Ladder Capital Corp (LADR) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to Ladder Capital Corp's Earnings Call for the Third Quarter of 2021. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended September 30, 2021. 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. Please go ahead.

Thank you, and good evening, everyone. For the third quarter, Ladder generated distributable earnings of $17 million or $0.14 per share. I'm pleased to report that we had another quarter of strong loan originations supplemented by additional gains from our conduit securitization and real estate equity businesses. After resuming making loans in March, we expect to end this year by having originated the highest annual volume of balance sheet loans in Ladder's history. Year-to-date through September 30th, we originated $1.5 billion of balance sheet loans, driving both portfolio and earnings growth. Approximately 1/3 of our loan originations were made to repeat Ladder borrowers, reflecting the value of our franchise and strength of our relationships.

In the third quarter, we originated 23 balance sheet loans totaling $578 million. 75% of those loans are collateralized by multifamily, manufactured housing, industrial and suburban office properties.

In addition, we have a strong growing pipeline with over $1.2 billion of additional loans under application. The composition of our balance sheet loan portfolio remains consistent with prior quarters, and we ended September with a $2.8 billion portfolio, primarily comprised of lightly transitional balance sheet loans with a weighted average loan-to-value of 67%. Furthermore, we continue to expect our loan production to comfortably outpace repayments over the coming quarters. After experiencing robust payoffs last year, 45% of our balance sheet loan portfolio is now comprised of post-COVID originations. Our remaining loan portfolio is performing very well with 100% collections, demonstrating the strength of our conservative underwriting and the success of our proactive asset management process.

We continue to focus on the middle market, where we're seeing constructive credit trends and opportunities to lend in high-growth markets that are experiencing positive demographic shifts and strong fundamentals. Our strategy allows us to achieve compelling risk-adjusted returns while building a diverse loan portfolio comprised of granular loans with an average loan size of approximately $20 million.

In our conduit business during the third quarter, we originated $50 million of new loans and securitized $73 million of loans for a gain of $2.4 million. We are also continuing to build our pipeline of conduit loans, which we will target the sale of securitization over the coming quarters. In our real estate equity segment, we sold 3 assets generating $8.4 million of gains above undepreciated book value, further illustrating the embedded value in our real estate portfolio. Turning to our capitalization. As of September 30th and after buying back $7.6 million of stock, we had total liquidity of over $1 billion, and our adjusted leverage stood at 1.6x net of cash and 1.1x net of cash and securities, which we intend to continue to amortize down and/or sell.

During the quarter, we closed a $600 million amount of CLO at a cost of LIBOR plus 155 basis points. While we plan to continue to take advantage of the CLO market as an additional source of attractive financing available to Ladder, we remain committed to the unsecured corporate bond market, which commitment is accompanied by our high-quality pool of unencumbered assets, primarily comprised of cash and first mortgage loans.

Looking forward, we expect continued portfolio and earnings growth. In addition, we are well-positioned to benefit from a potential rising rate environment, both by way of our large and growing portfolio of floating-rate loans as well as our significant base of fixed-rate liabilities. In short, we expect our strong originations momentum and the long-term investment in our capital structure to bode well for Ladder in the coming quarters and years.

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

As discussed in the third quarter, Ladder generated distributable earnings of $17 million or $0.14 per share. As Pamela mentioned, our originations and pipeline are very strong and complemented by the $600 million managed CLO that we closed in the third quarter. The CLO financing has an 82% advance rate, a weighted average all-in cost of LIBOR plus 189 basis points and provides for a 2-year reinvestment period with an expected weighted average duration of approximately 4 years. The offering was heavily oversubscribed, attracted a broad range of leading institutional investors and provides Ladder a highly attractive cost of capital and a flexible nonrecourse and non-mark-to-market format.

Turning to our corporate bond financing. In September, we redeemed $466 million, a 5.25% bond at par that were due to mature in 2022. The bonds were effectively refinanced with our June offering of $650 million that had an 8-year tenor, a 4.75% coupon, with the ability to call the bonds after 3 years. Our nearest bond maturity is now October of 2025. The unsecured bonds and nonrecourse funding sources continue to be a cornerstone of our capital structure. Our recent successful offerings in both markets have further solidified and lengthened our liability structure while reducing our usage of mark-to-market financing.

