Ladder Capital Corp (LADR) 2022 Q1 法說會逐字稿

Good afternoon, and welcome to Ladder Capital Corp's earnings call for the first quarter of 2022.

As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended March 31, 2022. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections.

We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the Investor Relations section of our website.

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

Thank you, and good evening, everyone. This time last year, we described our goal for 2021. To restore our earnings back to a level that comfortably covered our cash dividend by deploying the outsized cash we built in 2020. While loan payoffs during that tumultuous year confirm the strength of our underwriting and real estate valuation skills, our ample liquidity would limit earnings until those payoffs were replaced with new investments.

Our disciplined deployment of that capital led to successive earnings growth in each quarter of 2021 and full dividend coverage by the fourth quarter. Today, 75% of our balance sheet loan portfolio is now comprised of newly originated loans. We expect our strong loan originations momentum, accompanied by significant improvements in our capital structure to benefit our shareholders in the quarters and years ahead.

For the first quarter of 2022, Ladder generated distributable earnings of $31.5 million or $0.25 per share. We continue to drive Ladder's earnings and portfolio growth with another strong quarter of balance sheet loan originations. In the first quarter, we originated $732 million of loans, including 19 balance sheet loans totaling $677 million, with more than 25% of those originations made to repeat Ladder borrowers. 80% of first quarter originations were either multifamily or mixed-use assets with a significant portion of the mixed-use assets having a multifamily component.

We also continue to have a strong pipeline of additional loans under application. As both Paul and Brian will discuss in more detail, Ladder is positively correlated to a rising rate environment, both by way of our large and growing portfolio of floating rate loans as well as our significant base of fixed rate liabilities. Our balance sheet loan portfolio continues to be primarily comprised of lightly transitional middle market loans with a weighted average loan-to-value of 68% and a weighted average yield of 5.45%, excluding exit fees. Further, as a result of the significant loan payoffs we received, our hotel and retail concentrations in the balance sheet loan portfolio is now down to 5.5% and 5.6%, respectively.

As for our real estate portfolio, it continues to produce double-digit returns on equity from net operating income, primarily generated from our net lease portfolio. Our distributable earnings in the first quarter was supplemented by a $15 million net gain from the sale of 2 net leased assets, representing a profit margin of over 20% over an undepreciated basis in these assets. As of March 31, our securities portfolio totaled $663 million, down from over $700 million in the fourth quarter as we continue to reallocate capital into our balance sheet loan business.

As of quarter end, we have total liquidity of approximately $700 million and our adjusted leverage stood at 1.6x net of cash, 38% of our total debt is comprised of fixed rate unsecured bonds and 79% of our total debt is comprised of unsecured bonds and nonrecourse financing. We continue to maintain a differentiated approach to our capital structure within the commercial mortgage REIT space through our strategic use of unsecured corporate bonds and ongoing pursuit of becoming an investment-grade rated company.

In conclusion, we believe Ladder has a simple and compelling story that offers a somewhat unique value proposition to our investors. So I want to leave you today with a few key highlights. First, we have a strong and conservative underwritten portfolio of balance sheet loans with more than half of the portfolio comprised of multifamily and mixed-use loans. Second, after demonstrating our strong credit skills and asset management skills through robust payoffs, over 75% of our $3.9 billion balance sheet loan portfolio is now comprised of new loans originated in the last 12 months with fresh valuations and business plans.

Next, we are beginning 2022 with a significantly enhanced capital structure, with the vast majority of our debt comprised of unsecured or nonrecourse debt as we continue on our path to becoming an investment-grade company. And finally, we have positive earnings momentum from strong loan originations enhanced by a rising rate environment.

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

Thank you, Pamela. As discussed in the first quarter, Ladder generated distributable earnings of $31.5 million or $0.25 per share. Our originations and pipeline remain very strong, and our capital structure remains anchored by a conservative combination of unsecured corporate bonds, non-recourse CLOs and mortgage debt. Our best-in-class capital structure has been recognized by the rating agencies with corporate credit ratings 1 notch from investment grade from 2 of the 3 rating agencies. As of March 31, we had total liquidity of $698 million and our adjusted leverage ratio stood at 1.6x net of cash. Further, 85% of our capital structure was comprised of equity, unsecured bonds and nonrecourse non-mark-to-market debt.

