Ladder Capital Corp (LADR) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to Ladder Capital Corp.'s Earnings Call for the First Quarter of 2021. (Operator Instructions) As a reminder, today's call is being recorded.

Good afternoon. This afternoon, Ladder released its Financial Results for the Quarter Ended March 31, 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 obligations 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.

Good evening, everyone. With 2020 behind us, we are at a pivotal turning point and are actively focused on rebuilding our investment portfolio and earnings. In the first quarter, we started the process with our first loan originations in a year and we expect new originations to outpace loan payoffs over the coming quarters. For the first quarter, Ladder produced distributable earnings of $3.2 million or $0.04 per share. Since March 31, 2020, we converted over $3 billion of investments into cash, including payoffs for 79 loans totaling $1.5 billion or 45% of our balance sheet loan portfolio.

As of March 31, 2021, we had $1.3 billion of unrestricted cash after reducing our overall leverage by $1.9 billion or 34% of our total debt. Associated therewith, we also reduced our mark-to-market debt by $1.9 billion or 68% since March 31, 2020. Consequently, as of March 31, 2021, our adjusted leverage stood at 2.3x, 1.4x net of cash and only 0.9x net of cash in our principally AAA-rated securities.

We are pleased with the credit quality and performance of the assets on our balance sheet. We enjoyed an unparalleled level of loan repayments over the past year, reflecting the strength of our underwritten portfolio and the wide array of refinancing options available to our middle market borrowers. Going forward, our shareholders can expect to see us remain committed to being basis lenders with disciplined in-house credit underwriting and hands-on asset management. As we grow back into our capital structure, our shareholders can also expect us to see us increase our use of unsecured and nonrecourse funding that is not subject to mark-to-market provisions.

During the first quarter, we started redeploying cash and replacing loans that paid off as Ladder originated $155 million of new loans, including a $41 million conduit loan and $114 million of balance sheet loans that feature a weighted average interest rate of approximately 7.3%, inclusive of LIBOR floors.

In the second quarter, through May 5, we closed an additional $93 million of loans, including $87 million of balance sheet loans that feature a weighted average interest rate of 5.02%, inclusive of LIBOR floors. 40% of these loans, which were repeat Ladder sponsors, while the other 60% were closed with new sponsors who entrusted the expertise and flexibility of Ladder's lending platform to execute their transactions in this unique environment.

Our deep and experienced in-house origination team continues to expand Ladder's borrowers universe by highlighting our product differentiation and flexibility. In recent weeks, transaction volumes in the broader commercial real estate market increased meaningfully as buyers and sellers benefited from both greater transparency into underwriting fundamentals and the value of properties as the country reopens.

With the benefit of transparency, we currently have a pipeline of more than $900 million of additional new loans under application and in the closing process. In connection with our growth, we hired 9 additional professionals across the organization. With ample cash on hand, we expect to continue to benefit from the unique environment before us as we pursue new opportunities to further expand our robust pipeline.

In conclusion, we're proud of the progress we made on behalf of shareholders as we move into the next phase of our recovery at very low leverage and flush with liquidity to invest. Our business model, the same model we opened the doors of Ladder capital with 12 years ago, proved durable during these most unprecedented and volatile times. We are now moving forward in a position of strength as we put Ladder's balance sheet to work by investing shareholder capital at attractive risk-adjusted returns in this new and dynamic environment.

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

Thank you, Pamela. As discussed in the first quarter, Ladder produced distributable earnings of $3.2 million or $0.04 per share. We originated $155 million of new loans in the first quarter, $150 million of which were funded at closing, and we funded $9 million of advances on existing loans. This was offset by loan repayments of $375 million and a $46 million loan sale. In addition, we completed the foreclosure and sale of a hotel property in Miami, reducing our balance of nonaccrual loans by 25%. No new loans were added to nonaccrual status in the first quarter.

Also during the first quarter, we sold $329 million of securities, generating $0.4 million in gains and the value of our securities portfolio overall increased by $6.8 million. Our CECL reserve decreased overall by $5.4 million to $36 million in the first quarter as a result of loan payoffs and sales executed during the quarter, and a moderately improved macroeconomic outlook.

Overall, we reduced debt by $442 million, including the redemption of $147 million of our 5.875% corporate bonds scheduled to mature in August. We declared a $0.20 per share dividend in the first quarter, which was paid on April 15, and repurchased 20,000 shares of stock at an average price of $10.71. We expect our dividend to remain unchanged in the second quarter of 2021.

Undepreciated book value per share was $13.88 at quarter end, while GAAP book value per share was $12.08 based on 126.3 million shares outstanding as of March 31.

Looking ahead, we have significant liquidity and a strong and diverse capital structure with corporate leverage at historically low levels. Our 3 segments reflect the same strong credit metrics, which Ladder shareholders have grown accustomed to over the years. Our $2 billion balance sheet loan portfolio is primarily first mortgage loans, diverse in terms of collateral with a 69% LTV, an average loan size of $19 million and a short 1.6-year weighted average remaining duration. We have $141 million of future funding commitments.

Our balance sheet loan portfolio continues to perform well as we received 99% of interest collections during the quarter. Going forward, we have a healthy pipeline of originations under application and expect our balance sheet loan portfolio and net interest margin from carry income to continue to strengthen as the year progresses.

Our $1.2 billion real estate portfolio is diverse and granular and includes 164 net lease properties with strong tenants that include major drugstore chains, warehouse clubs, dollar stores and supermarket chains. The portfolio is the result of Ladder's long-standing strategy of focusing net lease real estate investments on necessity-based retail properties occupied by solid credit tenants under long-term leases. The portfolio continued to perform well during the quarter with 100% collections on our net lease portfolio.

Finally, as of March 31, Ladder's $764 million securities portfolio remained 85% AAA-rated, almost entirely investment-grade, with a weighted average duration of less than 2 years. Financing term and costs associated with this portfolio have now recovered and surpassed pre-pandemic levels.

