parts, but certainly that they were just buying things in box and securitizing that. And so there is more of a residential mortgage problem, I think. So that's why we set up Ladder. The team and I left and the team that I left with set up the company through private equities that ultimately went public. So looking any of the individuals at Ladder were with me in 2008 at that time.

As far as going into this recession, we are very low levered relatively. We are one notch below investment grade at 2 of the 3 rating agencies. That's been a long-term goal. Most people who know us, who we've been saying that for 8 years or so -- last out a lot 8 years ago, not getting locked out any more. So we have plenty of cash. We just extended and upsized the revolver -- the revolver to $324 million. We did a great job on that. And we have lots of cash, and we have great access to the corporate bond market. And I would just point out that we have one of the differentiating feature of the Ladder as we had $1.6 billion in corporate bonds outstanding, none of which are due until (inaudible) the bulk of them are not due until 2025, 27' or '29. So -- and the rate on the $1.3 billion that's due in '27 and '29 is on average about 4.5% fixed. So as LIBOR goes higher, and we're now adding loans at 6.5% to 7% (inaudible) the bottom line because we're still paying 4.5% on that $1.3 billion of corporate bonds.

And that's really the operating leverage we keep talking about, and it shows up, I mentioned in my comments, what has gone on with the top line interest income line versus our interest expense. So I think we are as well positioned as anyone. And we do believe this is going to be a mild recession. Again, the Fed paused this. We did this on purpose. And it was very expensive to hire people. You couldn't get enough people. Housing prices were out of control, gasoline was flying and so they want to slow the economy down. And I know that a lot of people haven't seen a recession like this, but this is a little bit (inaudible) and it's something to be afraid of. This is not an overleveraged situation, where there's -- I think China is having a 2008-style downturn in their real estate sector (inaudible) I'd say there's going to be a relatively shallow recession and kind of quick recovery. And I don't really think it's a great idea that has 0 interest rates for 10 years. So hopefully, we wouldn't revisit that again.

Our next question is from Eric Hagen with BTIG.

So for loans that are maturing this year, I imagine some sponsors that have typically relied on financing from the CMBS market or an asset sale. So in cases where those options are either unattractive or uneconomical, what do you think is the source of takeout, if you will, in those kinds of situations?

Well, if it's in a CLO, I think the issuer is going to be very accommodative and modifying the terms just keeping it going. But to the extent that it's down on any line or if the loan is due in a bank, I think the banks, especially, with the regulators are going to be less tolerant. And so as a result of that, I think the profiling will go up on the property or else, as I mentioned earlier, that's stretched in our concept where the guy is going to say, I can't really refinance the loan I had even though I didn't do anything wrong. Rents are doing what they're supposed to be doing, but interest rates have eclipsed all of the income we've gained, taxes in certain places are going higher. And so a lot of the effort on the part of the equity sponsor has been for not.

Whereas I do think from the lender's perspective, you're going to have a situation which I would think when you got cap rates in the 6s and 7s, this was more normal. And there's less leverage and people who can meet their maturity date with the full balance might very well wind up in a first mortgage with a mezz or as I often call that a stretched senior. And those are attractive because it isn't like the properties are falling on embedded value. They're simply drifting down because cap rates are going up because interest rates have moved. But once interest rates stop climbing, the value tends to stabilize pretty quickly. And with the dollar being very strong, I think there's a whole lot of international interest, too, that might make this a very interesting scenario going forward. We really like what we see coming here. It may be a little difficult for some of the equity guys that are not capitalized, but the debt guys should be fine.

That's really interesting perspective. In the net lease portfolio, can you discuss how well matched the underlying lease term is with the mortgage financing that you have against it? And does that have any bearing, I mean, the matching? How many bearing on the assets that you choose to sell? And then in cases where there's maybe a more meaningful mismatch in term, how do you think investors should approach the value that they're getting there?

Well, it's a big portfolio. It's 168 triple properties. So -- but I will say that, for instance, I know that we have 4 beach side wholesale clubs and be done for 10 years, there CMBS deals and they're open to prepayment without penalty in September. So that's about $45 million worth mortgages that have been out there for 10 years. I believe even at higher interest rates, given the fact that in those 10 years, (inaudible) private company to a public company. Obviously, the pandemic didn't hurt them. And so the cap rates have really collapsed there. And so we've got a reasonable game there if we want to sell them. However, we also have a fortunate scenario that if we refinance them, we'll probably refinance into higher proceeds and to cash out refinance. And the cash flows are excellent, and the lease terms are 10 years left the average term -- the average lease term is 10 years. So we're pretty comfortable with those assets and we got do either with them.

