Ladder Capital Corp (NYSE:LADR) Q3 2023 Earnings Call Transcript

Ladder Capital Corp (NYSE:LADR) Q3 2023 Earnings Call Transcript October 26, 2023

Ladder Capital Corp beats earnings expectations. Reported EPS is $0.31, expectations were $0.3.

Operator: Good afternoon and welcome to Ladder Capital Corp.’s Earnings Call for the Third Quarter of 2023. As a reminder, today’s call is being recorded. This afternoon, Ladder released its financial results for the quarter ended September 30th, 2023. 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. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today’s call. At this time, I’d like to turn the call over to Ladder’s President, Pamela McCormack.

Pamela McCormack: Good morning. We are pleased to provide an overview of Ladder’s financial performance for the third quarter of 2023. During the quarter, Ladder generated distributable earnings of $39 million or $0.31 per share. It is worth emphasizing that these results, which yielded an after-tax return on equity of 10.1%, were achieved while maintaining a modest adjusted leverage ratio of just 1.6 times. Our book value has remained steady even as we continue to add to our seasonal reserves to align with the current market environment. Our dividend also remains well-supported by net interest margin and net rental income. And we will endeavor to prioritize credit optimization in the upcoming quarters in order to continue to deliver these results.

We’ve consistently maintained robust liquidity with approximately $800 million in cash and cash equivalents. This amount represents more than 14% of our total assets. With our fully undrawn unsecured revolver, our same-day liquidity stands $1.1 billion. It’s worth mentioning that our leverage ratio stands at less than 1.0 times when excluding investment-grade securities and unrestricted cash, underscoring our commitment to prioritizing safety and prudence in the face of ongoing market uncertainties and the prevailing geopolitical landscape. Over 40% of our debt is comprised of unsecured corporate bonds, 55% of our assets are unencumbered, and 82% of these assets consist of first mortgage loans, investment-grade securities, and cash and cash equivalents.

This composition significantly enhances the flexibility and liquidity of our balance sheet in comparison to traditional secured funding sources. Turning to our balance sheet loan portfolio. It stands at $3.4 billion as of September 30th, and features a weighted average yield of 9.77% and an average loan size of $27 million. In addition, we maintain limited future funding commitments amounting to only $258 million with more than half of this commitment being contingent upon favorable leasing activities at the underlying property. In the third quarter, we received loan repayments totaling a $119 million. When combined with the year-to-date repayments for 2023, through September 30th, our total loan repayments reached $560 million. Our strategic and on originating loans within the middle market with a smaller average loan size remains a key factor enhancing credit quality.

As demonstrated in the past, these smaller loan sizes allow borrowers to access a broader array of capital sources for repayment. These through refinancing or asset sale and contribute to the resilience of our credit portfolio. During the quarter, we foreclosed on a mixed use loan secured by four properties in Harlem, New York, with a combined carrying value of $31 million. The property is 89% occupied and our plan moving forward actively work on stabilizing the multifamily and retail components of these assets. This action resolved alone on non-accrual, reducing the balance from $88 million to $58 million. In the same quarter, we sold a hotel in San Diego, California that we previously foreclosed on, resulting in $800,000 gain. This gain was in addition to a $2 million gain we record the time of foreclosure in 2019 and resulted in an 18% return on equity from the time of initial investment to the point of sale.

Subsequent to quarter end, we concluded foreclosure proceedings on a $35 million multifamily loan located in Pittsburgh, Pennsylvania. The loan had previously been classified as non-accrual in the second quarter of 2023. The property primarily consists of a 174 newly constructed multifamily unit that are 98% occupied. In addition to these units, there are some office and commercial space, and the property currently generates a solid in place capitalization rate of 7% at our basis. Further, as Paul will cover in more detail, we increased our CECL reserve to align with our assessment of current market conditions, but we did not identify any specific impairments during the quarter. Regarding our proactive asset management approach, we maintained ongoing communication with borrowers and closely monitor their business plans well ahead of any maturity date.

We are paying special attention to pivotal milestones where a capital infusion may be needed and our ability to optimize asset value is bolstered by our expertise in real estate ownership and operations. Turning to our securities portfolio. We have begun capitalizing on opportunities to expand this portfolio by acquiring additional $58 million of AAA CLO securities, which are presently offering highly attractive returns and a compelling unlevered yield of approximately 7.68%. Our real estate portfolio remains substantial, contributed to distributable earnings generating $16 million in net rental income this quarter. In 2023, all three major rating agencies reaffirmed our credit rating, and two of these agencies maintained our rating at one notch below investment-grade.

