Ladder Capital Corp (LADR) 2020 Q2 法說會逐字稿

Greetings, and welcome to the Ladder Capital Corp Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Michelle Wallach, Chief Compliance Officer, Senior Regulatory Counsel for Ladder Capital Corp. Thank you. You may begin.

Thank you, and good afternoon, everyone. Before we begin Ladder Capital Corp's Earnings Call for the Second Quarter 2020, as the pandemic persists, we continue to wish that all of you listening tonight and your families are well and remain safe.

Turning to our earnings call. With me this afternoon are Brian Harris, our company's Chief Executive Officer; Pamela McCormack, our President; and Marc Fox, our Chief Financial Officer. Brian, Pamela and Marc will share their comments about the second quarter, what they're currently seeing in the third quarter, and we will then open up the call to questions.

This afternoon, we released our financial results for the 3 and 6 months ended June 30, 2020. The earnings release is available on the Investors Relations section of the company's website, and our quarterly report on Form 10-Q will be filed with the SEC later this week.

Before the call begins, I'd like to remind everyone that this call may include forward-looking statements. Actual results may differ materially from those expressed or implied on this call, and we do not undertake any duty to update these statements. I refer you to our most recent Form 10-K and Form 10-Q for a description of some of the risks that may affect our results.

We'll also refer to certain non-GAAP measures on this call. Additional information, including a reconciliation of these non-GAAP measures to the most comparable GAAP measures is available on our website, ir.laddercapital.com, and in our earnings release.

With that, I'll turn the call over to our President, Pamela McCormack.

Thank you, Michelle, and good afternoon, everyone. For the second quarter, Ladder produced core earnings of $12.8 million or $0.12 per share. As Marc will elaborate on further, these amounts exclude a $16.9 million COVID-related adjustment. Our undepreciated book value per share increased by $0.16 from the prior quarter to $14.17 per share.

Since the onset of COVID-19, our primary focus has been on strengthening our balance sheet by increasing liquidity and reducing leverage. Our access to the unsecured debt markets allowed us to finance a large portion of our capital base with long-term flexible capital and limit our use of the shorter-term secured funding most commonly used in our industry.

During the second quarter, we reduced mark-to-market debt by $1.1 billion or 39%. On a net basis, we reduced our total debt outstanding by $727 million while increasing our liquidity and unrestricted cash balance by $468 million. Liquidity is an asset we value, and we have a lot of it. While we will continue to be prudent and thoughtful about the current economic climate, we look forward to redeploying our substantial cash holdings.

The strength and flexibility of our multicylinder business model will be evident as we commence redeployment. We have the ability to make commercial real estate investments throughout the capital stock and the right team, experience and platform to provide the new loans and rescue capital we expect to be in high demand as a consequence of this crisis. We expect conduit lending on high-quality stabilized assets to return for us, which should add additional interest income and periodization gains.

In addition, any new balance sheet [loss] originate should add to our recurring interest income on a nearly dollar-for-dollar basis since we're already flushed with liquidity.

Turning to our balance sheet. As a result of our recent efforts, we are pleased to further report that, as of today, we have over $750 million of unrestricted cash. $2.6 billion or 40% of our total assets are comprised of unencumbered assets, including cash and $1.26 billion of first mortgage loans. Over 75% of our capitalization is comprised of equity, nonrecourse debt and long-term unsecured debt with staggered maturities extending through 2027. And finally, total repo debt for both securities and loans account for just 25% of Ladder's total debt, with only $375 million of loan repo outstanding across our entire portfolio.

Turning to our balance sheet loan portfolio, which currently accounts for just 44% of our assets. We have over 150 loans in the portfolio with an average loan size of $19 million, which provides significant credit enhancement through granularity and diversification across sponsors, property types and geographic locations. Performance of the portfolio remains strong with a 98% collection rate in July. With a weighted average LTV of 68%, our borrowers continue to have significant equity invested, and we've been pleased with the strong level of commitment they have expressed in defending their assets. No specific loan loss provisions were required in the second quarter.

Looking more closely at this portfolio, 76% of our balance sheet loans are lightly transitional, where the assets are close to stabilization and require minimal capital improvements. Our balance sheet loans have a weighted average seasoning of 18 months, which is a little over 15 months remaining to initial maturity and 27 months remaining to final maturity. Further reflective of the lightly transitional nature of our portfolio, we have less than $150 million of future funding obligations over the next 12 months and less than $250 million in total, all of which we can comfortably meet with current cash on hand. The majority of these future funding obligations are conditional and are subject to the achievement of predetermined good news events like tenant improvements and leasing commissions due upon the signing of new leases that enhance the cash flow and value of the underlying collateral. We continue to have limited exposure to hotel and retail loans, which comprise only 14% and 8% of our balance sheet loan portfolio, respectively. Currently, almost half of our loan portfolio remains fully unencumbered, and our exposure to mark-to-market financing on hotel and retail loans is just 1% of our total debt outstanding.

Turning next to our securities portfolio. As of June 30, our securities portfolio stood at $1.5 billion. We reduced the portfolio by 22% or $424 million in the quarter, and we paid down securities repo financing by $276 million. Since quarter end, we paid down an additional $80 million of securities financing as we further delevered. As Brian will elaborate on later, we have seen liquidity, pricing and financing for our securities portfolio all steadily improve, and we continue to expect our portfolio of almost exclusively short-duration AAA-rated commercial mortgage-backed securities to pay off at par given their super senior position.

Moving on to our real estate investments. This portfolio continues to be a strong source of recurring earnings for Ladder. Our $1 billion real estate portfolio is predominantly comprised of triple-net lease properties with 12-year average remaining lease terms. We're pleased to report 100% collection rate on our triple-net lease portfolio in July and a 97% collection rate on the equity portfolio overall. Our triple-net lease portfolio was almost entirely leased to necessity-based businesses, including dollar stores, grocery stores, drug stores and wholesale clubs that have performed well over the long term and particularly so during this COVID-19 crisis. We expect the net lease business to continue to be an important part of our strategy going forward.

In conclusion, we look forward to benefiting from the competitive advantage we expect to have as a result of the substantial liquidity we've built up. We are using our in-house origination capabilities and national footprint to monitor the macro environment and investment opportunities on the ground and our space as we seek situations with compelling risk/reward dynamics. We remain cautious but optimistic. We are in this for the long term. And while our hearts are certainly with all of those who have been impacted by the pandemic, we're also excited about the substantial opportunities that will likely arise from the crisis for the company and for our shareholders, with whom we remain fully aligned.