Once we put them into another CMBS deal, we can't really sell them to the prepayment penalty is too high over loans are assumable. So it's a little hard to talk generally. We don't usually sell things if there's large prepayment penalties or if we do, we ask the buyer to pay that prepayment penalty. And for the most part, they've been accommodating that. So we don't have a lot of leverage in that portfolio. The reason most buyers do pay that prepayment penalty is because they're able to borrow more than the debt we put on those assets. So we like that portfolio. We've been selling it. We'll always sell it if it feels like the price is right. But we're happy to hold it forever.

We think that we have assets and tenants, and we actually pay very close attention to dollars per foot in case we get the thing back vacant. So overall, we've been selling here and there, but not at all a concern. We think we are filled with options with 5 to 6 years left on the mortgages, we're not selling those. So the prepayment penalty simply too high, although going down as rates rise. So the real estate book has ample gains in it. I think we've taken quite a few of them at this point. But when people are buying cap rates very tight and they're able to finance themselves at very low interest rates, I think you have to ask (inaudible) sometimes -- and I sometimes say I love our real estate assets, but it's like the kids going off to college. You run this, but they have to go, and that's the way we approach it.

(Operator Instructions) Our next question is from Matthew Howlett with B. Riley.

Brian, on the last quarter, you talked about the $0.04 impact of LIBOR 150 at the end of June. Now where we're close to 2.5%. Can you just talk a little bit about the cadence on what to expect in the third and fourth quarter given the Fed hike this week and then what probably maybe 50 bps, September?

Yes. I mean, last quarter in our last call, I think we were talking -- it's funny. We mentioned, I think if our estimates were if the Fed raised, and we kind of talk about the Fed funds rate and LIBOR as if they're the same. So forgive me there. But they do track together. And so we -- no one thought I think at the time in April when we were talking that the Fed would raise rates 200 basis points by year end, we did. However, we did not think they would do it before the end of the next quarter. And so they did that all very quickly. The 275 is really -- been a little bit of a surprise, not a surprise in the last week, but certainly from the April perspective. And at that time, I think on a gross basis, if 100 basis points given where we were with our portfolio, we'd probably add $0.16 a share. And 200 basis points would add $0.36 a share gross. So I was not going to talk about 15% of that for expenses. And so at $0.36, you would maybe call it $0.28 or $0.29 a share.

And the other part of that was that we had an estimate of what would pay off going into that. And the second part was we had that we would originate going into that also. I think the origination part of that conversation has been a little bit slow, but I don't think it's a problem. I think it's just delayed because there are transactions that we're working on right now that have been going on for a while, but the loan proceeds were not as high as they were 2, 3 months ago. So there's some price negotiations going on. So I'm pretty comfortable that the market is a little rate shocked because it moved so quickly. However, I'm relatively certain through many years of experience that the commercial real estate market will be just fine with rates at 6%. I don't think that's going to be a problem. It just takes a little while for those rates to set in.

So I do anticipate that the Fed -- and I think the Fed will keep raising rates. I think they're probably going to get to around 3% by the end of the year. Yes, I would expect our top line interest income to keep rising. And as you know, our fixed rate $1.6 billion does not rise with it. So it's just additive, and there's a lot of operating leverage as a result of that. So we haven't picked at the expectation a little.

Got you. How inclined are you to keep raising the dividend? I mean, obviously, you covered the dividend next to real state came from the real estate sales this quarter. And I know this obviously -- I'm not sure, going into what you think would be a potentially soft planning, but a minor recession. How much do you want to raise the dividend?

I love raising the dividend. I'm one of the biggest shareholders in the company. However -- and Paul, you can chime in here, or Pamela, but I'm pretty sure we're covering the dividend now a lot of interest and expect to cover it again in the third and fourth quarters. And unless the fed starts cutting rates or we stop originating loans, I don't see that ending. So I suspect we've got an attractive runway here, and I will never get tired of raising the dividend as long as the funds are available. And I think we've really built a machine right now that has the ability -- people say what are you going to raise the dividend to I say, well, tell me where the Fed is going and all the confidence in the world in our origination machine as well as our credit standards. So we'll get that right. And I think the world is simply less liquid than it used to be and excess benefits lenders. And I think we're one of them, so I'm very optimistic about the quarters ahead here.