We are one notch away from an investment-grade rating with 2 of the 3 major rating agencies. We remain committed to the unsecured bond market and conservative liability management as we continue our March towards becoming an investment-grade capital structure is comprised of equity, unsecured bonds and nonrecourse nonmark-to-market debt. Furthermore, a more expensive crisis-era financing continues to amortize aggressively. Timing of this works well with our deployment of capital into new loan origination and our goal for a fully deployed balance sheet in the coming quarters.

Complementing the strength of our capital structure are our 3 segments, which continue to perform well. Our $2.8 billion balance sheet loan portfolio is 97% first mortgage loans, diverse in terms of collateral and geography with less than a 2-year weighted average remaining duration. During the third quarter, loan origination activity outpaced payoffs as we added a net $280 million in balance sheet loans.

Our balance sheet loan portfolio continues to perform well as we received 100% interest collections during the third quarter, and the general portion of our CECL reserve decreased to 50 basis points. The decrease was driven by a significant portion of our balance sheet loan portfolio now being comprised of 2021 originations with new valuations and the overall improvement in the macroeconomic outlook.

Furthermore, we reduced our nonaccrual loan balance by $12 million as 1 hotel loan paid off at par during the quarter. The payoff included the collection of all default interest and late fees due. Moreover, no new loans were added to nonaccrual status.

As Pamela mentioned, our conduit business generated $2.4 million of distributable gains with the contribution of $73 million of first mortgage loans to a securitization during the quarter. Our $1.2 billion real estate portfolio is diverse and granular and includes 163 net lease properties, which represents 2/3 of the segment and continued to perform well during the quarter with 100% rent collections. The sale of 2 of our net lease properties contributed $6 million to distributable earnings, generating a combined return on equity of 16.7% over our whole period. The sales further demonstrate the embedded value in our real estate portfolio.

Also during the third quarter, we successfully sold an REO student housing property, generating a $2.3 million gain above our original basis, and we acquired a student housing property with a joint venture partner for $20 million.

Turning to our securities portfolio. As of September 30, our $725 million securities portfolio is 85% AAA rated, almost entirely investment-grade rated with a weighted average duration of approximately 2 years. This portfolio continues to benefit from strong natural amortization and liquidity as the majority of the positions are front pay bonds. Also as of September 30, our unencumbered asset pool stands at $2.8 billion and is comprised of 78% cash and first mortgage loans. The size and quality of our unencumbered asset pool continues to provide Ladder excellent financial flexibility.

During the third quarter, we repurchased 694,000 shares of stock at an average price of $10.94, and our Board of Directors increased the authorization level of our share buyback program to $50 million, effectively adding $15 million in buyback ability to the previous outstanding authorization.

Undepreciated book value per share was $13.78 at quarter end, while GAAP book value per share was $11.98 based on 125.5 million shares outstanding as of September 30, which was paid on October 15, and we expect our dividend to remain unchanged in the fourth quarter of 2021. For more details on our third quarter 2021 operating results, please refer to our quarterly earnings supplement, which is available on our website as well as our 10-Q, which we expect to file tomorrow.

I'll now turn the call over to Brian.

Thanks, Paul. As I was preparing remarks for this last earnings call, it's apparent that we are in the final stage of our pandemic response business plan that we set forth about 18 months ago. With our earliest corporate bond maturity now not until 2025, we've built a strong foundation to finance our planned increase in earning assets in the years ahead. As we enter the end of 2021, we have plenty of liquidity and are lightly leveraged. This combination will provide us with plenty of runway to increase our loan portfolio in the years ahead and continue the earnings momentum now underway at Ladder.

For quarters as we follow our simple business plan of investing our cash into newly originated balance sheet loans at a pace that exceeds the pace of loan payoffs each quarter. This growth in lending will be accompanied by growth in earnings, and we expect the positive earnings momentum that began in the second quarter to continue. As we invest our cash on hand, our earnings momentum should estate assets to supplement quarterly earnings and provide additional capital for reinvestment into higher-yielding commercial mortgage loans. We currently have $2.8 billion of unencumbered assets and $130 million of those assets are securities.