Overall, our investments in balance sheet loans and securities portfolio have decreased in size due to strong levels of natural amortization and robust levels of payoffs. Our strengthened capital base and solid liquidity position provide a strong foundation for Ladder as we ramp up investing activity in this new post-pandemic commercial real estate environment. For more details on our first 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 this week.

I'll now turn the call over to Brian.

Thanks, Paul. When we look back on the last year, I think we may very well have witnessed how our credit models hold up under extremely sudden and negative downturns in the economy. Every credit cycle has its own unique lessons, and this 1 was no different. There's always a few things we might do differently if we had another chance. But the 1 thing you can never change are your actions and decisions leading up to the event.

At Ladder, we have always felt that our strength is in our underwriting and our real estate valuation. And after having now lived through 4 full quarters in a pandemic, I'm very pleased with how our approach towards credit held up. As Pamela mentioned, we had 79 loans pay off of total principal balance of just over $1.5 billion during a nearly complete shutdown of the U.S. economy.

With stated goals to lower our leverage and raise liquidity as we entered into a very uncertain market back in March of 2020, to say on this call that we have $1.3 billion in unrestricted cash after paying down nearly $2 billion of debt, including over $1.2 billion of repo debt and $426 million of unsecured corporate bonds before any of it matured, gives me a strong sense of accomplishment.

Our goals on leverage and liquidity have been met. Our new goals are now being worked on tirelessly. One is to restore our earnings back to a level that comfortably covers our cash dividend. While loan payoffs provide a degree of confirmation of our credit skills, they unfortunately take a bite out of our quarterly earnings unless those payoffs are replaced with new investments.

I'm happy to note that in April, our net monthly loan inventory increased for the first time in a year as we originated $93.7 million in new loans and took in $44.96 million in payoffs. We think this trend will continue going forward as we deploy our ample capital position into attractive investment opportunities that are presenting themselves in the after mass of the pandemic. While April's net loan growth is encouraging, having over $900 million in loans, presently in-house and under application, we think April is just the beginning of a bigger trend.

Holding over $1 billion in cash may be a fine idea when stock price is well below book value. But now we are working to rebuild our earnings stream and drive our share price back to where it reflects the earnings power of our company. Thankfully, the commercial real estate sector, despite receiving no support from the government programs, never felt the full brunt of what many thought possible as a result of the government-mandated shutdown of the largest economy in the world.

While the credit cycle is not yet complete, there's plenty of reason for optimism going forward, and we think the next couple of years will provide excellent growth opportunities for Ladder. As the year ahead unfolds, we expect our loan inventory to swell with only minor increases in leverage as the recovery of our earnings gets into full year.

We also expect some of our higher cost of debt to amortize down as the year progresses and to be completely behind us by this time next year, adding a further tailwind to our earnings growth story. If interest rates rise, one might think this could slow transaction volume in newer loan originations, but we believe this will be a positive development for us as we deploy capital into higher rate loans. We also think that current tax changes being proposed by the Biden administration will create additional volume in loan origination, driven by tax planning in reaction to those proposed changes. The investment picture looks very attractive at this point in the recovery, and we are planning to take full advantage of it.

Operator, with that, we can open up the call for questions.

(Operator Instructions) Our first question comes from Tim Hayes with BTIG.

Hope you're doing well. The first question, just kind of around capital allocation and the pipeline. Brian, where are you seeing the best risk-adjusted returns? I know the pipeline looks pretty strong here for the second quarter. And I'm curious if you could give me a little bit of a breakout, is that mostly first mortgage? Is it certain asset types you're focusing on? And are you willing to do mezz or some construction lending at this point as kind of the world continues to recover ?or are we focusing more on senior defensive asset types? Just again, looking for color on the best risk-adjusted returns.

Thanks, Tim. I thought on the last earnings call, I probably said that about 3/4 of our loan production would be in bridge loans, the transitional loan book. And I thought 25% would be in the conduit business. What we're witnessing is 90% in the bridge loan portfolio and 10% in the conduit book. We're really not acquiring a lot of real estate. We -- everything is pretty expensive. We haven't seen anything too cheap. And obviously, haven't been buying a lot of securities either.

Although the financing and those yields, interestingly, are pretty attractive, but I still think the best pound for pound investment we can make is the transitional bridge loan portfolio. And that's where, literally, the whole company is focused. Unfortunately, we've been experiencing more payoffs than originations. But I do think this is the last quarter we'll be saying that.

In April, as I indicated, we had about a 2:1 ratio of origination to payoffs. I think that will turn into something that sounds more like 4:1 or 5:1 in the quarters ahead. So given our large amount of cash and our lack of leverage, I suspect that we will probably be able to get a lot to the bottom line on the revenue side because we're not picking up any expenses.

So I think your question has several parts to it. But -- so first mortgages, we're not writing mezzanine loans. We're not against writing a mezzanine loan, but we're not targeting them. I tend to think with interest rates as low as they are right now, if you need a mezzanine loan, it's probably an over-leveraged asset.

And I guess the other question was, are there any assets that we're defensive around? No, not really. We wrote 1 very small hotel loan for about $5 million to a repeat borrower and a very low leverage. We're very comfortable with it. And the rest of it is bridge loans. And I think I indicated in our last call, I thought it would be a 6% yield unlevered. I think I've been a little bit timid on that number. I think it's higher than that. But I hesitate to indicate that we're going to write $2 billion of loans at that level. So far, so good. We're very optimistic. Volume has picked up, demand has picked up. And I think what's really going on is you're seeing people going outside now after the vaccination rollout.

So pretty optimistic as to how things look going forward, certainly in the next couple quarters. I do not think we will -- we've been seeing a series of lower earnings as we've been taking on payoffs. Payoffs are a good thing. But as I said in my discussion there, they take a buy down of earnings, too. But I think we've reversed that at this point.

