Ladder Capital Corp

Good day and welcome to the Ladder Capital Corporation first quarter 2020 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Michelle Wallach, Chief Compliance Officer and Senior Regulatory Counsel. Please go ahead.

Thank you and good afternoon, everyone. Before we begin Ladder Capital Corp's earnings call for the first quarter, 2020, I would be remiss if I did not acknowledge the pandemic and the impact that it has caused worldwide. We continue to hope everyone remains safe and healthy during these truly unprecedented times. As the health crisis unfolded, latter's near-term corporate priorities included the well-being and safety of our employees. We moved swiftly to activate our business continuity plans And all ladder employees have been working remotely since mid-March. Despite the remote workplace, we are operating effectively and efficiently. Turning to our earnings call, with me this afternoon are Brian Harris, our company's chief executive officer, Pamela McCormick, our president, and Mark Fox, our chief financial officer. Brian, Pamela, and Mark will share their comments about the first quarter and what they are currently seeing in the second quarter. And then we will open up the call to questions. This afternoon, we released our financial results for the quarter ended March 31st, 2020. The earnings release is available in the investors relations section of the company's website and our quarterly report on form 10Q we filed with the SEC later this week. Before the call begins, I'd like to remind everyone then 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 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.lattercapital.com, and in our earnings release. With that, I'll turn the call over to our President, Pamela McCormick. Thank you, Michelle, and good afternoon, everyone. First and foremost, I echo what Michelle said. I hope you and your loved ones are safe and healthy and remain so during these unprecedented times. And a special thank you to all essential workers out there on the frontline. The global scale and rapid spread of COVID-19 clearly changed Ladder's operating environment during the first quarter as March looked very different from January. During the first quarter of 2020, LADA produced core earnings of $30.9 million, or $0.26 per share, reflecting an after-tax core return on equity of 8%. I am pleased to report that our unrestricted cash balance is approximately $830 million, and we have over $2.6 billion of unencumbered assets. Remarkably, Our unencumbered assets, inclusive of such cash, currently represents approximately 40% of our total assets and includes $1.25 billion of unencumbered first mortgage loans. Cash alone represents approximately 12% of our assets. The quality and composition of our unencumbered asset pool is a clear differentiated ladder and a key element of our strong balance sheet. While today's unique circumstances make it difficult to project the future with certainty, We are confident that Ladder's historically conservative approach and recent proactive measures leaves the company well-positioned to manage the impacts of COVID-19 and take advantage of opportunities that arise in our sector from potential further disruption. With our significant buildup in cash liquidity, which we'll discuss further on this call, I'd like to point out that Ladder Stock is currently trading at roughly its cash balance. We believe this is due in large part to speculative market fear over our investment-grade security foldings. The impact of COVID-19 will likely come in two waves. The first wave was a hard squeeze on liquidity. We withstood that despite having marked market financing on our large securities portfolio. The second wave will be on credit. We're even better positioned for that with the help of that very same portfolio. Our portfolio of short-duration investment-grade securities, which is almost entirely AAA-rated or government-backed, currently represents 24% of our assets. We intentionally pivoted towards these super senior securities, and we continue to expect this portfolio to be beneficial to our shareholders in the current environment, giving their stable credit profile, enhanced liquidity when compared to first mortgages and mezzanine loans, and the significant structural benefits the underlying transactions offer to the most senior bond prices. As previously reported, Latter-Tonsi met all margin calls received with available cash on hand during the largest market dislocation in recent times. As prudent risk managers with significant equity stake in the firm, we take a balanced and borrowed approach to our use of leverage. We maintain significant available cash and a highly liquid portfolio of unencumbered first mortgage loans in combination with our securities portfolio in order to be prepared to weather dislocations and spreads. We remain well positioned, and our $830 million of available cash will allow us to quickly and readily respond to potential further dislocations. We have, then, and we continue to have now the financial wherewithal to hold our securities portfolio through full or par payoff at maturity. Second, we elected not to sell the majority of our entire securities