Ladder Capital Corp (LADR) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to Ladder Capital Corp's Earnings Call for the Second Quarter of 2021. (Operator Instructions) As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended June 30, 2021. Before the call begins, I would 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 the 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 would like to turn the call over to Ladder's President, Pamela McCormack.

Thank you, and good evening, everyone. I'm pleased to report that after successfully raising over $1.1 billion of unsecured and nonrecourse debt by issuing unsecured corporate bonds and a managed CLO, we are flushed with cash, modestly levered and aggressively deploying our substantial liquidity. For the second quarter, Ladder produced distributable earnings of $13.4 million or $0.10 per share. As of June 30, we had total liquidity of $1.4 billion, and our adjusted net leverage stood at 2.5x and 1.7x net of cash.

Year-to-date through June 30, we've originated over $1 billion of new loans, driving both portfolio and earnings growth. In the second quarter, we originated 22 balance sheet loans, totaling $800 million, and we funded $689 million, including future advances on previously originated loans.

New balance sheet originations during the quarter had a weighted average loan-to-value of 67% and a weighted average coupon of 4.91%. Since the end of the quarter, we originated an additional $190 million of new loans.

The majority of loans closed are collateralized by multifamily, manufactured housing, mixed-use and office properties. In addition, we have a strong growing pipeline with more than $1 billion of additional loans under application. While we are now growing our balance sheet loan portfolio on a net basis as projected, we're continuing to experience a healthy level of payoffs, demonstrating the underlying strength of credit in our assets.

Consistent with our diverse business model, gains from the sale of conduit loans in select real estate are contributing to earnings again. In our conduit business during the second quarter, we sold $48 million of loans, which produced $2.6 million of distributable earnings. As Paul will discuss, in July, we securitized $73 million of loans for which the gain will be realized in Q3.

In our real estate equity segment, the sale of a net lease property contributed $7 million to distributable earnings. As we've said before, we believe there is significant embedded value in our equity portfolio and this gain on sale is illustrative of that. We expect additional sales from this portfolio to contribute to earnings to complement the net rental income it regularly generates.

Separately, and as I previously mentioned, we've also been really active on the capital markets front, raising $1.1 billion of unsecured bonds and nonrecourse CLO debt. In June, we issued $650 million of 8-year unsecured bonds at 4.75%, extending our debt maturities into 2029. Following this issuance, Moody's, Fitch and S&P upgraded our outlook to stable, and S&P also upgraded Ladder's senior unsecured bond rating.

Subsequently, in July, we raised $500 million of nonrecourse, non-mark-to-market, match-funded debt in a managed CLO at an attractive cost of capital of less than 2%. Going forward, we expect to continue to complement our strong base of unsecured debt with additional CLO financing.

Paul will provide more details on these financing and our enhanced capital structure, but suffice it to say, the right side of our balance sheet is in excellent shape, which allows us to remain squarely focused on deploying our excess liquidity and growing earnings. While doing so, we've also been actively adding additional personnel to meet the demand for our capital.

We're excited about the quality and depth of opportunities we're seeing in our established investment products, and we look forward to sharing the results of our ongoing efforts in the quarters ahead. With that, I'll turn the call over to Paul.

Thank you, Pamela. As discussed, in the second quarter, Ladder produced distributable earnings of $13.4 million or $0.10 per share. Pamela provided an overview of our originations, loan payoffs and pipeline, which were all strong. I will spend a moment providing some detail around our unsecured bond and CLO offerings, then discuss some balance sheet activity and review the performance of our 3 investment segments.

As Pamela mentioned, in June, we closed the $650 million 8-year non-call 3 unsecured bond offering priced at a rate of 4.75%. The offering was heavily oversubscribed and benefited from rating agency upgrades as well as outlook. As a result of the strong demand, the offering was upsized from $400 million, with the final interest rate well below the low end of price talk. We now stand as one notch below investment grade from 2 of our rating agencies, who have taken note of Ladder's focus on long-term, well-staggered, unsecured borrowings, complemented by nonrecourse, non-mark-to-market financings.

This offering provides liquidity to repay our $466 million 5.25% 2022 bonds when they become prepayable at par this September. Once such bonds are repaid, our nearest bond maturity will be in October of 2025. Furthermore, in July, we closed a $600 million managed CLO at an 82% advance rate and a weighted average coupon of LIBOR plus 155 basis points. The CLO's expected weighted average duration is over 4 years and provides for a 2-year reinvestment period. This offering was also heavily oversubscribed and attracted leading institutional investors and provides Ladder a highly attractive cost of capital.