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

Thank you, Pamela. Business and market conditions steadily improved over the course of the second quarter. The liquidity and capital-strengthening actions taken and abled allow Ladder to focus on managing its portfolio of investments and working to reduce its cost of funds. In this part of today's presentation, I am going to follow up on some of Pamela's comments regarding Ladder's funding and provide further insight into our earnings results.

In response to the COVID-related conditions, Ladder moved to delever its balance sheet. By June 30, the adjusted leverage ratio was reduced to 3.09x and reflected over $800 million of cash on hand. Net of unrestricted cash, Ladder's adjusted leverage ratio was 2.54x. During the course of the second quarter, total debt was reduced by $727 million. In paying down debt, we intentionally targeted secured borrowings that were subject to mark-to-market provisions. We paid off $276 million of securities repo debt, $156 million of loan repo debt and $647 million of FHLB advances. In doing so, we achieved a major 2020 goal by paying down FHLB advances to below the $400 million level mandated by FHFA rule. The debt was paid down with the proceeds from a combination of sources. Loan repayments during the quarter totaled $331 million. Sales of loans and securities generated an additional $590 million. And the new Koch facility and CLO provided a combined $517 million of non-mark-to-market liquidity. Finally, Ladder took advantage of the market disruption by repurchasing $139 million of our corporate bonds.

Looking at the 2Q income statement and core earnings. We are reporting $12.8 million of core earnings and core EPS of $0.12. There are a number of COVID-related items, including specific expenses, losses and gains that had a net $16.9 million unfavorable impact on Q2 GAAP income before taxes, and those items have all been excluded from core earnings in the second quarter. The excluded items include nonrecurring professional fees and severance costs and debt prepayment penalties that were incurred in conjunction with the fundraising and refinancing activities discussed previously. Had it not been for the unprecedented market conditions, Ladder would not have incurred these charges. Our desire to raise liquidity and respond to adverse market conditions also caused us to sell newly originated performing loans at discounts to par, sell AAA-rated securities at substantially discounted prices and securitized conduit loans at a loss. Partially offsetting these losses were $17.5 million of gains realized on the repurchase of our corporate bonds at discounted prices. For the amounts related to each item, please refer to the core earnings computation note in the non-GAAP measures section of the press release and in the quarterly statistical supplement that has been posted to our website.

With regard to shareholders' equity, our securities portfolio valuation mark steadily increased during the quarter, resulting in a $26.1 million credit to shareholders' equity as liquidity returned to the CRE, CLO and CMBS markets. We also paid a dividend of $0.20 per share in Q2. As Pamela noted, we did not record any specific loan loss provisions in the quarter. With regard to CECL, the dollar amount of that general reserve decreased by $0.7 million. GAAP book value at June 30 increased to $12.44 per share from $12.31 at the end of the prior quarter while undepreciated book value per share rose to $14.17.

Looking forward, we draw our optimism from our strengthened capital base and solid liquidity position and an expectation that items of the nature I just discussed will not adversely affect our future earnings. In recent months, our loan and securities portfolios decreased in size and funding costs increased as we focus on liquidity and we shifted to a greater component of long-term non-mark-to-market funding. We are encouraged to see the substantial restabilization of the securities financing markets since mid-April as borrowing spreads today are now less than half the levels experienced during the depth of the crisis.

I'll now turn the call over to our Chief Executive Officer, Brian Harris.

Thank you, Marc. As you've heard today, the second quarter was a rather noisy one with many transactions that rarely take place in our normal course of business, but these are unusual times, to say the least. And while we've managed through numerous recessions, we certainly haven't seen one quite like this.

There are many factors to consider in managing risk as we enter the second half of 2020. While we all saw the massive negative consequences that resulted from the sudden shutdown of the U.S. economy, the initial shocks to the economy were felt in late March and early April, and the initial responses from the various governmental agencies to counter those shocks were also seen over the last couple of months.

We now have to deal with the longer-term impacts of the recession on our economy while trying to judge the longer-term effects of many things that are just being witnessed for the very first time. Items to consider include: the November election, the opening or cancellation of schools in a month, the persistent continuation of the lowest interest rates ever seen, unprecedented Fed and Treasury intervention, the loss of 33 million jobs in just 2 months, a second wave of infection and the rollback of some business openings as a result, and finally, when the research and science will catch up with this awful virus.

Let's face it. We will not return to what most of us consider normal until we can sit down next to a stranger without concern for our health and well-being. No one knows how deep the recession will be or how long it will last, but at Ladder, we're assuming we are going to deal with a rather severe recession that will last for about a year, and that's assuming some sort of vaccine or treatment of the virus can be found by then. As conditions change in real-time, we will adjust our risk management accordingly.

Under almost any recessionary scenario, the short-term game plan is the same, lower leverage and raise liquidity profile. We have effectively been managing the downturn since November of 2019 when we extended the term of our $266 million unsecured revolver to 5 years and followed up with the issuance of a 7-year unsecured corporate bond on January 30, 2020, just 6 weeks before the markets were thrust into turmoil in mid-March.

Our experience with past recessions has taught us that a little extra caution is warranted at the onset of any downturn. Because of this liability management, when market volatility spiked as the first quarter ended, we had ready access to over $1 billion of unrestricted cash, providing us with the necessary flexibility we used to further improve our balance sheet for the terrible downturn that was beginning in March.

When the pandemic hit markets in the middle of March, we identified 5 ways we could further enhance our liquidity profile. First, we look to our regularly scheduled mortgage payoffs. And in the second quarter, we took $331 million of loan payoffs. Second, we sold $172 million of principal amount of performing loans. This is no small feat considering our offices were closed and the properties could not be accessed, but yet we were successful. After financing and costs associated with the sales, these 2 items added $300 million in cash to our balance sheet. Third, we sold $439 million of principal amount of securities at a loss of $15.4 million, which was more than offset by our purchase and retirement of $139 million of Ladder's corporate bonds at a gain of $17.5 million after costs. Our sales of securities also allowed us to pay down securities repo financing in the quarter by $276 million. The fourth action we took was to issue a private CLO with $481 million of first mortgage loans as collateral, a significant portion of which were unencumbered, adding to our growing pile of liquidity. The fifth and last action we took was to enter into a fully funded $206.5 million nonrecourse non-mark-to-market credit facility with Koch Real Estate Investments. Successfully raising that much cash in what may have been the most illiquid quarter I've ever seen was truly a statement as to how versatile our liability management allows us to be in a very short period of time.