Our 3 segments continued to perform well during the quarter. Our $3.9 billion balance sheet loan portfolio is 93% floating rate, diverse in terms of collateral and geography with less than a 2-year weighted average remaining maturity. During the first quarter, loan origination activity outpaced payoffs as we added a net $306 million in balance sheet loans. The portfolio continues to perform well, and we continue to feel positive about the underlying credit of our freshly originated loan portfolio.

As Pamela discussed, over 75% of our balance sheet loan portfolio was originated in the last year with floors set at the time of origination. Therefore, our interest income directly benefits from any rise in interest rates. This benefit is complemented by our liability structure, of which over 50% is fixed rate, including $1.6 billion of unsecured corporate bonds with our nearest maturity in October of 2025.

Our $1.1 billion real estate portfolio continues to perform well and includes 158 net lease properties, representing approximately 2/3 of the segment. Our net lease tenants are strong credits, primarily investment-grade rated that are committed to long-term leases with an average remaining lease term of over 10 years. As Pamela discussed, the sale of 2 net lease properties during the first quarter produced a net gain of $15 million and generated a combined IRR of over 16% during their respective hold periods.

Turning to our securities portfolio. As of March 31, our $663 million securities portfolio was 86% AAA rated, 99% investment-grade rated with a weighted average duration of approximately 2 years. 93% of our portfolio is floating rate, and therefore, also positively correlated to a rising interest rate environment. Further, the portfolio continues to benefit from strong natural amortization and therefore, liquidity as the majority of the positions are front pay bonds. As of March 31, our unencumbered asset pool stood at $2.8 billion, and 77% of the pool is comprised of first mortgage loans and cash, thereby continuing to provide us excellent financial flexibility.

During the first quarter, we repurchased 55,000 shares of common stock at a weighted average price of $11.13. We have $43.5 million remaining under our $50 million board authorized stock repurchase plan. Our undepreciated book value per share was $13.52 at quarter end, while GAAP book value per share was $11.81 based on 127.2 million shares outstanding as of March 31st.

We declared a $0.20 per share dividend in the first quarter, which was paid on April 15 and for more details on our first quarter operating results, please refer to our earnings supplement, which is available on our website as well as our 10-Q, which we expect to file tomorrow.

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

Thanks, Paul. We are happy with the results from the first quarter, seeing a fourth consecutive quarter of increased distributable earnings. As credit spreads widened, starting in the fourth quarter of 2021, we took full advantage of prevailing market conditions and focused on originating mortgages secured by newer and higher quality real estate assets at the most attractive yields we've seen in years.

Assuming the Fed does move ahead with the market narrative of several increases to the Fed funds rate over the next 6 months, we would expect our earnings per share to continue to rise in the quarters ahead. Ladder's earnings are positively correlated to rising 1-month indices for LIBOR and SOFR. During the first quarter, the 1-month LIBOR index moved up from 10 basis points to 45 basis points, while the Fed hiked the Fed funds rate by just 0.25 of a point.

While 2 additional consecutive 50 basis point hikes in the second quarter was nearly unimaginable just 3 months ago, it now seems likely. If 1-month LIBOR were to follow that logic and rise by 1% to 1.45% by the end of June, rough math would indicate that our third quarter net interest margin should also increase by about $0.04 per share. It's also helpful to note that just 4 weeks into the second quarter, 1-month LIBOR has already increased by 30 basis points to 0.75%.

Moving on to our products. We feel particularly confident in our inventory, having essentially recalibrated our asset base over the last 2.5 years. Because we had shorter maturities going into 2020, we received $2.5 billion in bridge loan payoffs since the first quarter of 2020. This figure speaks volumes as to how strong our credit skills are.