Unsecured bonds and nonrecourse funding sources continue to be foundational pieces of our capital base. And with these offerings, we have further solidified and lengthened our liability structure. These actions continue Ladder's progression towards our goal of being an investment-grade-rated company. Pro forma for these offerings and the repayment of our 2022 unsecured bonds, approximately 87% of our capital structure, is comprised of equity, unsecured bonds and nonrecourse non-mark-to-market debt.

Complementing the strength of our capital structure are our 3 segments, which continue to perform well. Our $2.5 billion balance sheet loan portfolio is primarily, first, mortgage loans, diverse in terms of collateral and geography, with an average loan size of $21 million and a short 2-year weighted average remaining duration. During the second quarter, loan origination activity outpaced payoffs as we added a net $524 million in balance sheet loans.

Our balance sheet loan portfolio continues to perform well as we received 100% interest collections during the second quarter. The general portion of our CECL reserve decreased to 65 basis points as a result of new loan originations and an improved macroeconomic outlook. Furthermore, no new loans were added to nonaccrual status in the second quarter. And in July, nonaccrual loans were reduced by $12 million due to the successful resolution of a hotel loan at par, including the collection of all default interest and late fees due.

As Pamela mentioned, our conduit business generated $2.6 million of distributable gains in the second quarter. And subsequent to quarter end, we participated in a securitization, contributing $73 million of loans for an estimated profit of $2.4 million. Our $1.2 billion real estate portfolio is diverse and granular and includes 165 net lease properties, representing 2/3 of the segment, and continued to perform well during the quarter with 100% collections. And as Pamela mentioned, the sale of one of our net lease properties contributed $7 million to distributable earnings, demonstrating the embedded value in our real estate portfolio.

Finally, as of June 30, Ladder's $719 million securities portfolio remains 89% AAA-rated, almost entirely investment-grade, with a weighted average duration of approximately 2 years. This portfolio continues to benefit from strong natural amortization and sales, resulting in a continued reduction in the portfolio size as expected during the quarter.

Also during the second quarter, our unencumbered asset pool increased to $3.3 billion and is comprised of 83% cash and first mortgage loans. The size and quality of our unencumbered asset pool continues to provide Ladder excellent financial flexibility. Further, we declared a $0.20 per share dividend in the second quarter, which was paid on July 15. And during the second quarter, we repurchased 100,000 shares of stock at an average purchase price of $10.98. We expect our dividend to remain unchanged in the third quarter.

Undepreciated book value per share was $13.79 at quarter end, while GAAP book value per share was $12. This is based on 126.2 million shares outstanding as of June 30. For further details on our second quarter 2021 operating results, please refer to our quarterly earnings supplement, which is available on our website as well as our 10

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I will now turn the call over to Brian.

Thanks, Paul, and thanks to all who took the time to join our call today. It was only 4 months ago that I was happily describing the brisk pace at which we were signing up new mortgage loan applications and set out a goal of closing $1 billion in new loans before year-end. Now with 5 full months remaining in the year, we have already eclipsed the goals I had set forth for the full year.

The second quarter was pivotal for us, in that we saw substantial net loan growth in our loan portfolio, mostly comprised of balance sheet loans with attractive floors added to a portfolio of existing loans and assets that continue to perform very well. It was also nice to see our other products contributing to profitability once again as we sold conduit loans and a net lease property both at attractive gains. We expect all these trends to continue in the next several quarters.

The capital markets provided us with an opportunity to issue unsecured corporate debt, as previously mentioned, that allowed us to essentially refinance, upsize, extend -- and extend an upcoming unsecured bond maturity, while lowering the interest rate that we will enjoy for the next 8 years.

Subsequent to quarter end, we were also able to issue our first managed CLO at a very attractive cost of funds just 2 weeks after we accessed the unsecured corporate bond market. These 2 executions paved the way for us to safely finance our growing investment portfolio for years to come and should support our earnings momentum that is just getting started. We've said before that market disruptions usually provide excellent investment opportunities in their wake, and we saw plenty of evidence of this in the second quarter. We expect our earnings momentum to continue in the quarters ahead.