This is an noteworthy achievement, especially in light of the disruptions in the commercial real estate mark. In conclusion, we are continuing to maintain a patient’s stance, assured by the secure coverage of our dividends. Due to the resilience of our credit portfolio, we also continue to maintain a high bar when it comes to reinvestment. However, we are well-prepared to seize new investment opportunities that offer attractive risk adjusted returns once that transaction activity rebounds. This readiness is supported by robust liquidity, prudent leverage, and the expertise of our seasoned originations team. With that, I’ll turn the call over to Paul.

Paul Miceli: Thank you, Pamela. In the third quarter, Ladder generated attributable earnings of $39 million or $0.31 per share, driven by contributions from strong net interest margin and not at net operating income, both of which benefit from our primarily fixed rate liability structure. Loan portfolio decreased in the third quarter due to $119 million in proceeds received from loan paydowns, partially offset by $17 million from funding on one new loan and existing commitments. As previously mentioned, we foreclosed on a $30.5 million loan collateralized by four mixed use properties reducing our non-accrual loan balance. In addition, we sold a previously foreclosed on hotel property for a $0.8 million gain. In the third quarter, we increased our CECL reserve by $7.5 million, bringing our general reserve to approximately 110 basis points of our loan portfolio.

The increase was driven by the current macro view of the state of the US commercial real estate market and the overall global market conditions, including the increase in long-term interest rates. We continue to believe that the credit quality of our loan portfolio benefits from overall diversity and collateral type and geography and granularity with limited exposure to any single sponsor or market. Our $888 million real estate segment continues perform well and provide stable net operating income to our earnings. And as of September 30th, the carrying value of our securities portfolio was $477 million, comprised of 99% investment-grade rated securities, of which 83% were AAA rated. Worth noting that as of September 30th, 2023, 70% of our securities portfolio was unencumbered and readily financed for, which is in addition to the $1.1 billion of same-day liquidity we maintain.

Ladder same-day liquidity simply represents cash and cash equivalents of $798 million plus our undrawn corporate revolver of $324 million with a maturity in 2027. As of September 30th, 2023, our adjusted leverage ratio was 1.6 times, down from prior quarter as we continue to de lever our balance sheet, all the while producing steady earnings. Unsecured corporate bonds remain an anchor to our capital structure with $1.6 billion outstanding or 41% of our debt with a weighted average maturity of four years, an attractive fixed rate cost of capital at 4.7% average coupon. In the third quarter, we repurchased $5.3 million in principle of our unsecured bonds at 81.6% of par, generating $0.9 million in gains from the retirement debt. Through September 30th, 2023, we’ve repurchased $67 million in principle of unsecured bonds at 83.4% of par generating $10.6 million of gains.

As of September 30th, our unencumbered asset posted $3.0 billion or 55% of our balance sheet. Over 80% of this unencumbered asset pool was comprised of first mortgage loan, securities, and cash and cash equivalents. We believe our liquidity position and large pool of high quality, unencumbered assets continue to provide Ladder with strong financial flexibility. As Pamela discussed is reflected in our corporate credit rating that is one notch from investment-grade and two of three rating agencies with all three rating agencies reaffirming our credit rating in 2023. In the third quarter, Ladder repurchased 19,000 shares of common stock at an average purchase price of $10.33 per share and year-to-date, we have repurchased 2.5 million of our common stock at a weighted average price of $9.22 per share.

Our share buyback program authorization of $50 million, that’s $44 million of remaining capacity as of September 30th 2023. Ladder’s undepreciated book value per share was $13.77 at quarter end based on 126.9 million shares outstanding as of September 30th, and as Pamela discussed, remains stable. Finally, our dividend is well covered, and in the third quarter, Ladder declared a $0.23 per share dividend, which was paid on October 16th, 2023. For more details on our third quarter operating results, please refer to our earning supplements, which available on our website as well as our 10-Q. With that, I will turn the call over to Brian.

Brian Harris: Thanks Paul. The third quarter saw interest rates generally surge higher to levels not seen in a very long time, but Ladder’s performance was impressive, now having delivered double-digit ROEs over each of the last four quarters. Our distributable earnings over the first three quarters of this year were $128 million, a 17% increase from the $110 million over the same period in 2022. This was accomplished with the modest use of leverage, a smaller asset base, and while keeping our liquidity levels quite high. Notably, today we hold over $800 million of T-bills maturing in less than three months with an average yields maturity of 5.45%. During the quarter, we began reallocating capital from cash and T-bills into CLO AAA-rated security, acquiring a modest $58 million of them in the quarter but we expect to grow this position in the quarters ahead.