And I think, just what's the update on the investment grade? I mean, I'm a little surprised to hear the bonds -- your bonds are getting that much of a discount when you're not away from investment grade. It seems ridiculous to me. But where are you in terms of the rating agencies? And I know these are the lines, if you could go down if you get the upgrade? Just how important that is to you too and how close are we?

Well, I will speak on behalf of rating agencies. I'll speak on behalf of my opinion. And we have some general guidelines as to how rating agencies, and they have different guidelines, but we generally understand how they look at it. But -- so we don't think we're too far away from that if we wanted to do it. Rates got too high for us to attempt to get that done. But instead of that being a problem, we made it into an opportunity, and we acquired some of our bonds back. But the rating agencies don't stand still. Some of them will take a look at what they think or whatever recession is that's coming. But given that our 80% of our assets, we have a lot of payoffs after the pandemic started because we had very high floors, and we had very good credits when the Fed lowered rates. We got paid off more than most.

So I think you might remember, it wasn't that long ago, we were holding $2 billion in cash. And so we simply moved that $2 billion into the loan category, we're only levered 1.8x. So we are going to maintain rational leverage and hopefully allow us to have the option of making a run at going to an investment-grade level with an issuance. But a lot of things have to fall into place there, and none of them are promised. But we feel pretty good about it. We've studied this and we understand where we have to be as long as the goalpost don't move too much. But as far as the bonds getting down and trading that low, that was indiscriminate selling. And we were not singled out as one of the bad ones or the good ones that they were (inaudible) everything as high yield sold off as the fears of recession to which surprisingly, because it's almost the high-yield complex was energy related and a lot of it was being caused by energy crisis.

But I will never figure out what makes (inaudible) sell things, but that was in sight was that I'll just try to take advantage of it as present itself. But when we see yields in the 8s and 9s on our own paper, we could beat 8% or 9% ROE pretty easily. So I can make a case for not buying them back. But given that we're uniquely positioned to take a 20-point gain, the night we buy the bond, which no one else can do because they have to wait for the principals come to them in 8 -- in 7 or 8 years. Sometimes, that's a little tempting. It's also, by the way, one of the unique features of Ladder and that we have that ability to go buy a lot of our stock back in the open market at these discounts. If you're on a repo line, you don't have that opportunity.

And we -- I mean, we'll see the peers, but I doubt many of them bought back their (inaudible) some of the securitization that I'm glad to see Ladder doing it. My message to the Board would be keep buying back both debt and stock when it's there. I think that's one of the benefits of being internally managed. We try to always buy them both because we don't want bond investors thinking -- we don't want equity investors thinking we're just taking care of the bond guys that we don't want to bond investors thinking we just buy stock back. But in this case, given the sell-off that took place, it was the worst half year in 40 years in the stock market. So that presents great opportunities, and we had plenty of cash. So we buy a lot. We spend a little bit, but we were doing very well in the overall portfolio. But if those opportunities present themselves, you should expect us to wait in there.

And that's -- I also want to point out, during the pandemic, when our bonds sold off, we buckled them too. I think we bought about 100 and those were the 27s that are out there now. Those are -- they used to be 750 of them out there, and now they're 650. So those are very nice instruments to have in the open market. And if the overall market gets shaky, and you're in good shape, and we always try to be on the front foot. And as I said today, we are on the front foot. And we're not against buying other people's instruments either. When the whole sector gets hold off for a reason, we'll step in there and take advantage of it. That's what I mean like. We got the dividend in the low 7s, we've got yields on our bonds in the 7s and so sure buy them back Yes, they're pretty cheap. But we can make so much more by investing money right now, and I think that's how we best serve our shareholders.

And just one follow-up on that. Do you think that some of the bigger REITs could have problems, mortgage rates within a hotel or big office exposure and that could be an opportunity for you guys to step in somewhere?

I don't know. I don't take too much attention to other companies. But the sector is -- the office market, we're going to have to see where it goes. I'm generally optimistic, I think that come September. I think the country is getting one more summer in even though most people are acting like there's nothing wrong out there and no one's in the office. I think in the fall, the office market will come back. I think the hotels sector is doing fine right now. The other reason you're not seeing a lot of financing there is because it don't have 12 months of trailing 12 cash flows. But once they do, I think hotels are going to -- should be just fine.

We have reached the end of our question-and-answer session. I'll turn it back to Brian Harris for closing comments.

I don't have too much to say other than we're focused on our plan. Our plan has come full circle at this point. And they were supposed to do, we're set up to take advantage of it, and rates are higher than the banks have planned for. And we really do look forward to the year ahead. These are good times for us. So thanks for staying with us and also (inaudible).

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.