Without reciting all of the debt paydown that followed, net-net, we paid off $727 million of debt in the quarter while simultaneously raising our unrestricted cash on hand to $826 million at the end of the quarter. I'm happy to report that we continue to receive scheduled payoffs as the third quarter began, and monthly mortgage payments are at 98% collections.

I'll now just briefly touch on our short maturity securities portfolio, which has rebounded in price as expected. And today, our leverage on that book of business is just 64% of par, down from 79% at the end of March. What is oftentimes overlooked by the market is how short these securities are in duration. They just don't take a lot of price action in normal markets. Perhaps a live example will help.

At the end of the first quarter, our single largest holding of a CUSIP was LoanCore 2018-CREA for $106 million, which we owned at par. This is a AAA-rated class in a managed CLO that was becoming a static pool in June of 2020 when its reinvestment period ended. In June, we sold 3 separate $5 million pieces of this bond at an average price of $99. And then after receiving paydowns in July to our most senior class of $9.6 million at 100 cents on a dollar, our exposure dropped from $106 million to where it is today at $81 million. True, we took a loss of $150,000, but over a 30-day period, we received $24.45 million in proceeds from the disposition of $24.6 million of our most concentrated position. We expect this position to pay off at par within the next 12 months. While this is only one line item, it is our largest. And hopefully, this clears up some of the market concerns that we and our stakeholders had to deal with in late March and early April.

I would add that since we last spoke on May 5, we have not received a single pricing-related margin call on any of our securities holdings as our portfolio has appreciated quarter-over-quarter.

So when do we go on offense? That's a question we get a lot and understandably so, given we're holding an impressive $826 million in cash at the end of the second quarter, and that cash isn't doing a lot for our earnings these days. The answer is, we believe, soon, but we need to be cautious. We have to assess the risks out there, that if judged correctly, should produce extraordinary opportunities in the next year or 2. Much of the low-hanging fruit has been taken off the market over the last few months in the form of very oversold securities that were made available by forced sellers. The next opportunities will come when borrowers exhaust the patience of their lenders and deplete their capital reserves. We don't know how far prices will fall for some property types, but we have to figure out how some of these items play off each other in this new central bank-driven market. We will get the answer on school opening soon, and the election in November will soon be here. And we may even see science make further advances in treating this virus, but let's not overlook the loss of 33 million jobs this year. Hundreds of millions of dollars are being raised by new funds to take advantage of the highly touted opportunities in commercial real estate. We, too, have a lot of liquidity and plan to take advantage of those opportunities if they do, in fact, arise. But things could get worse, too. And until we have more visibility into where the economy will shake out in the long term, we'll bide our time, strengthen our balance sheet and stay ready for the green light to go on for new deployment of capital in large size.

We expect some lending to resume shortly, mostly in the conduit to start, but I think we'll have a better idea where to invest after September when schools are opened or closed and the virus is either under control or it's not.

The election in November will give us much guidance also as to how to approach real estate investments. A lot of currency has been printed around the world recently, and rates are near or below 0 in many cases. Gold hit a record price recently. That all adds up to likely inflation in a few years. And if that's the case, it will be best to own hard assets like real estate and not long-dated mortgages with low rates.

Let's move now to Q&A, and thanks for listening today.

(Operator Instructions) Our first question comes from the line of Tim Hayes with B. Riley FBR.

Hope you're doing well. My first one, just as it relates to the dividend here. Understanding it's a Board decision, but core EPS kind of came well below where the dividend is set. I'm just wondering how you feel about where it is right now and if you have any expectation of when you'll be able to cover it.

And I know you could go ahead and deploy your excess liquidity today and cover your dividend, but you increase your risk and compromise your liquidity. I know that's not something you guys are going to do either. So just wondering if you're okay under-earning the dividend for now, or if you think it makes sense to further rightsize it given where core earnings are shaking out.

This is Brian, Tim. I'll respond. We're pretty comfortable with the level where it is right now. And in fact, when we sat down with the Board and came up with that number, we actually decided we only wanted to do this one, and we didn't want to go back to the well if there were further problems, with the understanding that interest rates are extremely low right now. So to produce 10% dividend, you're going to have to use some leverage. And the leverage picture is a little bit unclear right now. We have leveraged our agreement with many banks, but those very same banks are taking very large reserves also. So we want to be a little bit cautious there. But we don't think we're going to have problems earning that dividend in a couple of quarters from now. So we're very likely to leave it where it is. We're not concerned. And if you look at the earnings power of the balance sheet, given the amount of cash we have, we can continue to delever ourselves and also save in interest expense there.

Got it. Brian, that's helpful. And then the occupancy rate in the diversified real estate portfolio dropped a good amount this quarter. And I assume that was the main driver for the NOI decline in that portfolio. Can you just give us a little more context around what types of assets saw the most hardship? And what steps, if any, are being taken, increased occupancy in those assets? What your outlook is and maybe why no impairment is taken?

Yes. I'll start, and then I'll probably point you over to Marc Fox or Pamela if they can respond. We're obviously in different locations. Obviously, hotels are the ones getting hit the hardest. A typical hotel, let's take a hotel down in Miami, the mayor of the city told them to empty their hotel out, cancel their bookings, and here's your property tax bill, and there's a mortgage guy over there. You have to make that payment. So I think in our last call, we mentioned that commercial real estate has largely been left out of the aid associated from the government. I don't know if that will continue. I saw something in the Wall Street Journal today talking about a possible inclusion this time around with some scenarios around -- the highlight was malls and hotels. But hotels are clearly getting hit the hardest followed by retail.

Industrial is doing very well. Apartments are doing very well. Apartments may suffer a little bit if they don't extend the unemployment benefits. I heard that there are about 12 million people that might be on the door of eviction if they don't extend those benefits. But -- so Marc, if you or Pamela have anything further from there, I mean, it kind of follows the natural sequence of what you would think.

Yes, Brian, I think we're going to actually have Rob answer this -- focus on this.