In our lending platform, even though market interest rates are relatively low, we are seeing a large amount of new purchases taking place, and sponsors are putting up large cash positions for these acquisitions, providing lenders with a fairly high degree of comfort when making loans secured by these assets. The ratio of acquisitions to refinancings is pretty high these days. Most asset classes are changing hands at what seem to be rational levels of dollars per square foot, appropriately reflecting the realities of lower cap rates, along with lower rents in buildings.

If we do experience any sustained periods of inflation as many investors expect, these assets should appreciate in value in that environment, but we will likely have to refinance those years down the road at higher interest rates.

One notable exception to the observation I just mentioned is what we're seeing in the apartment market. Except for some of the densely populated urban centers, the value of the standing inventory of multifamily properties in most smaller cities has appreciated dramatically from values seen just a few years ago. While price spikes with any asset class are always a concern, this property type has plenty of fundamental support under it, primarily driven by new groups of renters not usually found in this type of housing.

While many baby-boomers have decided to retire early, many of them also own homes. And with the price appreciation they've seen in their largest investment, many have decided to sell at loftier prices than they ever expected as they near retirement. Add in strong performance of both stock and bond investments, and earlier-than-expected retirement became a distinct possibility. Many of these Americans are moving out of houses and into apartments.

Our successful efforts in the capital markets in the second quarter will provide us with a long runway for making new investments as we continue to deploy our ample liquidity safely with one of the strongest balance sheets in the commercial mortgage space.

As the remainder of 2021 plays out, you can expect Ladder to amplify our activities seen in the second quarter. We expect to continue to deploy our capital mostly into bridge loans, but also into conduit loans as profit margins in that sector remain attractive. We will probably continue to sell more real estate assets than we have in the past, but not at a rapid pace. The value of our owned real estate has appreciated quite a bit, so some selective profit-taking may be in order. I expect future earnings calls will be focused on new investment activity and growing our asset base carefully to provide durable long-term streams of income to our investors.

Operator, with that, we can open the call to Q&A.

(Operator Instructions) The first question comes from Tim Hayes of BTIG.

My first one, Brian, can you just touch on the returns you're seeing on new loans today, especially as you focus on multifamily and some other asset types that a lot of other capital has been chasing? I guess my broader question here, I'm obviously asking about the returns on new loans, but you're originating a lot of new loans. We saw the unlevered asset yield come down quite a bit. It sounds like you're continuing to sell real estate.

I don't know how you're viewing CMBS today, but I'm just wondering if it makes sense also to pair investment with -- in loans with some buybacks given you're trading at quite a good discount to book value, and it's a 7% ROE based on where your stock is trading. How that compares maybe to the returns you're seeing on new loans.

Well, sure. I'll try to keep all of those in mind as we go here. But yes, I would say that multifamily loans are aggressively bid across the board. However, there's a lot of them, and there's a lot of multifamily changing hands right now, I think, because of the price appreciation that I indicated in the call. Those tend to be getting done at around LIBOR plus 350. You've seen several CLOs done recently in the last couple of weeks with large multifamily components. And that's about where they are. Some of them are a little bit older, so you might see 360.

But there is some discussion about spreads coming down to, on multifamily, down to 275 to 300. They may one day. They're not there yet. We're pretty happy with what we're finding out there. We are gravitating more towards the newer properties as opposed to can be repositioned to older properties. So 350 kind of point, call it so, call it a 4.5 unlevered yield there.

Office, quite a bit higher, call it 100 back from that. And I think that we have pretty much been originating this $800 million that we closed at around a mid-5 kind of unlevered yield. And the $1 billion that we have under wrap in various different types of assets is about the same, so call it a 5.5% unlevered. You put a little bit of leverage under that if you go into the CLO market. That LIBOR plus 155, you quickly get to a double-digit return.

Because we had a mix of some older properties, so pre-COVID loans, which are doing quite well, by the way. I know there's a lot of people trying to make big distinctions between pre-COVID and after COVID. But if indeed, we are in after COVID. But the levered yield on the CLO we just did was over 20% on the remaining piece that we're holding on our position. Now that will probably come down as some of those older loans pay off a little sooner than the newer loans. But we're very happy to have a 2-year managed period there, and we think we're going to be frequent issuers in that area. That really is what we're looking at to replace our former activities at the Federal Home Loan Bank.

So the last part of your question, hotels are not terribly available, or I mean, I would finance a hotel, but the rates we would have to charge, frankly, are equity-like. And so we're just not getting a lot of those done.