Over just the last 14 months, we've originated approximately $3.3 billion in new bridge loans just as rates began to rise and inflation started to raise higher. And we started to sort out the post-pandemic economy and the so-called new normal. Our origination efforts were supported by our highly enhanced capital structure.

Today, we have far more loans on multifamily and mixed-use properties than we have had in the past with less retail and hotel loans. Our securities portfolio has been greatly reduced and is paying off rapidly, while our highly curated real estate portfolio has shown incredible resilience under difficult market conditions. If rates do rise as expected, we think our sales of real estate may slow down after the second quarter ends, but our net interest income from our increased loan portfolio is ready to step in as the workhorse of our earnings engine.

To wrap things up today, I'll just say that the Fed is in a tough spot these days in an incredibly volatile world. Given their dual mandate and an economy supporting the lowest unemployment rate ever and the highest rate of inflation in 40 years, it would seem that the Fed has little choice but to raise rates into a slowing economy. With that backdrop and our large component of long-dated fixed rate liabilities, Ladder is positioned to benefit greatly from rising short-term interest rates. Rate hikes from the Fed should increase earnings at Ladder and by extension, allow us to distribute more of our earnings to our shareholders in the quarters ahead. If we get any help at all from the loan securitization business, that will just add to what is already a very positive earnings picture.

I'll now turn the call over to Q&A.

(Operator Instructions)

Our first question is from Jade Rahmani of KBW.

Just curious about your view on the state of the commercial real estate market. Overall, do you expect borrowers in the current market to be able to handle higher rates as they face debt maturities this year. Typically, there's about $400 billion of commercial mortgage debt maturing each year. wondering your thoughts on the likelihood of a potential uptick in commercial real estate loan defaults.

Thanks, Jade. This is Brian. I think that they'll be able to handle it. I mean, I think -- I don't think the world was existing in a place where it thought interest rates were going to stay at extraordinarily depressed levels for an extended period of time.

That said, I do think that there's some changes that we've undergone in the sector where oddly, they're not -- it's not a broad brush against commercial real estate. It really depends what kind. I don't think apartment loans coming due should have any problems, unless they're rent-controlled maybe, and that doesn't make a lot of sense, but I think that there's a lot of delinquent rent there due to the eviction moratoriums. And those could become problematic if a maturity date comes up and the tenants in the building have 9 or 10 months of rent that they haven't paid.

But other than that, like newer apartment buildings that are not rent-controlled and are stabilized shouldn't have any problem at all because the tailwind from the inflation side of that is the shelter costs are just rising and as housing prices rise, apartment rents rise with it. A couple of exceptions to that, certain cities. And that's -- what I mean, it's almost like a grid at this point.

Hotels should be doing okay. Not too many people are leaving the country, although as gasoline goes up in cost, sometimes that can affect that part also. I think the office market is trying to find an equilibrium point between being leased and cash flowing and being used and occupied. And I think that there's going to be a hybrid version of that, which -- so the office market should probably be okay. But I am a little concerned about the ancillary businesses away from the office market as the delicatessen and the pizza place and the drug store downstairs in some buildings.

So it really will -- there will be winners and losers here. I think the grocery store has gone up in value and most people understand the utility of it as opposed to just delivering everything through an Amazon then. So I think at this point, rates are not terribly high. So they should be okay. If the Fed -- the Fed has 2 mandates, as I said, one is unemployment, and they got the lowest unemployment ever. So that's fine. And the other one is price stability and they are not even in the neighborhood of having prices under control.

So if they really do attack that with short-term interest rates, then I think there is going to be another part to this answer down the road a little bit because when I look around the general public, and they always say the consumer is fine, but I don't know who the consumer is. The consumer -- if he is rich, he's fine or if he owns a house, he's fine or a stock portfolio. But if he's not very wealthy and doesn't own a home and rents and has a car that goes to work, the things that are really bothering me as far as their ability to hang in there will be energy prices, gas, food and rent. And there -- I know the headline of inflation is 8.5%, but I think all 3 of those are significantly higher than 8.5%.

In terms of the economic outlook, there seems to be a decent probability of a recession over the next, say, 18 months, have you adjusted any asset management policies, increased surveillance, increased dialogue with borrowers? How do you overall think the company would be positioned?