Okay. Rob Perelman is our Head of Asset Management.

Great. Yes. I'm sorry. Could you just repeat the question?

Yes. Sure thing, Rob. Basically, just asking about -- Brian answered which types of assets in the diversified real estate portfolio are getting hit the hardest right now. But just wondering what steps are being taken or can be taken in this environment to increase occupancy, and what your outlook is for the assets that have lost some tenants and maybe why there was no impairment taken.

Well, we're seeing some occupancy in office expansion because people are needing more space to comply with the COVID-related rules. So there's some backfill that's going on there in the office product. We've also experienced an incredibly good rate of collection on our rents, so we haven't really seen a big occupancy drop.

Yes. And also, I don't think there's much we can really do in the way of increasing occupancy in this kind of an environment. Obviously, it helps if hotels are open, and then occupancy goes up. And we actually did see occupancy go from around 10% to 40% in the economies that did open in the hotel side. The retail side are usually well occupied. Some of them are just not open again. Office, that remains to be seen. Some places -- I think office is doing well in the suburbs right now as people have left the cities. And I don't know how permanent that will be, but I suspect some of it will be. And the utility of living inside the big cities, I think the jury is out there. We'll see what happens, and a lot of that has to do with crime, which is on the increase, and also the services offered by those cities. So Ladder Capital is not going to increase the occupancy in an office building in New York City.

But yes. So overall, I think we're playing with a very fickle set of circumstances right now that could change quickly, but I will say that I am shocked at how well things are performing. I thought they were going to be a little bit worse than this at this point. Even properties that are closed down, people are making payments. And to -- I think it's been a good 10-year period, so a lot of people do have some cash around. I don't know how long that will last. But for the most part, we've been in very constructive conversations. And probably, the least constructive conversations we've been in are those where the borrower is actually very well off with an enormous amount of capital and just wants to negotiate because the situation's happening, but not having to do with their own personal balance sheet. So it's funny. It's the small borrower that's doing -- trying a lot harder than the very wealthy borrower.

I think that part of what you're seeing is related to the fact that we sold a couple of office buildings out of our portfolio last quarter -- in the first quarter, and so you'd see a difference because of that.

Okay. That makes sense. Okay. I appreciate the insights there. That's really helpful. And then just another, I guess, high-level question, Brian. Just your outlook for transaction activity in the second half of the year. Obviously, no one has a crystal ball here and a lot is going to be dependent on, as you mentioned, if we get a vaccine and how -- if we're -- kids are getting back in school, people are able to get back to their jobs and such. But just wondering, do you have an outlook for transaction activity in the back half of the year, and what impact that would have on your appetite to deploy capital and/or collect repayments.

My instincts are telling me that it might be better to actually be the borrower in a market like this as opposed to be a lender. Occasionally, we've talked about that on some of our calls. Conduit lending is back in a very soft kind of way. And a lot of cleanup from inventory that was sitting on the shelf is getting done. But I would say the typical conduit loan today that's getting written is a 3.5% to 4% 10-year instrument at 50% LTV.

I think if we begin to deploy capital, and I think we will, we'll probably be a borrower of funds like that because I think we can find some attractive situations where, perhaps, somebody has to sell something. And in addition to that, I would say that a stretched senior used to be, if a guy bought a property for $100 million, he could borrow $75 million. I think $100 million purchase today, you can probably borrow about $60 million. And so a stretched senior now goes from maybe 60% to 70%, 75%, and I think that is a sweet spot for risk/reward right now on the debt side.

If you remember, in 2008, when we opened, we had quite a few mezzanine loans in our position because we felt that the capital markets were very fearful and maybe too fearful. And so then once we got to around 2012 or '13, we stopped writing mezzanine loans because we felt at that point, markets were priced right. And then around 2016, we felt that mezzanine money was too cheap. So I would imagine it will feel and smell like equity in some cases, or at least in some scenario where somebody is forced to transact.

The other thing that you should keep in mind here, which I don't know if you're hearing it from others, but there's very little demand and despite the fact that rates are incredibly low. And I think that has to do with buyers are hoping that there's this big adjustment lower in price when they buy something, whereas sellers are hoping this whole COVID thing will go away and they'll find a cure and we'll snap back to where we were before it happened. So there's just a real lull right now in activity, it seems. And so that's enabled us really to get to work on our balance sheet and do the things we need to do to get ready for when transactions do begin to occur. But we think the competitive landscape is drastically reduced.

Our next question comes from the line of Rich Shane with JPMorgan.

I hope everybody's well. When we look at sort of the linearity of the P&L, and this is a fairly linear business, spread -- net interest spread is now negative. There will presumably be some continued pressure on lease income. What are -- where is the leverage over the next 3 to 6 months in terms of driving profitability back towards that dividend? And I realize, Brian, in your comments, that you're not going to be in a rush on that, but just how do we think about the next quarter or 2 before you become more aggressive in terms of deploying capital?

Yes. There's been improvement, let's say. I mean, that was a hell of a shock at the end of the first quarter, and the cost of funding these businesses really took off, and it went at an extraordinarily high rate. Today, that -- those spreads on those repo lines have been cut by about 50%, but they're still above where we would normally expect them to be. And they're negative right now, for instance, in our securities portfolio. So we lowered our leverage in that from 79% to 64%. The portfolio has come back into the high-90s now in price. And as more of these CLOs become managed -- I'm sorry, as more of these CLOs become static pools and as they run out of the reinvestment period, they'll start to pay down. So the static pools are paying off as every time a loan pays off it goes right to the AAA. So it's really a balancing act between how negative is the funding and how much do you want to hold those for price recovery. And my guess is we're getting sort of near equilibrium, so I would imagine we'll continue to sell some of those positions and delever. That's probably our highest leverage position anyway, even at 64%. I think Marc mentioned that if you remove cash from our equation right now, we're at about 2.5x on the leverage side.

As far as leasing pressure goes, we've got a net lease portfolio that has 12 years left on it. There will be no leasing pressure on those assets. But to the extent that we have office buildings or retail centers, of course, as things roll, there will be some. But I think we'll continue to lower our leverage as we go. And I think that a lot of our new investments will be either organically levered because we step into a rescue situation with a mezzanine loan where borrowers may be making a payment also, or if we go out and borrow money from somebody else regarding a piece of real estate. The real estate lending business is just not very attractive with LIBOR plus 150, 175 financing when the 2-year treasury is at 12 basis points. And so I suspect that you'll continue to see pressure on those, but banks are obviously pressured by profits also because of this lending environment. So I think the hard asset side of life is calling. And I think the lending business is something that we're innately familiar with. And we'll wade into it, but we'll probably be more transactional than balance sheet-driven on that.