portfolio at a loss during the initial stages of COVID-19. Many of the AAA securities we own also benefit from structural cash flow tweaks and over-collateralization provisions that actually accelerate the repayment of our positions upon distress at the underlying collateral level. With the recovery in AAA pricing, our decision to not liquidate our portfolio at a loss was reinforced. We may elect to opportunistically sell selected securities, but in our view, despite certain market fears, our security holdings are our most senior and secure investments. We expect this portfolio to serve as a reliable source of enhanced cash flows as our AAAs naturally pay down and de-lever over time. Our multi-cylinder business model is working. In addition to our significant cash position, 24% of our assets are currently invested in super senior securities that hyper-amortize in disruptive situations. 15% of our assets are allocated to our equity portfolio, which is dominated by long-term triple net lease properties with an enviable list of necessity-based and essential businesses as tenants. And only 46% of our assets are balance sheet loans. which stand in stark contrast to others in our space that have all or nearly all of their risk concentrated in this one segment. In addition, our balance sheet loan portfolio benefits from significant granularity and diversity. As a result of our $20 million average loan size, our investments have spread across a wide range of borrowers, property types, and geographic markets. And 80% of our balance sheet loans are lightly transitional, where the assets are close to stabilization and have completed renovations. At origination, these loans had a weighted average LTV of 71%. These same loans currently have a 1.26 times DSCR within place reserve. The significant third-party equity our borrowers have in these loans provides strong motivation for them to protect their assets and provides the company with a substantial protective equity cushion. Like all prudent lenders, we'll be very focused on asset management to protect and enhance the value of our loans. What is often missed is that almost half of our loan portfolio is unencumbered and is therefore not subject to the approval of a third party for amendments or any form of margin call risk whatsoever. The size, quality, and composition of LIDAR's unencumbered asset pool is exceptional in the mortgage rate space and uniquely positions us to defend shareholder value with highly liquid assets as opposed to retained security interests and B pieces in CLO and CMBS transactions that have extremely limited liquidity. Because we did not engage in construction lending, we currently have modest total future funding obligations of $290 million over the next three years. And over half of that are subject to predetermined good news events, such as tenant improvements and leasing commissions related to new leases, or the achievement of specific performance-based NOI occupancy or other hurdles. As Brian noted on our last earnings call and long before COVID-19, In addition to our pivot to our securities, we began to reduce our exposure to loans backed by hotel and retail properties, the asset classes most adversely affected by this crisis. As of March 31st, hotel and retail properties represented only 11% and 8% of our balance sheet loan portfolio, respectively. The unique nature of COVID-19 limits our normal visibility into expected underlying property operating results. In April, approximately 99% of our loan portfolio remained current. We expect some future diminution in operating results, but we believe performance will be helped by the application of unemployment insurance and other economic stimulus programs, including the Paycheck Protection Program, which will assist certain borrowers with their payroll costs. We are also seeing strength in certain borrowers and tenants' businesses. Our $671 million triple net lease property portfolio accounts for 64% of our real estate equity investments. The portfolio is generally financed with long-term, non-recourse mortgages and is principally leased to credit tenants, with counter-cyclical, necessity-based businesses like groceries and pharmacies that enjoy an average remaining net lease term of over 12 years. By way of example, our three largest tenants are Dollar General, BJ's, and Walgreens. all of which are highly defensive in nature. The portfolio has historically been a source of reliable income, and we expect it to continue to perform well during these turbulent times. As also detailed on previous earnings calls and well ahead of the crisis, we began replacing secured debt with long-term unsecured debt to strengthen our balance sheet through the execution of a series of unsecured corporate bond issuances with staggered maturities extending out through 2027. We currently have $1.9 billion of unsecured bonds, outstanding from four issuances, including the seven-year, $750 million bond offering we closed in January. That offering was particularly timely given the recent turn of events, as was our use of the proceeds to pay off a large portion of the company's secured debt. As of today, 72% of our capital base consists of non-recourse financing, unsecured