Warehouses, pretty well bid also, but when things aren't terribly well-occupied, there's a fair amount of yield in those. So it's not an uncomfortable market for writing loans. There's a lot of acquisitions, there's a lot of equity in those things. And we can lever them modestly to get ourselves to a double-digit return. So covering our dividend once we get fully deployed should not be a problem.

Having said that, we are happy to face the realities that we are investing in a much lower interest rate environment. And while going into the downturn caused by COVID, we had very high floors that really protected the income stream and still do. I mean we have a couple of billion dollars of those still. And -- but we expect those to pay off. But our payoffs are slowing down now because we tend to have 2.5 years -- 2-, 2.5-year cycling on loans. And we're now almost 1.5 years into the beginning of the COVID situation. So we expect our paydowns to slow here. Yes, I think we were pretty -- we're ahead of the pack for the most part during the downturn.

So does that all add up to attractive-enough returns that I would ignore the stock price at 80% of book value? No. It's not attractive enough. The frustrating part, I think on my side, and again, I don't repurchase stock for a living, but oftentimes, when you see dips in the stock caused by various things, it's not -- it's oftentimes just market conditions. It's at the end of these quarters where we're in a hot period and we're not able to access the market.

You might have noticed that we actually moved up this call a week from our normal cycling of when we normally did earnings calls. And the reason for that is so that we have an extra week in the open window period where we can repurchase our assets. So I would anticipate us picking up the speed of repurchases, while we're also picking up our investment in the bridge loan portfolio business. The good part about where we are now, after all the capital raising we just did, we pretty much have nothing else to do, except make investments. So for the next couple of years, I think all we're going to talk about is a growing asset portfolio.

No. That's absolutely right. I was planning to ask a question about the cap structure, but there's -- like to your point, there's not a left to go on there, except for the CRE CLO that you mentioned. Given the pace that you're originating loans at, it doesn't seem like it will take very long before you maybe be back in that market.

So do you have an idea of just what type of, I guess, max capacity you want to hit before tapping that market again? Given that commissions are pretty attractive still, I imagine you want to go pretty quickly. But just trying to -- or did you want to stagger that out, the maturity of that a little bit? I'm just trying to get a feel for when we could see another deal in the market.

Yes. I think the financing situation at the company level going forward is going to be a staggered corporate bond maturity schedule. So we've got 25s, 27s and 29s. I'm not averse to putting one in there, in the middle of them, but we tend to try to extend -- blend and extend, as they say, with lower rates. That's always helpful. Obviously, it is a fixed rate component of our financing, so it is really designed for a market where we believe interest rates will rise. And that is, in fact, the -- that's what we're putting on. That's how we're expressing that.

The -- on the CLO side, that's really replacing, as I said, the Federal Home Loan Bank as well as most of our repo. And I would expect us to be back in the CLO market, probably, I would think every -- no more than 6 months apart. When we did our first managed CLO, we had $900 million of additional loans that were not in that CLO. So we could have done a much bigger one, or we could have done another one right behind it.

The CLO coming 2 weeks after the corporate bond issuance had the effect of adding $500 million to our balance sheet. So that's why we have -- despite having made $800 million worth of loans, we still have a climbing cash balance on our balance sheet. So we're going to let that play out a little bit and let some of our new originations come through before we access the CLO market again. And I think we'll target the CLO market more in a pool-specific way. So if we can put together a $700 million pool of multis, that will probably be more attractive than -- to certain investor bases than a multiple asset class.

So we have the ability to create different types of combinations. And I think we'll be very judicious in how we go about accessing the market. But we're going to try to create things that the market wants to buy as opposed to things that we want to sell.

Okay. That's interesting and makes sense. And then my last question here, just on the conduit market, it has been active, but not quite nearly as active as the CRE CLO or SASB markets. Just curious what your outlook is for CMBS conduit, what it takes to really kickstart that market the way that we've seen it with those other 2 that I mentioned and what velocity we should expect from you guys going forward to sell loans.

Well, our preference is to do quite a bit in that space. However, there is just not, as you said, a lot of activity there, at least from our side. I think one of the reasons for that is because the pandemic has really gotten rid of the trailing-12 income number. And until you have a -- I personally think you could buy some conduit loans that don't have a perfect trailing-12 because you kind of know what happened.