That makes sense. Look, you guys are in a position now where you can buy the dip, but the mistake we saw a lot of people make in 2008 and 2009 was buying the dip before the dip was done. So that -- it was actually interesting. My question was going to be, are you guys going to start to -- conduit execution isn't great. Historically, that's a signal that you start buying securities. So I thought it was really interesting. You basically said, "Look, we're still waiting." When I think about you owning real estate, the first thing that goes through my mind is condos in Vegas. Again, that's the historical experience we have watching you guys. As you think about that market going forward, what is the condos in Vegas equivalent in 2020?

It's a great question. There -- it's funny that my phone is ringing this whole week on condos. And the one that I'm getting the call on more than any other place is Miami, and the second one is New York. New York has its own problems right now, largely brought on by a couple of decisions made by some of the governor and the mayor combined. And I think with -- it is -- they have literally shocked that market. So I don't know if they'll reel back from that at all, but you throw on the mansion tax, you get rid of deductibility in the salt states and then they just -- and then you take away services on the street.

So I think -- I don't know that we're anywhere near where we would wade into a New York condo at this point. But I think Miami is a different story. Miami has its own issues regarding water and how high it goes when there's a lot of rain. But I do think that Florida, in general, is an importer of wealthy people as the baby boomers near retirement. So we could easily wind up in a situation in Miami, I think.

However, I don't really think the banks are the sellers here. The banks have done some construction loans. They haven't been over their skis. There's a few mezzanine positions out there. You've seen some of them get sold in the market recently. And a lot of those mezzanine positions or even first mortgages that are too high in the leverage stack, they'll probably have to either break price and just take losses, or else, they'll just sell them. And I think most of the real opportunities, and I don't know what price it's going to be at, but I think a lot has to do with who's the President and what does the tax picture look like for real estate owners. I mean Biden has already said he's planning on paying for a lot of things through commercial real estate. So I think -- I would expect to see really -- if I had to pick a city where I think there'll be a great opportunity, I would say it's Miami.

Got it. And at the risk of annoying my peers who are listening to the call, I'm going to ask one last question. Historically, when you've made -- when you've taken that approach, it has been in a way and it sounds similar this time, where they are real estate developments or projects where you can sell off small pieces along the way. Would that be the intention going forward so that you have the potential liquidity in smaller bites?

Yes, I think so. I mean we tend to -- in an environment like this, if there's going to be a seller, it's probably going to be a distressed seller. So there's no sense in getting overly aggressive in paying prices. In fact, I don't know if you remember, but when we bought the Vegas condos, we did not buy penthouses. We probably should have, but we felt that we weren't comfortable that we could sell penthouses in Las Vegas for $2 million. Turns out we could have. But we stuck to the very basic small units, 1 and 2 bedrooms, where there would be lots of buyers. And I -- we generally like to figure out a way to delever quickly and get most of our money back in a short period of time, and then we'll let the rest of the asset run for the gains. So we try to get as much of our money off the table in the first 12 to 18 months as possible.

And I don't think we're -- when you say watch out for the dip because the other dip's coming, I think that could easily happen here. I think real estate prices got a little ahead of themselves. Stock market was driving a lot of that. But the low interest rates here, if you can get a loan, maybe we'll hold that inventory of selling back a little bit because I think sellers can kick the can here a little. There's very few loans that we couldn't add an interest reserve of 1 year and just extend them. The borrower would be happy to do that. We don't do that by any chance, but I suspect others will. So yes, we would expect to try to have something that is sellable right now that we don't have to do anything to other than buy it.

(Operator Instructions) Our next question comes from the line of Jade Rahmani with KBW.

Nice to hear from everybody. I just would like to ask Brian, what are your thoughts on the viability of the commercial mortgage REIT business model? We've seen a lot of rescue capital financings at -- levered cost of capital that are in asset of the typical returns these businesses generate. So in that environment, there definitely seems to be, if you look at the stock market as a differentiator between viability and non-viability, there's clearly a bifurcation or trifurcation. So with the cost of capital where it is, where do you think levered returns to common stockholders need to be to make this a viable business going forward?

I think that will come down to the safety of the investment. I -- for instance, a AAA CLO right now, that has a 2-year maturity, it will yield about 1.9%. And that has -- that's on the recovery. That was 2 70 probably 3 months ago. So call it, 1.9%, and it should pay you off in 2 years. And yet, the 2-year treasury is at 12 basis points. So I guess I do wonder how long will it take for the guy who owns that 2-year treasury to sell it and buy a AAA mortgage product of the same duration that yields 15x what he's making in the government bond market. So I think costs will continue to come down, although, obviously, banks are going to look to try to stoke their earnings with higher funding costs, but the universe has shrunk. And the REIT model is a dangerous model if you're not careful with it. And I think, through the years, you've heard us espousing our concerns about the funding model on repo. And we've taken numerous steps over the last 5 or 6 years to get away from it. And right up until January, when we borrowed $750 million unsecured -- and I remember one of the questions we got in that first quarter was, why did you borrow that money? Why didn't you take repo because it's cheaper? And I think we said because we're a little afraid of that.

And so today, we have a very small amount of repo financing and some of the rescue trades. I think those will be blips on the screen. I don't think they'll be common. I think people thought there were going to be a whole lot more of them than there were. In fact, I remember the day I woke up and there was supposedly 5 REITs going bankrupt, and none of them ever did.

But I do fear a little bit what I'm seeing. And this is government cheese being thrown. It's -- if you see the residential side of the business, they're doing very well, and they're all stacking up leverage. And the government, I guess, has put a foot in there. So the principal guarantee is a bit of a shiny object that people like to go towards. But if you own a 30-year mortgage at 3% and rates go up, that shiny thing you've been following will turn around and bite you. So it's not just principal. I think the mortgage REITs that follow the residential government-guaranteed space have interest rate risk. Whereas I think the commercial REITs have leverage risk as well as principal risk. And you better be careful on which one you're playing at that point.