And I expect that the worst is over as far as any credit situations. Doesn't mean it is. I tend to think that we're talking about a pandemic that's coming to an end, I sure do hope so. But given what we see right now, we expect the volume is picking up. It's a little bigger than we're used to. We're writing slightly larger loans. But very strong returns and pretty comfortable, lots of equity in the transaction. People naturally understand that you have to have a little more equity in deals these days to get a loan.

So all looks good. And Pamela, I don't know if you want to add anything to the pipeline there, but feel free.

I would just say, I think it's our regular way of business. We're just seeing more attractive opportunities, we think, in part due to some liquidity in the market. But that -- as you hear from others, we're definitely -- I think we'll see a little spread compression over time, especially as our loans pay off, but we feel very strong about the pipeline and the returns we're seeing.

We've held up just by way of background, I think we said it on the call, we did $250 million of loans through May 5. And of that, over $200 million was balance sheet at a weighted average floor of 6.32%. So I think that's really indicative of the pipeline ahead.

Sorry. Pamela, do you say a weight average floor of what was that number?

It was the weighted average floor, I'm sorry, on the -- for all of the $200 million of balance sheet was 6.32%.

Okay. So the all-in coupon, including the floor? Sorry, if I just wasn't following that.

Yes.

Okay. Got you. Got it. Okay. No, that's good color. So it sounds like just to recap all that, you're primarily focusing on your balance sheet bridge lending business. Mostly whole loans, but -- senior whole loans, but not afraid to maybe step outside of that if a good deal comes, but -- and not concentrating on any specific asset class, just kind of what makes sense. Is that a decent recap of...

Yes. I would just circle back. I think I didn't say anything about 1 of the things you said, construction loans. That is just not a strong suit of ours. And we do shy away from those, and we tend to avoid them. So that isn't because we're afraid of them. We just -- there's a lot of dynamics in a construction loan that we don't really care for, such as the early payoff. When you take all the risk and somebody signs a big lease, then you get paid off. And if no one signs a lease, you have the full loan outstanding for the full term. So we've never really been comfortable with that business and nor are we now. So I would exclude that from our thinking going forward.

And just as everything closed to date and everything in the pipeline is a senior secured first mortgage loan.

Got it. Got it. That's helpful. Okay. And then just on credit, I know, Paul mentioned that there was no new nonaccruals and you resolved 1 loan that was on nonaccrual, which brought down the balance. I don't have the Q in front of me, but were there any other material upgrades or downgrades in the portfolio worth mentioning? And I think I saw the CECL reserve, there was a bit of a release this quarter as the portfolio contracted. But I think the CECL reserve as a percentage of the balance might have gone up a little bit. So just curious if you can provide any color on kind of the movements there?

I can start with that one, and then I'll have Paul chime in. But first of all, the CECL reserve was decreased, not increased, and he can give you the specifics. But we do not have any impairments this quarter. I think 1 of the things that I think you're going to see about Ladder, we -- because our loans turn over so quickly, and we tried to make the point, 1/3 of our balance sheet paid off on the balance sheet loan portfolio.

We've had like really, I think, unparalleled levels of payoffs due in part to our short-dated loans, but also just strong, really very strong underlying credit performance and I think we feel like, at this point, we expect nothing but a positive trend going forward. And Paul can give you the specifics on CECL.

Yes. And to be clear, no new loans were added to nonaccrual status during the quarter. They decreased, as I mentioned in the prepared remarks, regarding the hotel we resolved in Miami. And yes, we released our CECL reserve, and from a basis point standpoint, the reserve went down from 92 basis points to 85 basis points during the quarter.

Okay. I must have did some bad back of the envelope math there.

I think that's as a result of the portfolio getting a little smaller, and that's usually what drives that.

Right. Right, right. Okay. And then just in terms of cash interest collection on the loan portfolio and then rents in the real estate portfolio, any major change quarter-over-quarter?

We are still at -- from all -- from the beginning of COVID, 99% collection rate across our entire loan and equity portfolio with a 100% collection rate in our triple-net lease portfolio.

I think I'd say [hands in hands] too, Tim, with the payoffs that we've witnessed, the $1.5 billion of payoff. We had -- I don't remember exactly what day was, but we generally had a floor in our portfolio of 6.2%. And if you've got strong cash flows and stabilized properties that are coming out of the transition period, then obviously, there's plenty of cash available to lend on those assets today, but well below our floor. So I think that's why we're experiencing a higher prepayment frequency than a lot of our competitors.

Next question is Charlie Arestia with JPMorgan.

First, a quick follow-up on the CECL discussion. Appreciate all the color on the previous answer there. But as you guys kind of hit this inflection point this quarter and really start to go back on offense here, should we expect that reserve to really start to kind of grow from these levels in line with new originations, maybe offset by a lower overall reserve rate on the existing book as sort of the macro picture improves?

Yes, I think what you'll see is, as our post-COVID loan book grows, our reserve level should go up. However, with the accounting rules, every new loan has actually a piece of the general reserve. But as pre-COVID loans continue to pay off, the loan -- the reserve should shrink because those were made at different basis. So it really will depend. Our view on the economy moderately improved quarter-over-quarter, will depend on how fast the economy opens up in our macroeconomic view. So yes, all else equal, as our loan book grows, the reserve should grow with it, but it shouldn't grow by a large number.

It does make sense, Charlie, though, because for a while now, as our portfolio has been shrinking you've been seeing a lot of these givebacks out of the CECL reserve. We expect our portfolio to grow quite a bit in the next 12 months. So yes, if that's the item that drives it, then yes, I would expect it to go up.