And you know what happened and how the loans were performing before the pandemic, but there was so much surgery done in the triage unit in the downturn there, that I think that, first of all, a lot of owners are truly thinking about selling them as opposed to repositioning them again, even though rates are quite low. If you own office buildings with 10-year maturities, and let's say you've got a 4.5%, 5% loan and it's coming up in the next couple of years, if you've lost some of your tenants due to the pandemic, you're going to have a big CapEx bill, and a lot of the smaller office owners are not built that way. They're just not ready to fund that as to what's required there.

So I do think that the slowdown isn't reflective of no one wants to do the business or borrowers don't want to borrow money. I think that very little qualifies right now because so much of it was impaired during 2020, that you have to kind of get a year away from 2020 before the rating agency numbers come out the way you expect them to.

Got it. Okay. That's interesting. All right. Well, I will -- I guess -- but it does -- I'll leave it there in a second, but it does sound like you guys are originating some conduit loans and expect, I guess, from time to time, to be sellers there. But I think it's probably safe to say that you would be in there every quarter at this point.

Yes. We would love to. I would love to have the

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percent for loans and 50% conduit. It's just such a high ROE product. However, we're just not seeing the demand on -- relative to the bridge loan space. The bridge loan, I think we're closing about 85% bridge loans

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that's coming in.

The next question comes from Stephen Laws from Raymond James.

Pam, could you maybe dig in a little bit on the originations during Q2? Kind of looking at the sequential change on some of the pie charts, it looks like maybe it was primarily Southeast, to office, some West Coast, some multi. And also, it looks like you did -- now have a loan over $100 million. So you guys are looking at maybe at some larger loans now given the amount of liquidity you have. And so maybe kind of touch on whether the 2Q origination is representative of the pipeline we see coming in the next few quarters.

Sure. Yes. And by the way, I'm testing it this time because it didn't work last time, but I have Adam Siper with us today, who's our Head of Originations. But I think our originations look very similar to what we've done in the past and will continue to. Average loan size is trending up a little bit just because I think we are doing more volume and seeing more across the street.

But we -- our average loan size, I think, is just close to $30 million this quarter. We had one large loan, which I can let Adam touch on. That was an office property, just a great opportunity with a sponsor we knew. So that was that instance. But by and large, it looks very similar to us. In fact, our loans under application, the pool of loans under application, look very similar as well. It's a very high concentration of multifamily and office, with some mixed-use that also has a high multi component to it. So Adam, I don't know, let's test this again because last time, it didn't work.

Stephen, it's Adam Siper. I would just add, we -- I would expect over time for the pipeline to be very consistent with what the portfolio looks like today. Again, we're coming out of COVID. We're seeing a handful of very unique opportunities, one of which was the large loan Pamela referenced, which we were able to capitalize on, an office acquisition in Southern Florida. So we see a handful of those continuing, a number of which we have under application. But over time, we do see a very consistent granular portfolio with what we've originated in the past.

Yes, Steve, if you don't mind, I would just jump in there too and say, I think we've always had a view that, on average loan size, that -- that's very bite-sized, it's more liquid and easier and diversifies us better. However, we -- for the most part, the space in the $100 million-and-over business was very competitive. And it still is, in some respects, but it seems to be a lot less competitive in the $50 million to $80 million range. So I know that we are seeing some of those. In fact, I know, yesterday, we closed a loan for $110 million.

So we're not at all averse to getting above $100 million on an asset. The reason we haven't been too frequent in that space is because, for the most part, they just don't offer the right risk/return ratio. But we are seeing some of them now, and I think we will continue to do that.

And I think that's -- one thing I just want to add, is the strength of our pipeline -- I mean, sorry, of our platform. We have the ability. And I don't think everyone is built to go down into the $20 million average loan size. But the depth of our platform and the seniority of our originators, we have the easy ability to go up when we want to, when we see the right opportunity.

But our bread and butter is the average -- smaller average loan size, which I know a lot of people talk about, the vision they get into the

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some of their parents and the activity in their space on the equity side. We get a lot of that just by our middle market focus and the volume, the sheer volume of loans that we look at and do.

That's helpful. And you mentioned the platform, and that leads to my next question, Pam, for you and Brian, but as you think about the origination opportunity, you've got a lot of cash. You mentioned you're going to gradually sell some real estate, take some gains there. You've decreased the size of the CMBS portfolio. You would love to do more conduit volume, but it's just not there right now. Outside of the loan market, are there other opportunities you're seeing in CRE, either equity or debt opportunities, that you think makes sense in the Ladder portfolio?