Over the next year, I would anticipate net loan growth and increased earnings as we become fully invested using modest leverage. As evidenced by our large and growing pipeline of loans under application, we are seeing plenty of opportunities to lend safely in a post-pandemic world. We've constructed our balance sheet to benefit from rising interest rates that we expect to prevail in the near term with a substantial amount of fixed-rate unsecured longer-term debt as a differentiating feature at Ladder. By extension, we think inflation is here and won't be as transitory as many think.

There are so many clear signs of this, that they're almost too numerous to count. While commodity prices can move up and down rapidly, shelter costs as in apartment rental rates and home prices don't react nearly as fast in a normal economy. The recent cost of living adjustment announced for the social security recipients of the United States at 5.9% was the largest in 40 years. So that part of the government is seeing things differently than the Fed. I'll end here by saying that higher rates, a growing floating-rate loan portfolio and strong markets for selling mortgage-backed securities and real estate should pave the way for continued earnings growth at Ladder. I'll now go to Q&A.

At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Tim Hayes with BTIG.

First question here. Just actually maybe 1 or 2 around the pipeline. $1.2 billion, clearly, you're looking at a lot of different loans right now. Would you be able to first comment on how much of that you expect to close in the first cores you were doing? And I think the allocation of the portfolio went up a bit. So I'm just curious if you guys are taking -- if you're finding opportunities to get a little bit more spread there given that it's somewhat...

Clarify for me. I think you asked about the first quarter, but did you mean the first month of the fourth quarter? Or did you mean the...

Sorry, I must have must first. I meant fourth quarter in total. So just to repeat the question with less mumbling or net less job? How much of the pipeline do you expect to close in the fourth quarter?

Pamela, I'm going to punt that one over to you, if you don't mind.

Yes, no problem. So we have probably at this point, over $1.2 billion. I think our goal is to close someone. And it looks a lot like the same composition. I think your other question was what does it look like? It's the same composition. We're primarily multifamily, office and mixed use. And it looks a lot like...

Okay. Fair enough. But I guess just maybe harping on that part B of that question, just the suburban office. Are you doing anything in urban markets on the office side? Are you binding certain types of office assets that aren't receiving as much attention from the capital side and are providing opportunities to lend a little bit wider spreads, same on maybe on the hotel side? Or is -- are most of where you're lending kind of in the more defensive range where competition is a little stiffer?

Okay. Sure. I'll take that one. As you know, we don't target CLO specifically. So we'll oftentimes drift into areas perhaps that don't fit right into a typical CLO at the current moment. But we do focus on credit and basis. We always focus on dollars per foot, dollars per room for hotels, dollar per unit for apartment buildings. So we're definitely seeing some openings that are better than they've historically been. I have to be a little bit cautious with the answer because there's a few cities really aggressive in chasing even there. New York City is interesting. It has opened up much nicer than I thought it would. The residential areas of New York are quite crowded. The business side of New York isn't quite back. But given the way rents are moving in New York City, wow, we think it's a matter of time here until we wind up back in a hybrid scenario.

And while New York does have some of the same problems as Chicago and San Francisco, New York has the one benefit of getting a new mayor in November. And we're -- it's a very hopeful feeling throughout the city that perhaps the new mayor will focus a little bit more on crime than the last one. So -- but we're also seeing, in some of the lower tax states, California I -- I'm sorry, Florida, Texas. We are seeing plenty of activity there. When you look at an office building in Florida, it looks like it's on sale compared to New York and/or California. And it just looks like it should be relatively easy to grow. And most of the loans that we're doing are acquisitions. They are not refinances of a slowdown business plan because of COVID, what we're seeing is somebody actually putting new capital up, acquiring an asset with a holding more than the multifamily market.

The multifamily market is a little overheated, in my opinion, but it does have some technicals that are going in the right direction. The fundamentals are support. So yes, we did do 2 hotel loans in the quarter. Strangely, one of them was even in Chicago. But these are special situations, you really have to underwrite those might be. So -- but if you look at '20 hotels and you do too, that's fine. We're not actively seeking to do high-yielding hotels. We -- it is expensive capital for us. And we don't want to own a lot of it, but we're happy to own some of it. And so as Pamela mentioned, we're really -- it looks to me like the portfolio is shaking out in the rest, almost all of it multifamily and mixed-use. And when I say mixed-use, it's mostly multifamily. They might very well be a retail component or office component, but coming from the apartments.