So what is the levered return required? I think it will probably settle out at about -- if the treasury curve stays where it is, I think it will set out at about 7% or 8%. Because I just think with the 10-year at 60 basis points -- I mean, the only way you're going to get a lot higher than that is if you apply a lot more leverage. And I think we've all kind of seen that movie. It's not a great idea.

The 7% or 8% would be after corporate expenses, management fees, anything that some of these external managed vehicles require shareholders to absorb?

I think so. Yes. I think you can find -- I mean, it's $16 trillion in the banking system right now and savings rates have gone up and they're going up every month, at some point, somebody is going to turn around and say, well, maybe if it's safe to buy a REIT at 7% or 8% dividend yield, that's very safe and covered, might be something I could get comfortable with. And I do think you can settle into an area like that. For a market to demand a 12% or 13% or 14% return, that's pretty much what leads you to the problems that occurred in March. And for those who were overleveraged, they felt the bite.

Okay. Second question is in terms of the asset sales that were consummated, I think there's a perception that these types of entities that sell assets where there's margin calls going on, they sell their best assets. So what do you think the implications of Ladder's asset sales at 96% at par are for the credit profile of what's on the balance sheet today?

Well, I'll point you maybe in a different direction. First of all, I think that we undertook some sales in the high 90s. We -- as I said, we went through those 5 steps, right? So we had $300 million in payoffs. Now I would also point out, from a credit perspective, when you talk about what are your best assets, 10% of our loan book paid off in 90 days. So that is an unusually high amount of payoffs. And keep in mind the quarter that it took place in. So I would say if they -- if we were selling our best assets, we had bids for many other assets, and we had bids at higher prices, but we felt they were going to pay off. We had a building in Minneapolis, Minnesota that we were offered $0.98 on a dollar. We turned it down because we thought it was going to pay off, and that loan did pay off in the next 60 days. So that's one of the reasons I highlighted our largest CUSIP because we had a book of securities that the market was a little bit frantic about. So -- and I remember, I go back to 2016 when the price of oil fell and our stock really got hammered, and people said, "Oh, you have all these securities." And I told the market what our 3 biggest securities were, and I told the market when they would pay off, and they did. This is my version of that again. There's nothing to be afraid of here. These securities are not problematic. These are the most senior bonds out there. And as long as you don't play around with too much leverage, you should be just fine. And in fact, our largest security is paying down right now. It will probably pay off very quickly.

So as far as a statement that we would sell what you could and not what you want, I don't think we had to sell anything. I think we may have overdone it a bit. But in the world of never let a crisis go -- not be an opportunity, our bonds also were suffering unnaturally because there was a view that there was some -- a credit problem in the security side. So we were able to pick up our bonds at very cheap prices. We don't like doing that to our investors. But I think a casual understanding of financial readings would have told people that we had $750 million sent to us on January 31, and we had a $266 million revolver that was never drawn. That's $1 billion in cash. So I don't know how a $2 billion securities book puts a dent in that. And so I think we got caught in a little bit of a brush. And I'm sorry that happened. I thought the world was not going to get caught in that story because of the way our financials looked. And so I would tell you there could easily be some credit problems if we go into a depression and stay there, but the concept that we sold our best assets is crazy. And in fact, I can tell you that the best assets you can sell in the CLO book is the static pools that are paying off. And most of the bonds we sold in the quarter were actually managed pools. We did not sell the easiest ones. In fact, we can probably figure out what our -- how much static pools we have at this point. And we figured we didn't want to sell those because we wouldn't even sell those at 97. We want -- we figured they're going to pay off at par in the next 12 months, and we still think that. So we did -- we reject that concept, short story.

And Brian, if I may jump in with one fact, having been involved in the sales, we weren't actively marketing loans. We had buyers who knew the assets, and in the current environment of being unable to visits the assets. It was known buyers to known assets where we took advantage of the opportunity to raise additional liquidity. So I just think, in the context of that, just to be clear, we weren't marketing assets for sale.

And yes, we were answering the phone, and we were given bids on about 10 or 12 assets, and I think we sold 6 of them.

That's good to hear. Lastly, in terms of the bond repurchases that were done in the quarter, is that an activity you expect to continue to do? And how do you feel about repurchasing the stock? Overall, I mean, the company is trading at around 60% of net asset value. The commercial mortgage REIT, as I mentioned, winners and losers. There's a lot of the smaller mortgage REITs trading at below 60%, and then there's larger ones trading at closer to par relative to book value. So what are your thoughts on the trade-offs between securities repurchases?

Well, I think that's a balancing act. We wound up buying -- I think we bought more bonds back than we were planning to, but the reason we did that was because more loans paid off than we were expecting. So cash was piling up. And I guess, if we hadn't bought any of our corporate bonds back, which we actually identified as we felt was cheap in our last earnings call. But if I had not bought any of our corporate bonds back, we would have been showing up with $1 billion in cash on a market cap of $800 million. So I think that is a rolling balancing act. I think that the short-term bonds have snapped back. They're in the 98, 99 area. They're not terribly interesting to us. But depending on how much cash we might have, we might look at it.

The longer bonds, because they are BBs and they do have duration, are trading in the 80s, and they may stay there. That could get interesting. But that's just where a BB trades. That has nothing to do with, I don't think, with Ladder itself.

And -- but I do think our stock is interesting. We did buy some stock back recently. We haven't really put our back into that column yet. But at 60% book value with $800 million in cash and 22% of our securities sold at a small loss that was offset by the gain, 98% collections, I expect to have some noise in the hotel book in all likelihood. And I don't know to the extent that it will cause big losses, but they're out there, and that's a business that we're spending a lot of time on. But I think we will start weighing into the stock at some point here, and we'll occasionally buy some bonds back that we're very comfortable. We don't really have to make a lot of loans at 60% of book value to make the stock go up.

Our next question comes from the line of George Bahamondes with Deutsche Bank.

Just wondering if you can maybe speak to any sort of modifications that you had to do during the quarter, whether any were executed or whether you've gotten some additional inbounds from some of your borrowers to date?

Sure. Yes. This is Pamela, and Rob could elaborate if helpful. But we had a handful of modifications. We've taken the approach we've historically taken at Ladder. If we have a sponsor who's willing to defend their equity and which usually, in almost all cases, requires writing a check, we're working with them on general things like deferring interest and maybe allowing reallocation of the FF&E reserve. But generally speaking, a handful of modifications with paydowns of equity on the principal balance to accommodate the borrower.