We are aware of that, and we do believe that will happen. The word recession needs to have some degree attached to it. We don't think, at this point, we're expecting a severe recession, which means if you're under 45, you probably don't know what I'm talking about, unless you've been reading a lot of books. But a recession isn't necessarily a bad thing. If it's a normal part of a business cycle, and I think it's fine if growth shrinks or goes negative for a few quarters, not terribly problematic.

I don't think of this recession that may come as an echo to 2008, or an echo to the pandemic downturn that we saw. So I think the one before this was really around 1998, 1999 is the one I would look at. So I don't think a recession is something that should be feared, but yes, it is something that should be dealt with. I think equity returns in a recession don't do as well, but debt returns tend to do pretty well.

Our next question is from [Ricardo] (inaudible) of Deutsche Bank.

I was wondering if you please -- if you could please comment on the -- how is your conversation with the rating agencies, [happy wall] over the last couple of months. And what are the main milestones towards that goal that you guys have of becoming investment grade?

Sure. This is Paul. We have ongoing conversations with the rating agencies pretty frequently these days. And specifically with 2 of them, Moody's and Fitch, our upgrade considerations are primarily quantitative in nature. And it generally means more unsecured corporate debt on our -- as part of our liability structure. So we're a big believer in the use of unsecured corporate debt, for the flexibility reasons and various other reasons. So it's primarily quantitative in nature, the upgrade considerations. And they also like our internalized structure and significant in-center ownership, how aligned we are with shareholders and bondholders. So the conversations with all 3 rating agencies, I'd like to say, continue to go on and go well.

Perfect. That's very helpful.

(Operator Instructions)

Our next question is from Eric Hagen of BTIG.

Hopping on a little late here. Just a couple for me. First, just regarding underwriting and credit, what variables would you say you're most discerning with respect to right now, which is maybe a little different or which has evolved over time. And then in the net lease portfolio, can you remind us if there's any embedded rent increases in there?

Okay. I'll start the answer, but I'm going to -- Rob Perelman is on with us from Asset Management. So I'm going to ask him about the net lease, but -- and I think that's going to be a combination. But as far as the underwriting goes and how we are originating at this point, we felt in -- as the CLO market was moving very comfortably in 2021, we felt that multifamily loans were being bid too aggressively by originators targeting CLOs. Around the fourth quarter, that changed and spreads began to widen. And I think a lot of people thought that it was just a year-end phenomenon with some supply-side concerns. We didn't feel that way. We elected at that point to make a decision to deliberately target what we had not been targeting. We weren't avoiding multifamily, but we weren't targeting it either.

But in the fourth quarter of '21 as well as the first quarter '22 and including the beginning of this quarter, we have targeted a good part of our effort into originating newer products, apartment and apartment-like, meaning mixed use, building with the downstairs retail, with apartment upstairs. And I think we actually originated about 85% of our loans with that kind of a profile, which was starkly different than the prior 3 quarters in 2021.

But any time you go into a recession, and we've been through plenty of them, you have to really kind of look at replacement value and get back to basics dollars per foot matter, alterative use and also how much land is available around you. And also the underlying economics, I think right now, we're dealing with big city economics that need to be seriously considered before we simply assume that the cities in San Francisco, Los Angeles, Chicago and New York are going to be able to elevate rents as they see fit. And until they get some of the social questions out of the way, I think that's a cautionary tale too.

So I think we've always started with the big filters. And Eric, I don't know if you are that familiar with us, but the underwriting process at Ladder hasn't changed other than perhaps the assumptions going forward have changed. So whereas we might have done an 80% loan to cost acquisition before, it's probably 75% now, where we might have done a hotel, expecting it to do very well, we might avoid that completely at this point because we feel like it's the most cyclical of the product types. We avoided malls for years and years and they're hitting a point now where I wouldn't say we'll do malls, but I would say we're a little more comfortable with necessity-based retail, and that certainly is indicated in our ownership of triple net properties.