Yes, we are seeing some things, although there's a lot of stops and starts. We're seeing -- with the eviction situation going on in multifamily in major cities, you have banks that say they want to sell some loans, and then they put them out for bid. They say, we're going to sell them, it looks like a good price, we want to move forward. And then they turn around a week later and say, we have too much cash, we can't sell them.

So there is quite a bit of a fits and starts in that area. And -- but I think the space that we really like right now is the bridge loan area. That is just -- it's the space that looks reasonably attractive from a risk perspective. There's a lot of equity in deals. And it's really the space that's built for higher rates, which we do subscribe to. We don't think that's going to happen right away, but we do think so over the next few years.

So I know that when we say we're going to write granular loans, I know I'm looking for bigger loans because we have about $1.5 billion to get invested. And I would like to get that done before I retire. So I'm going to have to get through some larger loans just for the purposes of size and given the same amount of people that we've got. But it isn't that we're sacrificing profitability. Spreads are great. It's just that LIBOR is at 10 basis points. And -- but if it -- let's remember, January 2020, I think LIBOR was at 2.5%. So if LIBOR goes back to 2.5%, the floors don't matter anymore because LIBOR is not going to go below 0. And I guess it could. I shouldn't say that. I could look silly one day.

But the higher probability is that LIBOR is going to get meaningfully higher in the next couple of years. And when it does, we've got a fixed rate component of our liability set in the corporate bond sector. We've got $1.3 billion that isn't due for 5 or 6 years, and obviously, we'll be the beneficiary of that. But however, the CLO market also diversifies us and keeps us balanced into the floating rate market, where you asset liability-match, floater for floater. So we think we're built the right way right now and where we've got a bent towards owning floating rate assets.

Great. Yes, those 9 (inaudible) will help get the capital out quickly. Last question is around the secured nonrecourse facility. I think that's the Koch facility. It looks like maybe it paid down to $150 million, from $195 million. I mean should we continue to see that decrease? Are there any -- can you refinance that? What are your options around that financing facility?

Yes, sure. I'll take this. This is Paul. So the facility was paid down $45 million this quarter. Ultimately, it's secured by loans. And as the loans pay off, as you know, we have generally a short-dated loan portfolio. So as the loans pay off, we expect it to amortize down over the next basically 6 to maybe 12 months, so -- max. So we expect it to be fully behind us by the first or second quarter of next year.

And what's the balance on that remaining at this point, Paul?

Yes, that was a correct number. There's about $160 million in principal remaining.

And Stephen, just to go to your question, is it prepayable? Yes. We could pay it off now. But we would still have to pay the required minimum interest. And if, for some reason, they're not prepaid by the time we get to the end of the period, we will prepay them.

The next question comes from Jade Rahmani from KBW.

With the multifamily focus and the GSE is seeming to have -- [they pulled] back, their lending caps have been reduced for 2021 by 12.5%, do you have any interest in teaming up with Arbor, Walker & Dunlop, maybe some other nonbanks to do a multifamily-focused [CMBS]?

I love getting a question I've never thought about on these calls. We know some of those people very well. I certainly know, I've been over, [like] Arbor is a friend. But we have not really looked at it that way. And we tend to think of ourselves as an independent. However, you just saw us sell some loans to one of our partners in CMBS, and we have good relationships with them. But I think if there was a beneficial interest and that was mutual to do that, that would make sense.

The focused multifamily originators, they do very well right now. I mean they get very low rates, and there's a fair amount of volume and they've got that model down. I think that we tend to focus our multifamily origination in the brand-new, coming-off construction loan and not quite leased yet portfolios, which don't qualify for a Fannie Mae or Freddie Mac financing at that point. That's why we're there and we think that will probably be refinanced by those entities that you mentioned there.

So it's slightly different products, but nothing against cooperation at all. Happy to have lots of partners. I think it's -- I've always been a fan of working with other partners because it moves the inventory more quickly.

Yes. I noticed that, last quarter, Arbor did a CMBS of -- or maybe it was actually this past second quarter, but they did a CMBS of multifamily. And I also think that Walker & Dunlop had explored that product at various periods. They also have a JV with Blackstone Mortgage Trust. So it might be something that could be interesting.

On the real estate sale, you said $7 million distributable EPS. I assume that's about $0.06 to distributable earnings per share contribution, not assuming any tax leakage there.

Yes, it was in our REIT, and it was $0.05.