Okay. Yes. No, that makes a lot of sense. And then if I could ask 1 more, just wondering if you guys have any appetite for looking at deals overseas? Your peers have been pretty active in Europe over the past quarter or 2. And just curious to get your view on the competitive dynamic there on both the financing side and also kind of the regional disparities on lockdowns and the COVID impact there?

Yes. That's an area. Interestingly enough, I ran global commercial real estate for 2 European banks and 1 Japanese bank. Yet we think that they're -- with a company our size, and with the opportunity set in front of us, we feel very comfortable here. There's nothing against us doing something in Europe or in the Caribbean or anywhere else for that matter. But it's not a business that we're focused on. So I would anticipate U.S. growth at Ladder.

Sorry, I just wanted to add 1 thing. That's really the hallmark of Ladder, right? We -- our diverse granular loans, I think that's why you saw so much payoff. We're essentially basis lenders. And just going back to the early question on sort of the pipeline of loans, we are focused on domestic, strong basis opportunities. And I think we have this opportunity to reset our basis.

And that's 1 of the things I think that we're most excited about when we look out in the pipeline. All of the loans that we're originating now, we have the benefit of the reset in basis. And since we do focus very much on basis, it's been a great opportunity for us to make some of the better risk-adjusted returns that we've seen in a long time.

Next question is Stephen Laws with Raymond James.

First, touched on the pipeline, very strong. I know things have picked up since you're in 93 of originations. Sorry, if I missed this, Brian, but can you update us on where the balance is on the CMBS assets today and what -- how that's changed since quarter end?

I know the overall picture is about -- Paul, you may have the numbers, but I think it's about $700 million, but it didn't -- if you can give the increase and decrease on the securities portfolio.

Yes. As of quarter end, it was $764 million, and we've seen some amortization since quarter end. So I think it's around $740 million or $750 million. I don't have the exact number, but I think it's decreased slightly this quarter.

And I think at the year-end, it was -- in the fourth quarter, I think we sold over $400 million of securities. So it's down at a point now where what we own is pretty high yielding in that space, and it's very safely levered. And so we're pretty comfortable with that. That portfolio is also paying off very quickly. We took $50 million in amortization and payoffs this month. So -- and we've taken $200 million in the last year. So that portfolio will take care of itself. It doesn't really need to be sold. It will just continue to wind down. And we don't see too many reasons to leave the bridge loan portfolio to add securities right now.

And on the loan side, you covered the pipeline, covered near-term repayments for the next 3 to 6 months, kind of what are expectations? And I'm kind of trying to get to at what point this year does net interest income trough? Is that in the rearview mirror? Do we have maybe 1 more quarter where before the loans really settle in and contribute for a full quarter in 3Q? So trying to kind of get an idea of when the trough in NII will take place?

Yes. I think you're going to start seeing that in the upcoming quarter. I think Charlie said it best, we're at a real inflection point at Ladder. I think we just -- we went to work on the balance sheet rate liquidity and de-leveraged intentionally. We now are sitting with a lot of cash, seeing great risk-adjusted returns and we feel very confident, I think, just by the nature of our portfolio and the seasoning -- we have, on average, had about 29 months, 30 months of seasoning on loans at any given time.

And we're seeing -- just by natural normal duration of our pipeline, we don't have a lot maturing through year-end. We have some initial maturities, but they either look like they qualify for extensions and the ones that don't will pay off. So I think you'll see actually lower levels of payoffs just based on our natural timeline over the coming quarters, and you'll see loan repayment. And just with a huge pipeline ahead of us, you're going to see very quickly our pipeline outpacing loan repayments, I think starting with the next quarter.

And Stephen, I would add. I think you're seeing the trough this quarter, the one we're reporting on right now. Frankly, we're not very happy with this earnings number. However, the reason the earnings number is not where we want it to be is because of our preference for liquidity and lower leverage. It's not because we're taking write-downs all over the place.

So as we -- we've been asked for several quarters, when you going to start deploying all that cash? Well, that started last quarter. And while April is really the first month where we saw originations and -- not origination, but closings, outpace payoffs on a 2:1 factor. I think that will become 4:1, possibly 6:1 on the months going ahead. So I think the portfolio will swell pretty quickly. And I think a lot of the net interest income that we're going to be generating here is going to go right to the bottom line.

Great. And that may make this next question less valid, but can you talk about -- given the liquidity anything in the capital stack, equity or debt that looks attractive, you might look to retire earlier or repurchase? I'm sure you guys are doing those type of comparisons versus new investments all the time. So any thoughts around that?

Sure. We do it all the time. We look at it constantly. We do have $450-ish million due in September of '22 more than a year from now. So -- and that is pre payable at par and 0.31 in September. No, I'm sorry, that's prepayable at par in September, the [25], which is our next maturity date in the corporate side, those are prepayable at par spot [3.1] in October.

So we look at them. And if we can borrow money in the corporate space below 5.25, we might very well do something earlier rather than later. But we have more than enough ability to handle it regardless of whether or not we do another corporate bond issuance.

We would like to. We prefer the unsecured bond market to secured markets. However, creeping up lately, you've been seeing quite a bit of activity in the CLO market. We have more than enough inventory, and we're closing at a pace that's comfortable enough that we could issue a CLO also. And that actually has very attractive cost of funds associated with it.

The leverage on those is probably between 80% and 85% and the all-in without fees, cost of fund is probably LIBOR plus 160. So when we think about a corporate bond issuance, we actually look at it versus that CLO scenario. And in addition to that, we look at it against normal repo, which we all have to be a little careful with as we know.

So the CLO is probably the second favorite to the corporate bond issue and repo is third. But all are available, all are attractive, but we do enjoy somewhat of a low cost of funds right now anyway in the corporate bond market. We have the Koch facility, which we will be paying off as soon as possible, but we're not going to incur any unnatural friction costs there. So again, I think our interest cost year-over-year will be falling quite a bit.

Next question Steve Delaney with JMP Securities.