And the last one, industrial, yes, we're very comfortable as everybody else with that product type, but that, too, will get overbuilt at some point. So for the most part, you take, it doesn't really matter where we are today, it matters where we are in 3 years when the loan comes due. So we have to look ahead. And as we've indicated, we do see a mild recession, we believe, next year. So we're a little more conservative than we were and so far expressing it in terms of shorter maturities, lower LTVs.

Now if you look at our portfolio, LTV, it might be a little higher, but keep in mind, it's mostly multifamily now. So that would be an explanation for that. And we're just not doing too many stories where execution is at a premium. We're really underwriting basic real estate right now, and that's usually the right move as you go into a bit of a slowdown. And Rob, do you want to try to handle that other one about bumps?

Sure. Eric, this is Rob Perelman. The triple net book is varied in rent step. About half of the book has the annual rent steps and half is flat to stepping every 5 years under certain leases.

Our next question comes from Matthew Howlett with B. Riley.

Brian -- we had the 2 -- we had basically 2 Fed meetings here during the quarter and the expectations are 50 bps each. What's not to prevent from Ladder raising the dividend, $0.05 maybe more in the second quarter?

Well, there's 2 questions there. One has to do with the direction. The other has an amount attached to it. The second one, we won't communicate a dividend policy on the earnings call. But to the extent that the Fed does move 50 basis points in May and 50 in June, which I actually think will happen. What would stop us -- obviously, I have to ask for the Board's approval to raise the dividend. And I'd imagine a nuclear bomb might stop that request. But other than that, I'd imagine we're going to try to start adding on to some of our distributions.

So investors should think of the adjusted EPS, the dividend tracking adjusted EPS, and you might lag a little bit, but over time it's going to equal it.

Yes, sure. I mean we are shareholders, and then we try to be shareholder friendly. We think our shareholders have been very patient with us and are conservative, maneuvers that we've taken in the last 2 years. Strangely, the plan we laid out 2 years ago is almost exactly where we are today. And so we are now covering and we expect the Fed to raise interest rates. Our net interest margin has been rising quarter after quarter. I think it was -- I don't know if it's $56 million this quarter, top line. And obviously, we have that big liability set, which is fixed in rate, which should benefit us as floating rates rise. So yes, I would anticipate it.

Obviously, there's other things going on in the world besides again, the Fed moving interest rates. But we're having a little bit of a handoff session right now in our multifaceted earnings division. And we've been taking some gains as interest rates were low from real estate. I'd imagine that will slow as time goes on and rates go up, as you would expect. But I expect -- we expect to hand off the earnings, the tone to the bridge loan portfolio, which is in terrific shape to handle it right now.

And so we're very -- and we haven't really mentioned the conduit business much in a very long time. And I don't know that we should be mentioning it now either because that long duration fixed rate loans, but that used to be a very big moneymaker at Ladder. And if the yield curve steepens as we expect that, I think that could easily get back on stage here.

Well that will be -- it certainly will be interesting to see how that develops. I know the CMBS -- or CMBS spreads are wide right now. I would love to hear -- you mentioned the CLO market if that -- you said if that cooperated that could even be better for you guys. Just walk me through the cash generation -- the cash is coming down, which is a great thing. How you look at the -- how you look at liquidity really as you grow your portfolio in the next couple of quarters here if the CLO market doesn't cooperate, if it does. Just walk me through how things progress.

Well, I think that it's a complicated question. We're not overly concerned about the CLO market right now. And the reason why is because we sort of switched the Federal Home Loan Bank out for the CLO market. We did 2 CLOs, 1 in June, 1 in November. So that is match funded for a reasonable period of time, call it, a couple of years.

And we have -- we've added to our unsecured debt, back at last year, where we now have -- despite the fact that we have $1.650 billion coming due, the earliest of which is due of a late 2025, the lowest rate obligations we've got outstanding are two $650 million, one due in '27 and the other doing '29. So that's about $1.3 billion at an average rate of about 4.5%. And if the Fed or inflation continues, that's just going to turn into a big asset for years to come, like out 5, 6 years.