Okay. Okay. $0.05. Great. So I guess, looking at the income statement, it seems that interest income has still been below interest expense. Do you expect the third quarter to be sort of a crossover point, in which with the loans that have been originated as well as the pipeline you mentioned, there would be positive net interest income?

Yes. I think on the interest income -- this is Paul, Jade. On the interest income front, yes, in the third quarter, we'll have overlap in interest expense with 2 bond offerings outstanding. So ideally, we would have refinanced our 2022s when they're fully callable at par in September. So we'll have 1 quarter of kind of drag on $466 million of bonds.

We expect we will likely call those at par in September. So we will have a drag on interest expense that could create kind of some -- from a NIM perspective, some drag. But interest income, the top line, we do expect to trend up.

And that's a theme that will continue over the next year. We're going to have lower interest costs as the CLO with Goldman Sachs pays off as well as the Koch facility. And in addition to the higher cost, the $466 million that Paul referenced there, that's going to create $0.05 a share in drag in the third quarter, but that's going to be it. And then we're going to have 7.5 years of 50 basis points lower rate on that position.

And the way I like to think of it is the $466 million we refinanced and extended at 50 basis points lower and the additional $200 million that we borrowed is whatever we need to pay off Koch or the CLO. However, I'm relatively certain we don't need that money to do that. Those loans will pay themselves off, and those lines will go away. And when we get rid of all those drags, we're going to have a real tailwind to earnings here with lower interest costs.

Okay. And lastly, one of your larger peers has been quantifying the embedded gains in their real estate portfolio, primarily in multifamily. I had noticed that you've been saying that the net lease portfolio, it's performed really well through the COVID period.

Can you put any quantification around what you believe embedded gains are in the real estate portfolio, maybe in the dollar aggregate level or a per share basis? And are there any forms of capital that you would consider to free up equity, that would allow that value to be unlocked? You could consider selling ground leases [on the real estate] portfolio, or there might be other refinancing opportunities.

Yes. I think we have a pretty good idea of what it's worth. And the reason why is because given where interest rates are and the amount of capital in the world, we don't do much to sell things, we simply answer the phone. And oftentimes, we get a bid from somebody who wants -- knows what they want to buy and they know we own it. And it's oftentimes not a bid

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we always say everything is for sale at the right price. And typically, when we respond to an inquiry like that, the person says, well, it's a little too expensive for us.

Lately, the response has been, okay, when do you want to close? So we've got a pretty good idea across that -- all that triple net paper that Paul mentioned. It's probably up 25% to 35% from our basis. However, before we get too excited about that, we do have CMBS debt on most of it. So there could be some friction costs if we wanted to just prepay it or sell it or spin it off. I guess we -- it is assumable debt. So -- but a lot of the people who buy these triple net properties don't actually want the debt. So the one we had in this quarter, for instance, that we had the gain on, we actually paid over $1 million in prepayment penalty. But it was coming due pretty soon.

We also have several more. We've been at this long enough now that the -- we've got a bit of a conveyor belt coming towards us on loans that we've owned for -- we own assets that we've owned for over 10 years that are now coming off CMBS maturity. And the fortunate decision that we have to make is do we want to simply refinance the loan and do a cash-out refi and enjoy probably an 18% to 20% cash-on-cash return on our basis for years to come, or do we want to sell it because we tend to think that the interest rates are low and the conditions are right and should we go out and buy something else one day that might be more beneficial.

So those are the decisions we make every day. So I think across the board, I would say 25% to 35% higher in value. I don't know that we can naturally get at it just because of all the existing financing on it. But that's also another version of the tailwind behind us. As interest rates fall, we're going to have lower interest costs even in that portfolio as we refinance it.

So however, not totally guessing at those portfolios, I think you will see some of those sold even in the next quarter. So I suspect we're selling a cross-section. We're not selling all of one tenant or anything like that. So they all seem to be up about the same amount. So I think we're going to have a steady fill each quarter of triple net sales that are making profits and significantly contributing to us. However, we're going to lose the income on those things, too. And given that our current cash situation is quite high, I think we're rather judicious in where we'll sell things right now. But it seems like the market does want to buy them.

The next question comes from Steve Delaney from JMP Securities.

It's really nice to hear the enthusiasm in your voices tonight compared to where we were the last couple of quarters, so great to hear. Everything has kind of been covered. I just had a couple of cleanup things. On the conduit sales, the $73 million for third quarter, were they loans sold into this Wells C60 deal that we saw being priced, I guess, a week or so ago, a couple of weeks ago?