The A classes of new commercial real estate CLOs receive an unlevered 7.75% return in today’s market. We’re also quite eager to originate new first mortgages on balance sheet loans. However, quality lending opportunities are scarce these days with current rates over 9% causing many borrowers to hold off on borrowing. We think this situation will change in the quarters ahead, but we can afford to be patient as we are well-positioned to sustain earnings that comfortably cover our quarterly cash dividend for the foreseeable future. As mentioned earlier, we received $119 million in loan payoffs in the third quarter and in the 1st few weeks of October, we have received an additional $52 million of payoff after three more balance sheet loans paid off.

Consequently, our liquidity has increased further since the end of the third quarter. Credit is holding up nicely for the most part, but we are seeing some delays on loan payoff as lenders have become quite cautious before loan refinancings close. Ongoing negotiations for loan extensions are regular occurrences these days, but so far, it seems that most sponsors can, will, and must contribute more equity to maintain ownership in their assets. As rates have risen, property values naturally fell and while we don’t think the price deterioration is over, we do think the pace of depreciation is slow. If a higher for longer interest rate scenario plays out in the year ahead, we anticipate that our low coupon fixed rate corporate borrowings will enable us to maintain high net interest margins that are supportive of our dividend.

Given our high levels of liquidity, we will consider repurchasing some of these corporate bonds and retiring debt, while supplementing earnings in the quarters ahead. Switching topics, we get asked a lot about how changes to funding models that regional banks will impact Ladder given how many commercial real estate loans are refinanced in this part of the banking sector. The answer, we believe, is that short-term, some loans on our balance sheet may have challenges in refinancing, but in the longer term, if regional banks get smaller, hold more capital, and have diminished lending capability, the positive impact to alternative lenders like us should be very positive. The last few years have seen plenty of turbulence brought on by global pandemic, near zero interest rates, followed by the highest rates seen in four decades, along with heightened tensions with China, Russia, and chaos in the Middle East.

And it’s been rough on fixed income investors generally. Ladder has successfully managed through all of these market conditions, keeping leverage low and liquidity high. We expect the turbulence to continue for a bit longer until the Fed is convinced that the further rate hike they’re thinking about are no longer necessary. Until that happens, we are well-positioned to manage through a higher rate credit cycle and to take advantage of the opportunities markets like this invariably produce. Operator, we can now take some questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Sarah Barcomb with BTIG. Please proceed with your question.

Sarah Barcomb: Hey, everyone. Thanks for taking the question. So, during the last conference call, you mentioned that regional banks were still in the lending market. I think Silicon Valley actually took you out on one of your loans, and private credit was coming in to bid on assets in your target universe. So, I’m just curious if you have any updated observations, with respect to how the competitive landscape, as well as the takeout financing markets have changed at least over the previous quarter?

Brian Harris: Sure. Thanks Sarah. I would say that it’s more of the same. The regional banks are still lending. I would also indicate that when you used to be given a closing date by a borrower who asked you for a payoff statement, it was reasonably reliable that, it would probably happen on that date or near it’s not at all unusual to see things, back up a couple of weeks now. And, we’re after short term extensions, you know, just to accomplish the, the refi. And I just think it’s a heightened level of detailed analysis at this point. So, like, whereas you might not have had an unstoppable from a small tenant, they require it now. So, a lot of T’s getting crossed and I’s getting dotted. And I think it’s slowing the process, not stopping it.

Although, obviously, some banks, I think, have just changed their criteria with a lower capital base. But private credit is still out there. I think that a lot of the names, that we typically deal with in the world of CLO and transitional bond and transitional lending, some of them are having some difficulties now with their inventories and so there are some new names popping up. And I think I indicated in the last call some of the names I’ve never heard of, there’s a lot of capital around and on the sidelines. It’s rather expensive. And I think, many borrowers coming up on maturity dates believe that the existing lender is their best opportunity to get through a whatever refinancing or an extension because they know the asset at that point.

They’re obviously not going to fall down if they say they’ll do it. But, so I would say no real change. Other than a little bit more ticking and tying before the actual wires are sent.

Sarah Barcomb: Okay. Thanks. And then you touched on this, in your prepared remarks, Brian, but you guys are still running with very strong liquidity and low leverage. I was hoping you could comment a bit more on why you’re running with so much cash? I understand there’s high yields on cash right now, and you did buy some securities and some of your cap stack during the quarter. I guess should we expect more of the same in this next quarter or could we start to see some more allocation towards maybe CRE Equity? You’ve already kind of touched on loan origination, but just curious if that high cash balance has anything to do with covenants or just defensive positioning?