So the CLO market is not terribly important to us. And I think right now, we're -- we have unencumbered assets of close to $2.8 billion. So we could -- we could enter the CLO market now. Obviously, we did enter it 3 times with three with $900 million -- with three $900 million. But we also are paying a lot of attention to those rating agencies and how they feel about the mix of our secured versus unsecured.

And if we do want to become an investment-grade credit, then I think we're going to have to keep to about a 3x leverage scenario where I think a lot of our competitors are significantly more levered than that. So this would be -- if we did go in that direction, we would just issue another very large unsecured bond offering, but we would keep those unencumbered assets just that way because that's really what that market entails.

I would also point out, Paul mentioned with Fitch and Moody's that with their analytically, we understand what we would have to do to get there. But also the third one, S&P put us on positive watch yesterday. And I think that is as a result of those unencumbered assets.

That's certainly encouraging. Do you need the securities portfolio? Or can we -- is that just going to run down over time? Just curious on that side of it.

Yes. No, we don't need it at all. I've said it a few times, I think that goes to 0. They're occasionally in a world like this, where there is a whipsawing market with people in the office and out of the office, sometimes you can pick up some pretty attractive pieces of that. And obviously, with a total of about $600 million, $700 million, it's not a lot. But we have received $70 million in payoffs in the last 2 months in that portfolio. So it is really short at this point. I don't -- right now, they are LIBOR based primarily because they're from 2019, most of them. And right as -- we would like to see LIBOR catch up with where the 2-year galloped off to, and we suspect that will happen in a couple of quarters here.

Our next question is from Chris Muller of JMP Securities.

I don't know guys, not transmitting to the other side here. I don't know if you can hear us, but we can't hear you. I heard that.

Do you guys hear me now?

I can. Yes.

All right. So I have a slightly different one on the dividend. It's obviously great to see distributable earnings back to covering and exceeding the dividend. But I wanted to ask how the Board thinks about the real estate gains when they're considering it. Are these more of a -- considered a recurring item or nonrecurring when they're looking at the level to set that at? And Brian, your comments on the real estate sales slowing in 2Q are helpful of where you think the earnings power is going to shift to? So...

Yes. The Board looks at the entire business. It's in its entirety. And based on the amount of capital we have allocated to real estate or securities or cash for that matter. But I think that we don't view the distributable earnings differently if some of the gains come from real estate unless it's the end of our real estate gains, which we certainly don't think we we're at. We think we have extensive amounts of gains in that portfolio. And we haven't done a full-on sale to show the market that, but I think for several quarters in a row here, I think, last year, we made $26 million, $27 million in real estate sales.

I think we'll probably exceed that this year. I don't know exactly where we are now. But second quarter, I can see a little bit into, and I think we have a couple of sales here. But we're -- keep in mind, we're not actively trying to sell that. We can refinance that portfolio as it comes due. We like that portfolio and that it's a very stable and recurring income stream that generates double-digit returns without having to recycle all the time. So we are -- I would call us a very reluctant seller at times.

And so we -- so the Board looks at the earnings of the company on a go forward, if we had an unnatural distribution -- unnatural gain that was a one-timer, then I don't think that we would -- obviously wouldn't factor that into the go-forward on dividends. We want to -- we don't want to be bouncing the dividend around at all. We want to be just moving it in a single direction that's quite understandable and predictable so that no one is getting surprised by too much.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Brian Harris for closing remarks.

Yes, I'll just close by saying it's been an interesting time and coming out of -- what I consider coming out of the pandemic, who knows if the virus thinks that. But we indicated, I think, a long time ago, we thought this would take a couple of years and it did. And I would say that all of our higher rate financing that we entered into during the pandemic is going to be over with now. That will be another tailwind to earnings. I think we singled that -- we've signaled that in the past.

So we look forward to a very, very positive rest of this year. We do believe the Fed will continue raising interest rates, and we have positioned this company not just to survive it but to actually benefit from it. We are positively correlated in that direction, and we are really looking forward to what lies ahead. So thank you again for staying with us, and we hope to make you all very happy this year.

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