Just 1 for me. We noticed an article in a New York City real estate publication, where Ladder had provided some rescue capital to the owner of a couple of office buildings. Just curious whether you're seeing additional opportunities like that? I noted Pamela mentioned that I think the first quarter loan yield was 7.3%. So assuming that closed in the first quarter, we assume that loan, in particular, probably had a lot to do with that attractive weighted average yield.

Steve, it's Brian. I'll answer quickly, and then I'll send you over to our Head of Originations, Adam Siper. There's something going on in the background that I don't know that a lot of people are fully aware of. But -- and I don't know exactly what caused it. I wonder if it might have been (inaudible) situation that took place where the banks got a little blindsided. But the regulators are on top of the banks pretty seriously right now. And the banks are occasionally doing some unusual things with their loan portfolios that you wouldn't expect them to do. So I know that, for instance, in that scenario, I would not normally talk about this, but the borrower himself actually gave the interview. So I feel like we can say a few things.

But it was a very low-leverage loan in New York City. And it's funny, when we finance a lot of these loans coming out of the banks, we're writing loans at around 5% or even 6%. They're coming off of loans at LIBOR plus 175. So those are very high-quality loans. But for whatever reason, banks are getting a little jumpy around concentrations; I know apartments in New York City are making people a little scared. But that just happened to be a couple of Garment District office buildings, and the leverage on them was, frankly, where I think -- well below where I think those buildings would sell as they were vacant.

And what really happened is some of the Garment District tenants, they couldn't make their rent payments. So of course, you had the same thing that happened in the rest of the country. And the banks that held that note handled it a little differently and sold it to a real distressed investor who want to own the building.

So we were able -- if you call it rescue, I don't think we rescued it. I think he could have sold the building, too. But it was not a very courageous loan. It was something that we closed quickly. But before I take up too much airtime, I'm going to give you Adam Siper, who handles a lot of these interactions with the banks and (technical difficulty)

Adam, I think you're on mute. No? His mic's not working.

I wanted to add something while hopefully Adam fixes his technical issue. But what I wanted to say is I think one of the things -- we always talk about Ladder being basis lenders, and we will and we can, and we write a lot of heavy cash flowing loans like everyone else, but we don't price loans. I think a lot of our peers price loans to a CLO, which requires a lot of cash flow to make it work in that model.

We look at replacement costs, dark value, and we have the opportunity, I think, to do a lot of strong loans at great [basises] where we -- as Brian just said, we think that loan with -- and they just -- I think 1 of the things that you didn't mention on that, Brian, is they signed 2 leases with very strong tenants, and we feel comfortable at a dark value.

So I feel like the opportunities we're seeing right now are just outsized because I do think a lot of people are forcing their loans into a CLO model that some works and some don't. And that's the benefit of our hybrid financing and diverse capital structure.

And I just want to add 1 thing there because, like take an example of that. So the cash flow got interrupted in the building, but the actual loan on the building was pretty low. It was about $300 a foot. And obviously, well below replacement costs, which is usually anybody who's been in lending for a very long time, if you're below replacement costs, you hardly ever get hurt.

But that will not do well in a CLO because the rating agencies will look at the cash flow as if there's a problem. Now that cash flow is ramping up quickly as people return to work. And if you've been in New York City, you can certainly see that picking up. But that's 1 of those examples where if that was a cash flowing instrument in the CLO market, LIBOR plus 300, that's where everybody would bid in. And because -- I mean, it's not even -- it is leased, it's just tenants not making payments because you know the Garment District and tenants aren't, that's why they have factors in that business.

They're not heavy cash flow business. They're perpetually late on bills. But at the end of the day, that keeps moving. So yes, we love situations like that. We love when there's some level of stress somewhere. We don't like it when it's at the building, and in this case, we think bank got jumpy. And we think the regulatory environment may create great opportunities. And when you don't have a lot of cash flow, the CLO lenders are not there.

Great. Well, I hope you find some more. And I know I've got to hop off here, but in closing, I just want -- if Marc Fox is on the call, I just want to wish him all the best for the future. It's been a pleasure to know you and work with you, and all the best, Marc.

He said he wasn't going to be on the mic this time. But Marc, if you're on, we'll call this the equivalent of driving you around in the golf cart in Yankee Stadium.

You can pass my regards along.

Our next question comes from Jade Rahmani with KBW.

I also have never said anything positive about anyone in management, but I also want to commend Marc Fox. He's been really great to work with. So...

Thank you. We love him too here.

Well, I have to ask this because I've asked it for several different management teams, and I was given very colorful answers. So Brian, this is for you: what do you think about the ground lease business and the uptick in entities focused on that space? Is that something that Ladder could -- given its high liquidity and cash position and perhaps near-term, more greater flexibility on the hurdle rates that Ladder is willing to pursue?

The ground lease business has gotten a little more institutionalized here, but it's been around for a very long time. They don't have anything to do with interest rates. They don't have anything to do with interest rate movements. They're very safe assets. And I think there's nothing wrong with investing in them. However, I think the returns to be generated, if they're going to look great, and they're going to look like a tremendous value, they're going to look that way in a market fraught with danger, like in a pandemic, with low interest rates. That will be their best day on a ground lease.

So I don't really have a lot of interest in ground leases, and it isn't because I don't like some of them. I'm happy to do them if somebody wants to, please call. But I think for the most part, they're very safe, they're very low-return businesses. And I suspect they will gravitate back to where they generally have been over the last 50, 60 years. They're going to be -- they trade like treasuries. They're safe, so you won't hear anything from me about them not being safe, they are, but I think we'd probably rather -- and we think if you move out a little further on the spectrum, you can invest safely with higher returns.