That's some good color. I and tackling my -- all my questions that I packaged into one. I'll drop off there and hop back in the queue.

The line of Stephen Laws with Raymond James.

Brian, I guess the first question, the second quarter in a row, you guys have harvest air and whether we're going to continue to see gains, how we should think about that in the quarters ahead?

Sure. We are, I would say, an interested seller greatly. That could be because it performed so well in a pandemic. It could be because we have more than 10 years left on the leases. And it could be because several of the companies that we backed as a private entity are now public without -- we've invested in over the prior 10 years is really paying off right now. And so we own them at very attractive levels. A lot of our cash flows are higher now because we've take a building. So there -- they have appreciated rather dramatically. And so from our perspective, we will harvest gains when it seems like it's a fair price. We always will become a seller. The other thing that we did too, and unfortunately, we had a period in time there where our stock was trading well below book value. And so any time you see that, you say to yourself, all right, where's the problem here a mention. But these are really the silent heroes of the portfolio. These things generate double-digit returns day in and day out. We have no problems with them during COVID. And if we want to take some gains, we can. We have the -- I think that we're taking modest gains. We're not -- there's no real rush. Sometimes we get a price from somebody we want to sell to, and then they decide not to buy it, and you don't hear about it. But we...

The United States increased 600 basis points. So how targeted was that versus coincidental? It seems like an appetite is there for larger loans given how much liquidity you guys have on the sidelines.

How office properties are used. But frankly, in some of these office buildings in downtown Miami, I think if housing prices continue, some of these things will even convert to apartments at some point. Say, I would actually call it more coincidental than anything else. And I think a lot of that has to do with the fact that some of the larger competitors of ours that do traffic in $100 million plus some tenancy is a little shaky. What we're doing is we're getting into the -- we see a same here, and we're able to -- we know how to. I think we were in large banks for many years in their real estate portfolios that we compete for. And it's not because we can't compete for them. We're able -- we've always held that the middle market has a safer and higher-yielding analysis for us. So we'd rather know that, that sounds crazy, but it sounds like you need a lot of people, but it does actually keep you pretty safe.

However, once in a while, through repeat customers or for various other reasons, when perhaps editors there, the Michigan area was having a hell of a time because the auto companies were in trouble. And we were one of the largest lenders in Michigan, and it wasn't because we were targeting Michigan. It's just there were no banks and a lot of the same thing happened in Florida. And so we just happen to have $200 million loans in Florida. And we're actually pretty comfortable in New York, too, but you won't usually see us on a net center, the financial district, the B buildings that aren't so pretty but very affordable rents, especially when compared to some of the A properties.

Adding not with 7 $5 million on the portfolio.

Yes, I did notice that really changed much sequentially even though the $100 million plus doubled as a mix, but to point that Pamela. And in the quarter that Pamela just answered. Obviously, at Ladder, it's a little bit different than some other places, which we close to $200 million loan, we're going to be on the high side of things. And if that loan doesn't close, we'll be on the normal side of things, we closed $530 million or something like that. So I thought this quarter was a little slow, actually. And I know that one of the reasons it was a little slow is, believe it or not, we're getting clicks and overnight carriers don't oftentimes deliver overnight. And sometimes real estate closings have to wait a few days because of that. So there is -- it's tough to close quickly right now so beyond our control.

Our next question comes from the line of Steve Delaney with JMP Securities.

And congrats on the broad progress here for the second straight quarter. I'd like to start with the loan sale gains that Pamela mentioned, up to kind of a 3 plus percent gain on sale on the 73%. But Paul, the income statement, the GAAP income statement shows $3.3 million of a gain on sale. Were there some loans in there that weren't conduit loans that were sold in the quarter?

No, the impact is the hedging, Steve. So the GAAP will show the gross amount. Hedges associated with those sales.