Brian Harris: Sure. It has nothing to do with covenants. We are massively covering all of our covenants at this point. And in fact, I think our fixed, cost coverage is exceedingly high relative to what what’s called for in the space. Whereas I think a lot of, organizations that fund floating rate loans with floating rate, liabilities, their fixed cost coverages have actually gotten below covenants and are asking for waivers but, not the case with us. The only reason we’re holding so much cash is because loans keep paying off at a pace that exceeds our investment abilities. There’s plenty of cheap things out there and — but a lot of it is has got some problems to it. So, we would love to be buying, more CLO AAA, the A classes on these new deals are really very, very attractive.

Although there have been a couple of deals that we’ve stayed away from because they look like kitchen sink deals and, we’re a little comfortable with it. Unfortunately, I normally would say I would expect this, volume to pick up, but I’m not sure it will given where rates are. If it does, we will continue to acquire, and have continued acquiring securities in into the fourth quarter. And as much as I’d like to tell you that we’ll probably be a net investor with money going into investments rather than coming back to us, in the first three weeks of October, we took another $52 million in payoffs. So, Country Club problem perhaps and it doesn’t — you have to remember the differential between a T-bill now at around 5.5% and where you can possibly lend money safely, call it 9, 9.5, it’s not such a huge difference.

And because we use very little leverage, it really doesn’t impact us too much But we’re pretty comfortable that we’ll be able to continue picking up assets and you’re starting to see some assets change hands, with lenders or else notes being sold, and we might get involved in some of those also. But to-date, it it’s been slim pickings on the safe investment side, mainly because of the continuation in our opinion that value continue to drop. Although, as I said on the call, dropping at a lower rate at this point, the pace of deterioration is slowing down, which kind of has to happen. So, I kind of feel like we’re getting near the end of this credit cycle and that should bode well for us and the liquidity that we carry.

Sarah Barcomb: Great. Thanks Brian.

Operator: Thank you. Our next question is from Jade Rahmani with KBW. Please proceed with your question.

Jade Rahmani: Thank you very much. Wanted to ask first about, Ladder’s current capital structure and capital package. Within a stable environment assumption, what cash balance do you think would be reasonable to hold? And if you executed on that, what are we — do you think the company could optimally generate?

Paul Miceli: Well, the first question is pretty easy. Usually about a $100 million we like to have around. We’ll take it down to $50 million often. So, that’s not a hard rule, but around a $100 million, we like keeping local. If in there’s just normal conditions prevailing. But the kind of ROE, if we were to take it down to a $100 million, if we — it all depends on what kind of leverage fees. If we were to go to 3 to 1 leverage, that would add close to a $3 billion in inventory, which employing some through some leverage. If we didn’t employ any leverage at all, we would be able to drop a $1 billion worth of assets to the bottom-line. And if you call that 8%, $80 million gets there without any real change other than — but you’re giving up the 5.5% on the T-bills.

So, we think double-digit ROE is very attainable. Right now, despite the fact that we’re carrying a lot of cash, there are plenty of opportunities for us. Our corporate bonds because of the surge in interest rates in September look very attractive to us. Our stock looks very cheap to us also and we’d like to everything is on. We would love to write bridge loans. We’d love to own securities. We’d love to own real estate. And real estate might be creeping into the picture here. But those transactions take a while, as you can imagine. But securities don’t take very long at all, which is one of the reasons we’re gravitating in that direct because you’re effectively getting almost 50% subordination on a cross pool of the assets. Many of the new CLO deals are static, which we prefer because you’ve know the universe you’re dealing with.

So, I — it isn’t that — there is no attempt on our part be holding unusual amounts of liquidity. It is simply patience and our capital structure allows that patience because even with a diminished asset base, at — during times like this, I think it calls for extra liquidity, extra caution and extra — and lower leverage. So, that’s that part is just endemic to us. It’s in our DNA to keep leverage down and keep liquidity up, but I will admit this is pretty excessive right now. But it isn’t because of anything we’re doing on purpose. We’re not trying to show you we have a lot of liquidity. In fact, we’re a little surprised the market hasn’t rewarded it a little bit more, although we do have one of the lowest dividend yields in the space. But we began moving out of cash and securities last quarter and I think we’ll continue doing that in fourth quarter.