And what do you also think about all the debt funds that survived COVID that now have chosen multifamily and industrial as their favorite asset classes? Because I've been thinking a lot about this. And I think that hospitality is such an interesting asset class right now because people are going to stay 50% longer than they ever would before because they're going to work hybrid from a drive to hotel, which boosts the occupancy and then you can have a virtual check-in.

So all of the operating expenses are going to go down, turnover is going to go down. So hospitality NOI margins are going to increase, the drive to markets are going to have higher occupancy than before, and people are scared to lend them and they want to only lend on multifamily and industrial.

Well, I think what you're seeing there, first of all, separate multifamily from everything else because multifamily is probably the only sector in the commercial real estate business that's really supported by the U.S. Government. And so as a result of that, there's a constant buyer for it, interest rates are low, a lot of people are selling their homes because they've gone up so much in value. That's 1 of the salient differences of this turnaround as opposed to 2008, 2009. You don't have people losing their homes here.

People are selling their homes and moving into apartments, you also have a graduating class of kids who wound up living with their parents an extra year. And so there's plenty of reasons why the fundamentals of an apartment are fine because there's plenty of demand, people -- I think it's like 5 million or 6 million kids living with their parents that want to live in an apartment. But then you have to take the backdrop around it, like, so for instance, I think it's very different in San Francisco apartments relative to Manhattan apartments.

Brooklyn is not having a problem, Manhattan is having a problem. And is that simply because you press a button and go up more than 5 floors? I think it's a little more complicated than that. I think the Manhattan rents were so high and it was a reasonable value with the finest restaurants in the world, museums and Broadway and bars open all that long with Uber driving. But when you take the value away and you just leave the high rent, you can't even use the gym or the pool, of course there's a problem.

To back up what you just said there, if you take a look at the drive-to hotels in and around San Francisco, it is amazing what is going on because San Francisco office buildings, many of the big tech tenants have already said you'd never have to come back to the office. So as a result, a lot of their executives are in Lake Tahoe snowboarding for a few hours a day and then heading to the office, which is their hotel room. We're seeing this also in Wine Country and Napa Valley. And I suspect it's happening in other coastal regions. But you're right, there is really no reason to rush off the beach in the Hamptons on Sunday afternoon anymore to beat the traffic.

So it's going to set up some interesting dynamics in the hospitality business. I tend to agree with you. I think people are making a lot of loans in apartments and industrial for the obvious reasons. One is Uncle Sam and the other 1 is Uncle Bezos. And so those are pretty safe. And again, nothing wrong with those businesses, but they are, in my opinion, overbid. If you have an apartment building coming off construction and it's leased, there's 20 lenders and when there's 20 lenders, you probably don't want to be 1 of them.

But on the hotel sector, sort of interesting because can you really hear something about a hotel today that is bad news that hasn't come across your plate already? Yes, I think you can, actually, but it has to do more with Airbnb, it has more to do with people just renting out their rooms not on Airbnb. So there's plenty of competition, but I think then you factor in the unions, the hotel -- the hospitality unions in New York City and many of these hotels have changed -- have closed permanently. So we'll see where that shakes out. But I don't know that answer, no one does really. We'll see where it goes. But we are looking. There's plenty of large hotel loans in default right now, most of the ones that I know and like and they look cheap. They happen to be in large cities, but still scare me a little bit, not so much from the standpoint of the investment or the people, but from the politics.

I think a hotel in Chicago right now causes me some concerns. I don't know where the taxes are going. I think a hotel in Manhattan, I'll feel a lot better about it after November. But these big cities have really taken a turn against landowners, property owners. So -- but Hilton Garden Inn in Cincinnati? Sure. They should be fine. And what you're really seeing is the resort hotel is doing very well. Hawaii, there's some articles in the paper, they're doing fine. Miami, is you cannot get a room. And it is hotter than hell in Florida right now. And Florida, by the way, is open. There is nothing -- there are no restrictions in Florida whatsoever. Not saying that's a good answer or a good thing to do. I'm just telling you that you walk into a hotel, you walk right to the bar, you stand elbow to elbow with people without masks on.

So we'll see if that's a good idea later. But right now, it has returned and I think a lot of the states that have rushed the reopening, if they're going to be right, they're going to be really right because they are experiencing the lower unemployment rates than the states that have really held the lockdowns in place.

And Jade, I just wanted to add, I think you kind of like opened up a conversation on -- I think there's a ton of opportunity, I think, right now. And the way you're thinking about it is exactly how we're thinking about it, and that's why we're so excited to be sitting with all of this liquidity right now. We think that you're finally seeing transparency and people are able to make some of the judgment calls like you just made, and I think you're going to see us expressing that view in first mortgage loans, always focused on basis like what we always have.

And there's a lot of capital in the hotel business. I mean we had to foreclose on a few hotels, and we sold them right away. And on several of them, we made money. I remember saying to the borrowers, why give them to us, just put them up for sale. And they don't. I don't know why. But yes, so we're pretty comfortable, and we've been able to move out of our defaulted loan category; there was a $100 million loan that was attached to some buildings, but also a 1 million square foot vacant building, and we were able to sell it at our principal balance. That's pretty amazing. I've never seen that kind of liquidity. And I hate the term bank-owned property, but that's what people call us once in a while. But -- and loans in default are routinely trading at par or higher.

Yes. Well, you guys have a great asset management process, and I think that the proactiveness that you've shown is definitely a differentiator. I don't want to take too much time. I'm sure there's more people in the queue, but I think that the 2 things that investors would like to ask about is, number one, when does this inflection point in terms of earnings outlook come? Because you're looking at a company with, at least as of last quarter, $10 a share in cash. So deploying that cash at historical returns would easily cover the dividend. So when does that come?

And then the other thing is just optionality because Ladder -- I know that, Brian, you (technical difficulty) you could probably raise a lot of funds, third-party capital. So I guess the 2 questions, sorry for taking time. But number one, inflection point on earnings? Number two, just on would you consider raising a fund to be that bridge between when Ladder's balance sheet gets fully deployed and when earnings start to pick up?