Got it. They're in another line in there and so that's gross and then not including the hedges. So Pamela's figure was -- okay, great, 3.3%. Okay. That's helpful. And then maybe while we're on that same kind of comparison. So on the triple-net lease sales of $8 million to distributable and then the GAAP gains are 17.8%. Is the delta there something to do with recapture of depreciation?

Exactly. Exactly.

That shows a good guess. Okay. Well, the '17 was nice, but that will take the 8, for sure, to wrap up that cash, really nice to see it come down $300 million quarter-over-quarter. I guess I'm thinking out, Brian asked, after you're using CLOs now and you're getting great advance rates. In fact, I see you might be doing another CLO SL3 in November, even bigger. But where -- with everything that's going on, where do you see kind of cash settling in a range? Chris, Miller mentioned to me, he said it looked like pre-COVID. You guys usually carried at least at quarter end, you showed about $100 million of cash months from now where cash might settle?

I think it will probably still be in that $100 million area. Admittedly, there unique situation that took place when the U.S. government, but let's hope not. But I think you really also have to -- I know I've learned a lesson, if you have to really keep an eye on what can hurt you, what, on a mark-to-market basis, what can really move in price? And so to the extent that you've got credit-based margin calls in your repo facility, and you've got mark-to-market secured. And as you correctly noted that we're -- all we're really doing here, which is why I started by saying it sounds awfully similar to the last quarter, and I get the feeling we're going to be a broken record here for the next 2 quarters. I because all we're doing is moving cash into commercial mortgages. And we have lots of it still. The payoffs have slowed because I think we had faster payoffs than everybody else, we call it CLOs. And we keep the activity to what's required. So if a guy is a 90,000 square foot shopping center with 10,000 square foot vacant, it doesn't get 5 years.

They just see us I was getting around with a panel when we were writing our scripts. And I was saying it's lather, rinse and repeat. We're just going to do the same thing. We're just moving cash, which earns nothing into commercial mortgage loans, which earn around 5% unlevered. And we have 1.1x leverage if you get rid of security. And we have $130 million of bonds that are salable that are not levered at all. And so that's $130 million cash we can go to if we need it. We have a $250 million revolver we have it drawn. So it looks like this is just going to be a mortgage lending machine for the next 12 months, I think. And the question really is, and I think what the governor will be, how much are we going to push leverage, knowing that we're trying to become an investment-grade company. So that is where I think the pressure points will come in. But I don't see that for 9 months.

And Brian, I just wanted to add, you are dating us with the Ladder shampoo commercial. But I wanted to add -- I think -- I don't know if you caught this, but when you talked about the cash position, that's in combination with the $266 million undrawn revolver. So I just want to talk about the digital versus the cash.

Yes. Yes. That makes good sense. Okay. So listen, a great progress. I think it's exactly what the Street wants to see, and you're going to see with another solid quarter, the basic blocking and tackling and commercial real estate bridge lending is going to really help the stock price here over the next couple of months. So congrats for that.

Our next question comes from the line of Matthew Howlett with B. Riley.

Brian, just a follow-up on the investment grade. How long do you think it will take to get to investment grade? And how long would it take you to redo the stack, the unsecured debt call build legacy stuff once you get it?

Well, if I answer that question, there are 2 or 3 agencies that will put me in a jail cell for a year and make me wait. So I have my own model in my head. It's not around the corner, but we're hoping to do it in your lifetime.

Very helpful. And then just -- you're on track to fully extinguished at the legacy CLO from Goldman and the Coke facility, that's still on track to pay down because that's obviously going to seeming a lot.

Yes, I'll let Paul answer, but I know that the Goldman facility, I think I checked that yesterday. I think that's down to $20 million, $23 million. And Paul, you can tell them about the Coke facility when that runs out?

Yes. All in combined, those 2 facilities have amortized down 60% -- over 60% now. The Goldman facility very well could be behind us in the fourth quarter and coke likely through the first quarter, and it will be behind us.

Most of the costs associated with both of them are gone. They're already absorbed.

(Operator Instructions) Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Brian Harris for closing remarks.

Okay. Thanks, everybody, for joining us this evening. And those of you who listen to this year, hopefully, in -- I would say around the early to mid-part of February. Okay. So I look forward to talking to you then. Other than that, I got to get back to work. Thanks, all.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, enjoy the rest of your day.