That's correct. That's correct, Steve.

Okay. So now, I didn't see a print with your name on it in the second quarter. Brian, you said, you sometimes sell loans to friends. The $48 million sold there, was that just you selling conduit loans to someone else who then participated in a deal?

Yes.

Okay. That's what I figured. So that was kind of just a secondary sale. Okay. I just wanted to understand that, the distinction between those 2 because we had seen the $73 million, but not the $48 million. And just...

And that goes with our relationships around town. We do that frequently. If an originator wants to round off a pool quickly and hasn't originated them fast enough, they can call us and we're rather indifferent as to whether or not we securitize things or just sell them as whole loans. So in that situation, we did it.

Yes. I mean you got 5 points there and you got 3 points or 3.5 points in the other. I mean these are gross, not -- I don't know your hedging issues, but that trade worked, right, for sure. That was a nice sale.

And then just the final -- you've talked a lot about lending, and we know you're middle market. I would actually put you, at your average size, I would call that small middle -- the low end of the middle market. But obviously, you can go up 100 if you want to. It's a big gap. We've been on calls early this week. People are talking spreads, 300, 325, maybe 350, kind of where it was when it was tight before COVID, financing is better, is the offset.

But I mean, you're talking 500 basis point spreads, 450 anyway. And it's just that it's a big gap. And I'm just trying to kind of understand it. The things that -- I mean the obvious things are loan size and maybe property location, and it's not in a major gateway city, probably the type of sponsors.

I mean am I missing anything, Brian? Is there anything else to it other than the fact that the borrowers that you're engaging with, they are not being -- the big national guys and the asset managers, are just not operating at their level, that granular and regional level?

I think pricing is a big component. But I would point out that when a person -- when a party is buying a property, and they're expecting to reposition it and they don't plan to own it in 3 more years after that, the rate doesn't matter nearly as much to them as you might think. On a 10-year loan, it's much more of a battle. It's a bit of a knife fight when you're trying to charge 20 basis points more on a 10-year.

But in the bridge loan market, especially in the wake of the pandemic, you've got a lot of now money instead of how much does it cost money. And we're well known around the country as being highly structured in our thinking. And so we're able to think through things that -- and put them on our balance sheet without worrying about having to sell it if we don't want to. So we'll oftentimes see something that might have had -- and we always like event-driven situations. So if we see a very good asset at a very low dollars-per-foot but it needs a lot of CapEx, it's just well located but it hasn't been handled well because of the prior ownership, and then we'll step into something like that.

And oftentimes, the building across the street will have a much lower rate on it. And it isn't necessarily because there's anything wrong with either building. It's just that one of them has a little bit more of a structured component to it that doesn't always lend itself to a CLO financing. I think a lot of the originators in the country are targeting assets for the CLO market. We're not. We're happy to target things for the CLO market, but we're also happy to put them in the Ladder waiting room. And so when a brand-new apartment building comes out of the ground in Texas, and it isn't leased but it's brand-new and we know where it is and we know where everything else is leasing, we'll put it on our balance sheet for a year and let it grow into the CLO market later on.

So we'll incubate a little bit more, whereas I think our patience and ability to warehouse assets and loans without concern about margin calls or -- and management coming down the hall saying, let's sell this, it's been here for a long time, we understand that real estate is a slow-moving animal. It doesn't usually happen overnight and

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is ahead. And the CLO, for instance, as I said, we had $900 million of unencumbered loans right now, we could have done another CLO right away. Some of those loans would work just fine, but they're going to work better in 6 months because we already know what the cash flows are in half the building and let them get another 20% to 30% of it leased up and then it will sell right through.

So we're happy to be patient with the sponsor. We're also happy to let sponsors out of loans without undue prepayment penalties, if they want to sell the asset, because there's a whole lot of yield chase going on. So oftentimes, people buy something and they have a 3-year game plan, and 3 months later, somebody asks them if they would like to sell it. And if they're all jammed up in a structured financing, they really can't get out of those things without undue expenses, which is we'll let them out of it. And we'll take some fee for it, but we're happy to keep the inventory

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And congrats to you guys for getting the loan machine up and running so fast these days. So we look forward to third quarter and the rest of the year. I know you are.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Brian Harris for any closing remarks.

Just thank you, everybody, for staying with us full circle here, and we look forward to the quarters ahead and a growing asset base. So -- and we'll see you in 90 days. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.