Yes. 2-part question. The first 1 is, I believe, obviously, no guarantees, but I think we're talking about the inflection point. I think it's in the past, it was the first quarter. And that's -- really, frankly, if I had to tell you, the biggest problem in the company right now is we're getting too many payoffs and which, as a lender, I hesitate to say that because the opposite can be very, very challenging.

So we are taking a lot of payoffs. We've -- $1.5 billion paid off in 12 months without any push from us. So in the middle of a pandemic, for 80 -- 79 loans to pay off, that's pretty remarkable. I have not physically been in our office in a year, and yet we still took 80 payoffs or 79 payoffs.

So the inflection should be there. I think, as I said earlier, April was the first month where we had 2x the payoffs in the loan origination area closings, not under app -- closings. I do believe we could easily put up $500 million or $600 million loan origination quarter. In the next 2 quarters, we will not receive $600 million in payoffs. That I'm quite certain of.

And so I think we've hit that point. And the question is -- and I think the question you will be asking me in the quarters ahead is what is the multiple that you're originating is outpacing your payoffs? And I think it's going to go to 5 or 6:1 here pretty soon. And then I think it will probably level off to about 4:1. So I think in our last call, I said I thought we would write $300 million in the second quarter, $300 million in the third and $400 million in the fourth. I would double all of those.

And so the question is, how do we restore the dividend? It's very easy. You just -- you're write $2 billion worth of loans. You don't even need leverage. If you can get fees and rate at 6% unleveraged, you're there. The question is, though, you have to write $2 billion net. So if you take $1 billion in payoff, you're in the wheel. You've only made $1 billion worth of loans net. And unfortunately, no matter how hard we try, most of the new loans we're writing are at lower rates than the loans we were writing previously.

So it will be a bit of a grind there, but everybody else is in it, too. But I think our -- we're more confident than ever in our ability to understand what we're underwriting. And as we said, fascinating observations took place in some of our defaulted loans and REO properties. We're still learning after all this time. I remember turning around and looking at Pamela and Rob and saying, I don't think we should -- we're going to want to sell some of these loans. But we're in a REIT that pays a dividend. And everybody wants to talk about hotels and defaulted loans. And frankly, we're not in the vehicle that benefits from that.

Now a lot of our competitors have another vehicle that kind of does that. And so we think about it sometimes, but the 1 thing I've always told our investors is that I would have 1 job full time. And I work here for Ladder Capital and for the shareholders. And so if we were to set up a fund, we probably could have had a whole lot to do there. If you remember, when we went public, we closed all of our funds. We had a few of them.

And -- but we didn't like the conflicts associated with it. So -- but raising money in a fund and trying to buy distressed debt while the Fed is putting rates at 0 and there's capital everywhere, that's kind of an exercise in futility. And I think you're going to hear that from a lot of the distressed real estate funds. A lot of money was raised to take advantage of all the distress, but distress didn't come. And when the Fed started buying junk bonds, that took away a couple of punchbowls also, but the question was, what happens at the end?

If interest rates go up, what happens to zombie companies? What happens to people that needed. I mean, look at how many companies got taken off the respirator because of mean stocks. And then how many of them were able to actually issue equity? Hertz was looking to issue equity going into bankruptcy court.

So we're going to have to learn how to manage around some of that stuff, but I don't anticipate setting up third-party funds unless we're invested with it, because we think it competes. We don't want to be viewed as bailing out or any mistakes we made by putting it in a fund. And frankly, I wish we could buy distressed debt in a REIT, but if you buy a lot of it with that dividend, you start getting into this dividend coverage conversation that we've been in for a little while.

If you remember, a year ago, we were in a liquidity conversation. Now we're in a credit conversation. Now we're in a dividend conversation and an earnings conversation. So it just kind of it depends which 1 you want to talk about on any given day, but I think we're going to be talking about growing earnings in next quarter.

I would just add that the focus for us will be restoring earnings, and we have the flexible capital here. If we see something really compelling we have the ability to take advantage of it with our flexible capital, keeping in mind the constraints Brian mentioned about covering the dividend. But right now, everybody is 100% focused on Ladder earnings.

It would work better if you purchase a distressed asset and borrowed money from someone else.

Well, your corporate governance has certainly been very clean, and that's something I admire about you guys. I think, Brian, you could have probably launched 3 different funds at this point, and be dovetailing those against Ladder's balance sheet and be co-investing and sort of all kinds of co-investment vehicles. So the fact that you've kept the clean structure definitely, in my view, is a benefit to shareholders.

I think right now, the stock is reflecting probably kind of the minimum dividend yield of where peers should trade in anticipation of a future uptick. And it's kind of a waiting game, 1 of your peers just raised their dividend 40%, stock's up 9%. I'm sure Ladder when it raises its dividend, would have a similar rise, but really...

Yes. We'll get there. We raised our dividend 5x when rates were going up. We -- last time we thought rates were going to go up we loaded up the bridge loan portfolio. We benefited from that. And I think we're kind of seeing history repeat there. So I don't think this is going to be terribly difficult. I wish the rates would go up, it would be a lot easier.

And I think, Jade, you hit it earlier when you said we got in front of issues. I think 1 of the things you're going to see is there isn't really any noise coming out of the Ladder other than new loan originations for the next foreseeable quarters. And I hope that's true for the whole industry, but I feel very confident it's true for Ladder. And I think that's, for us, the focus.

Turning over to balance sheet, the amount of loans -- sorry, I just want to say, the amount of loans that repaid, combined with the fact that we reduced loans on nonaccrual by 25% in the middle of a pandemic, it says a lot about the credit quality of the assets on our balance sheet. And that's the 1 piece of this that I'm not sure we're fully being rewarded for right now is the work that we did. Our capital structure is as clean and strong, and our credits are as good as ever with tons of cash to deploy in this environment. And I think that's what -- I think that's what you're going to see happening.