And also, George, what I would add there is the more advanced hotel owners, and that's really mostly what we're talking about here because the hotels literally were closed. I mean it was the equivalent of the airline industry in the second quarter. In the bridge loan portfolio, most of our loans are nearing completion anyway for there are various refurbishments or PPIP and new flag. And -- but what the experienced owners understand is you're not going to be able to refinance that loan until you've got some history. And given the fact that the occupancy was 0% to 20% for 4 months, they're smart enough to know that we're going to need 12, 24 months of seasoning here even after the lights go back on. And so we -- I think in our largest hotel portfolio, we had a sponsor who wrote a check for millions of dollars in principle for an extra 18 months or 2 years, which we did accommodate.

Great. Thanks for that additional color, Brian. And my second question is on -- we haven't been able to get through all the disclosure just yet. Interest expense of $68 million. Were there any onetime items included in that number? How do we think about that in the second quarter? And how does that likely compare in the second half of '20?

Yes. It's Marc Fox. I think there are 2 things that you should bear in mind that flow through that income expense line this quarter that are somewhat unusual. And one of them is part of the bulk, part of the adjustments that were COVID-related. And so there's $6.5 million in prepayment fees on debt that was paid off as we were refinancing our liquidity, moving away from mark-to-market provision debt to non-mark-to-market provision debt. And then the second thing is that, as we bought back the $139 million of bonds, there were deferred fees on those bonds that had to be recorded as interest expense, and that was $1.5 million. And so those 2 together increased the interest expense line as you see it on the income statement.

And last one here, looking at the maturity profile, can you remind me, the [$180 million] looks like due in the third quarter of '20. Can you remind us of what that is tied to?

I don't know. I'm not familiar with that one, but I suspect I will be if one of these guys accuse me at all.

You're saying -- you're looking at -- if you could just repeat the question. You're looking at third quarter of 2020, and you're looking at a debt maturity?

Yes. Might be something we can discuss off-line. I might be interpreting this incorrectly.

I got handed a note here. I think it's securities repo.

That's what it is.

Yes, which is -- we're just -- well, we can roll that. We haven't done it yet. And I would also point out a little bit of a teaser into the next quarter. Marc, we -- and Matt, I don't know, Marc, we just paid down repo with excess cash again, right, into July. Didn't we write -- didn't we pay down like $80 million?

We did, Brian. We paid off $80 million, and that amount that you see with the $382 million in the third quarter, we're in the process of working our way through an extension or a refinancing of that with some of that debt going out into 2021 because we've seen an improvement in that market, as Brian said. It's not just in terms of pricing. It's in terms of availability of longer-term funding. So...

Yes. And we had some -- we had rolled some repo, George, in March when it was very problematic. But we felt it was safer to pay the higher rate and roll it a little bit further. And with those now coming due, we can roll them for less at this point. But one of the things that we always do with our lenders is if we've got a lot of securities that are tied to a longer-term repo line, they hedge that. So while we may want to sell something in that line, what we do is we always want to have a cash of things around that we can substitute. And that $80 million paydown that we just did, I think, last week, we just freed up $80 million worth of leverage. And so probably $100 million in securities that we can use for substitution if we want to sell some of the assets on those termed-out lines.

Our next question comes from the line of Rich Gross with Columbia Threadneedle.

I think I heard you say 98% payment for July for the overall portfolio. Would you be willing to tell us what the hotel and retail properties were?

I'm sorry. This is Pamela. The hotel and retail properties. Rob is on the call. I believe we only really had -- in the second quarter, we had a 99% collection rate. That was 98% in July. And I believe it was 2 loans. It was 1 multifamily and 1 hotel loan that was either late in payment or going to default, which we're working through right now.

Okay. And look, I know you guys have talked about how you do a really good job underwriting, which it looks like you do. Any thoughts on when we just look at the broad data out there just in terms of the CMBS data and the delinquency rates on the hotel and the retail portfolios, why you haven't been seeing that?

I'm sorry. Why we haven't been seeing a default rate on the hotel and retail portfolios?

Yes, delinquencies. So why yours are better than a every analysis?

Well, I can answer a part of this anyway. I mean, in the bridge loan portfolio, typically, if you're doing a major refurbishment of a hotel, there's interest reserves. So that wouldn't prove any great skill in underwriting there. And as one of our lead underwriters always says, "No matter what the market is, my interest reserve shows up." So -- but we don't fool ourselves into thinking that makes us good at this. But we do keep very short maturities, especially relative to the average. And that's why I think Pamela said, our average loan is already 1.5 years old, and it matures in 15 months. So we like to keep them on schedule. And if they're going to go off schedule, we like to know about it right away. So in many ways, we get into the scrum early. We think through 35 years of experience. If you're going to get to a battle over capital, you want to get in first when they have capital. You don't want to get in when they owe $2 billion to 19 different banks. So we have seen -- most of our hotel -- we don't generally even like hotels. We have been moving away from them recently anyway. So we had a lot of equity in the hotel portfolio when we made loans, and we have been moving away also. So that may have something to do with it. And but...

I would only add also, Brian, I think the only other items to add are we are 56% limited service, and almost half is in a drive-through market, which I do think has allowed -- let's see what happens with these virus reinfection rates, but we were seeing occupancy tick up pretty significantly across the portfolio. We're watching closely now with some of these new data on their infections. But I do think the drive-through markets will recover much more quickly.

And you could really see a few head fakes there. So for instance, student loans. We have a student loan portfolio out in California on the coast. It's absolutely beautiful. And California is going fully online. We didn't know what was going to happen with that portfolio because the students weren't going to be attending classes in person. But the students are showing up anyway because they want to live off-campus with their friends, and then they'll be online at their student housing area. I'm a little surprised by that. But I don't have any belief that those properties, even if they do take an interruption here in cash flow, that there's any permanent impairment there. So we have to be a little careful with that.

Hotels will reopen. Malls may have a different story there. That may be a much more permanent situation going on there.

Okay. The other thing I wanted to ask about is, I mean, look, you guys bought a lot of bonds back. You got a good price on them. But when you kind of think of that through the lens of do you still have some recourse secured borrowings and when you kind of debated between to pay down the secured borrowings or wanting to pay off the rest of the FHLB financing versus repurchasing the bonds, can you kind of talk us through that analysis?