Next question Matthew Howlett with B. Riley.

I know the call is going on for a while, but I just want to get 2 questions in. First, when you said the legacy Koch and April 20 CLO debt will be behind you a year from now, are we to assume that they'll be fully called or just amortized down enough where they don't have an impact on interest expense?

Yes. They have make-wholes that, frankly, if they didn't have them, we'd pay them off right now. But given the fact that there's no savings by paying them off now, we think it will happen -- because there is a structure where they get paid down as loans pay off.

So both of them are paying down quickly already, and they're not as big as they were when we borrowed them. But I'm estimating, don't hold me to it. It's not a due date. In fact, they're not due dates, but I do believe next year, they'll be gone at this time.

Okay. Remind us again, what the rate on the CLO was?

I'm going to guess here. But Paul, make -- I'm getting the sign, don't guess.

Yes. It was a 5.5% coupon all in with costs. It's about 6.25%, but it's amortized down -- just this quarter alone, it amortized down $30 million and subsequent to quarter end in April, it amortized down another $30 million and continues to amortize down.

And the new market issue today will be what? Something in the 2% area?

I'm sorry. What was the question?

Where would be the new issue market today if you were to...

On a CLO about LIBOR plus 150-plus fees. At 80% of it.

Okay. Okay. Got you. And then I guess the other question is also on the condo business. Obviously, the origination has been weighted towards the traditional loans. Brian, what's your -- just give us the overall outlook on the CMBS world? What do you need to do to see that market rebound? Ladder has been obviously a huge contributor since the financial crisis. We've heard things like properties need 2 years to stabilize, retail properties to get into the CMBS market. What is it going to take to get that market going? And how should we think about gain income in the future?

Well, I think the arbitrage associated with anything you can securitize is as attractive as you could possibly imagine it being, it's very attractive. But the problem is, at its core, is a cash flow-based analysis. And when you interrupt cash flow for 12 straight months, there's not a lot of things that fit very easily into it. Then you take in a couple of property types like regional malls that are blowing up all over the place. And then you take in big box retail with bankruptcies and then you take in names of companies, big names like Saks Fifth Avenue that are not paying their rent in many buildings.

And it is absolutely a moment to stop and stare and see just what should be going into that because there's a -- I don't think the credit cycle has found its end in the CMBS world. Now you won't see a hotel until you see 12 months -- of trailing 12 months income, which I don't even think we've gotten month 1 of yet, except in the state of Florida.

So I think it will be a good long time. And so what's it going to take? It's going to take volume, it's going to take eligible collateral. And I suspect we're going to be dealing with higher rates going forward. So I think the economy will be fine. I think that there's a lot of pent-up spending that will find its way into a lot of these assets. But how is the hybrid work model in offices going to work? I think Jade was right. I think hotels will do very well, especially resort type.

But there's a lot of uncertainty there. So what you're seeing is tremendous demand because there's been nothing on the production end. And it's a cabal of banks really that stay together, and they do very low leverage loans, and they do with them institutional accounts that don't borrow a lot of money. And God bless them, there's nothing wrong with that. But I don't believe that writing a 75% loan-to-value on an office building or a retail center with the shopping -- with a grocer is terribly pioneering stuff.

So -- but we will continue to write loans. And in fact, we've been writing them, but we don't anticipate being able to contribute meaningfully into a CMBS deal for 6 months. And it isn't because we don't want to. And we just can't find the collateral that's eligible, that -- you have to remember, the rating agencies factor into this also. And the rating agencies have a generally negative opinion of commercial real estate.

Right, of course.

So I just think it's a supply problem, more than anything else.

Got you. But there are a lot of maturities in the next 4 or 5 years. So can we think about maybe this being '22 in terms of an impact to Ladder's P&L? I mean how to just think about it from a...

Yes. I think we're as good as it gets in the conduit business. And there was -- when we started the company, there was 1 year, we made $180 million in the conduit. We were making 7 or 8 points. And could that happen? Yes, I guess so. But it's going to take a real stabilization, not of people going to work. But of people getting out of their -- going to their office when they work for 1 and also going out of their house to buy things. And there's just -- you've got to figure out how much of this is pandemic-related and how much of this is secular.

And if you go to a hybrid work schedule in an office building and everybody is in the office 3 or 4 days a week, well, that's fine for the landlord and the office building, not a big deal, but the guy that sells pizza downstairs or the deli across the street just lost 20% of his income.

So there are knock-on effects that you really have to follow it through and try to understand what it's going to mean. If a lot of this stuff happens, what's going to happen to the -- just look at New York City Mass Transit, subway ridership in New Jersey and Long Island Railroad, if these guys weren't being bailed out, they're dead. And so we'll see. But I think the jury is still out as to how the healthy U.S. population is going to interact with commercial real estate going forward.

Got you. Well, look, you got a great on-balance sheet transitional loan business. So I guess, we'll just focus on that and wait for the CMBS market to recover at some point?

Well, that's the incubator, right? We're kind of making a bet here that the world will find its feet and people will prefer to get out of the house prison they've been in. And -- but it's going to take a while. It's not going to be this summer. I think it will start falling out, certainly. And I remember when 9/11 happened, everybody thought no one would ever go in an office building again. And we began writing loans on skyscrapers, and I had rating agencies trying to tell me how they could hit that building with a plane, and I don't really think you can do it. But -- and ultimately, memories are rather short.

I will now turn the call to Brian Harris for closing remarks.

Well, thank you. Sorry the call ran a little bit late tonight. I'm sorry about our technical difficulties here. Unfortunately, that's living in a pandemic as it ends. But I look forward to future quarters; I think we're going to have better news going forward, and thanks for hanging with us during these quarters. All right? Thanks.

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