It was an analysis that really took place on a safety first story. And our stock was suffering a little bit because of a perception of a margin call that could hurt us on the securities portfolio. I don't fully understand that to this day, but it was written enough times that a lot of very smart people began to believe it. In any event, so we did sell some securities, I felt it would be helpful, even though I didn't like selling them at those prices. I wanted to show to the investor community what we owned. And in the height of the crisis, we were selling things at $0.97 and $0.98 on the dollar. We were not going to lose $300 million in that securities portfolio. And while we did take a margin call, as you could imagine, it was not -- we could have taken 5 more at the same size. So one of the rating agencies, for some reason, has highlighted the concern about possibly getting a margin call. I don't know where they think it's coming from. But to the extent that you're 64% leveraged on 2-year AAA bonds, that doesn't -- despite the fact that it's recourse and it does have margin requirements, it doesn't feel that dangerous to me. Historically now, March -- hopefully, that's a once-in-a-lifetime thing. But even in those scenarios, and today, I believe we can sell those securities even in a March-like scenario, which would bring cash to the balance sheet. And so we're not in any big rush there, but I think we'll continue to do that because of -- mainly because of the funding costs, not because we're afraid of a margin call.

On the rest, we had securities. Our obligations on the debt side, we staggered them out. We've handled that pretty responsively. And then as a result of that discussion around margin calls, our bonds that are due in 2 years traded into the 70s. We were -- as people said, why didn't you buy them then? We were not able to buy them then because it was the end of the third quarter and we were in a M&P high period. So despite the fact I would have loved to have bought them then. And if anyone asked me, I thought that we were more than adequately prepared for a downturn. In fact, probably -- the funny thing is when I look at the space of commercial REITs, I believe we're more liquid than anyone. And I can't find anybody who can contest me on that argument. Now to the extent that there's any leverage -- I mean there's a couple of net lease REITs that don't use any leverage whatsoever, but -- so I think that we were bordering on a point where we had too much liquidity. Hard to say that in a crisis like that. But when you've got a market cap of $800 million and you've got $1 billion in cash, I do get concerned that at some point somebody might walk through the door and say, "I'd like that cash. I'll pay 20% more than the market price right now." So that was -- we were somewhat concerned about that. And we were able to offset losses in the securities portfolio that both took place because of the pandemic.

The only thing I would just add to that, Brian, is I think, as we thought about paying down debt, we looked at a combination of things. We look to delever and we looked at upcoming near-term maturities and mark-to-market debt. And our goal was to reduce both of those risks. And I think, as you look at it, as Brian has said in the past, we took some extra insurance here with things like the Koch facility. But what we did is we positioned ourselves. We're flushed with liquidity right now, and I think we have 2 options, right? We are well positioned with very flexible debt and very limited loan repo and very limited mark-to-market in total. I think it's less than 25% now of our total funding. And we've positioned ourselves so that if there is further downturn, we're fully ready for it. We don't have to do anything else. If, in fact, it looks like the virus is recovering, and we can start reinvesting again, we're very well positioned to take advantage of all the rescue opportunities that everybody has been hoping will surface. So I think what we did was take the pain early, and anyone who's known and worked with Brian Harris for a long time knows, very early to see recession, very early to set up, and we feel ready now for whatever comes.

And I would say the actions we took, I've never seen 33 million lost in a month. So I don't really know where we come out on this. And the Fed and the treasury are desperately trying to bridge to the other side of the medical fix here. And my suspicion is they will. I think that they're going to say, the hell with inflation, and they're just going to keep throwing money at it. So that's kind of where the theme was going today.

But I would just point out that, in any recession, it doesn't even have to be a hard downturn. In any recession, you just want to lower leverage. You want to -- you do not want anyone having a liquidity conversation with you. And I felt that we were in far too many of those for the wrong reasons. So we wanted to get rid of that first. And now, we'll protect principal and manage our assets. And thirdly, we'll go about raising earnings through the lending business. But when you think about a company trading at 50% or 60% of book value, I think the right thing to do there is to try to bring in a lot of capital into the company that you can't really argue with what $800 million is worth.

No, that's really helpful. And then the last thing I wanted to ask about is, you still have the $361 million FHLB financing. Do you think that you're more likely to just pay that off with excess cash relative to doing some other financing transactions to take the rest of it out?

This is Pamela. I think I can answer that. No. Sorry. We have a good relationship with the FHLB. And I think we -- those maturities extend out through 2024, and we expect them to be paid off in natural course. It is our -- it continues to be our lowest cost of funding.

And then last thing I had is the 2 financing facilities you did with the Koch and the CLO financing. Obviously, the markets changed quite a bit since those were put in place. Are there opportunities to do other similar things at lower cost today? And does it make sense for you guys to do that?

There are opportunities to do them at lower cost. And we could do them, but I don't think we need to. I think that we actually did hit a point toward the end of the quarter where we had too much cash, and that's why we wanted to start getting ourselves deleveraged. And we did pay down some things that some people would say maybe we could have left them outstanding. But I think in the throes of that crisis in March and April, we may have overdone it a little bit on the liquidity side. As I said, there were 5 things we were going to try to do. And I remember sitting down with the management team saying, "Here's the 5 things we're going to try do to raise capital and enhance liquidity." And we didn't really think all 5 of them were going to work in that market, but we were able, at that point, to run the table, and all 5 of them did happen.

And another credit really is our partners, and I call them partners over at Koch. They did everything they said they were going to do. They didn't move the needle at all. They did exactly what they said they were going to do. And when it came down to closing that last transaction, we were, in my opinion, already out of the woods. But I just felt like they were a very good ally and a very good partner, and they've done everything they said they would do when it wasn't so obvious that everything was fine. And so we did keep going. And I remember telling our management team, "I really hope that one day, I'll look back on this and tell you this was a mistake to have done this. It was too expensive." And -- but it's a temporary situation, and we hope to do a lot more business with those people.

All right. Well, nice job managing through the situation, and good luck (inaudible).

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Harris for any final comments.

I'll just end here by saying thanks very much to our investors and your patience with us. I know it's been in a rough year so far year-to-date. But I think that we've got ourselves in a position to be on offense or be prepared for defense, if necessary. And I look forward to catching up with you again in another 3 months. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.