debt, and book equity. Since quarter end, we expanded our use of non-recourse financing to 24% of our liability structure, while reducing our mark-to-mark financing by approximately 30%. Consequently, nearly half of our secured financing related to loans and approximately 64% of our total outstanding debt is now completely non-mark-to-market. In fact, we currently only have $414 million of secured loan repo debt outstanding across our entire portfolio. Nonetheless, like others, we have also been decreasing our leverage on these facilities, and we're pleased to report that our total mark-to-market loan financing of any kind related to hotels is limited to a $17.5 million advance against two cross-collateralized hotels. As the crisis unfolded and we sought to maximize liquidity, we immediately drew down on our corporate revolver, extended financing terms, and entered into two new strategic financing facilities. As also previously reported, we engaged Moles & Company to assist us in evaluating strategic financing alternatives to best position the company's fees on the investment opportunities we expect this market and this location to create. We also reengaged our former colleague and trusted partner, Tom Harney, and we are delighted to have him back on the ladder team. With the assistance of MOLUS, Ladder established a new $206 million secured warehouse facility to finance balance sheet loans with Koch Real Estate Investments LLC, an affiliate of Koch Industries. The facility is non-recourse, subject to limited exceptions, and does not contain any mark-to-mark provisions. The facility also provides Ladder with match term and optionality to modify, restructure, and forbear in the exercising remedies. In connection with this facility, Ladder issued Koch the right to purchase up to a 3% stake in the company for $32 million. The Koch financing facility provides us with over $200 million of additional unrestricted cash, and the terms of the facility provide considerable flexibility to help enhance and preserve the underlying value of our loan. At the same time, the transaction aligns the company with a promising strategic relationship that may prove helpful in playing offense as investment opportunities we expect to result from this disruption become available. Polk has, through December of this year, to purchase the equity at a price that equated to a 30% premium when the deal was struck. Polk evidenced their long-term commitment to and belief in Ladder by agreeing to a meaningful lockup, which would yield Ladder $32 million of additional liquidity with solution of only 1.1% if they make this investment. We also separately executed a private CLO financing with Goldman Sachs Tech that generated approximately $300 million of net proceeds. This financing is also non-recourse and does not contain any mark-to-market provisions. The transaction financed $481 million with first mortgage loans at a 65% advance rate on a match-term basis. Planner retained a 35% controlling equity interest in the collateral. The structure also affords the company broad discretion in making loan modifications. Both of these transactions help facilitate the tremendous progress we made in expanding our use of non-recourse financing and reducing our exposure to mark-to-market debt. Turning to our dividends, we paid our previously announced quarterly cash dividend on April 1st. Our board will continue to make dividend decisions in the best long-term interest of the company and our shareholders. We remain fully aligned with our shareholders as management and the board continue to own 12.9 million shares of Ladder Stocks, or over 10% of the company, which is among the highest insider ownership of any commercial mortgage REIT. Ladder typically announces its second quarter dividend near the end of May. Our board will evaluate the facts and circumstances at that time with the understanding that providing income to our shareholders continues to be an important priority and objective for us. In closing, and before I hand off to Mark, I want to emphasize that Ladder was designed to withstand downturns and capitalize on the opportunities they create, and we look forward to doing so now. I hope you and your families maintain good health, and I thank you for your continued support. With that, I'll now turn the call over to Mark.

Thank you, Pamela. I will now provide an overview of our investment activities during the first quarter, as well as walk you through some of the specific impacts that the COVID-19 pandemic has had on our capital structure and the steps we have taken to adapt. At March 31, balance sheet loans totaled $3.4 billion. reflecting $314 million of originations during the first quarter. Those new originations had a weighted average spread of approximately 464 basis points over LIBOR and a weighted average loan-to-value ratio of 68.2%. With regard to our conduit loan business, Ladder originated $213 million of loans at an average interest rate of 3.88%. Ladder securitized and sold $185 million of loans during the quarter. At March 31, Ladder's conduit loan balance stood at $147 million. There were $8 million of individual loan impairment charges in the quarter, $7.5 million of which relate to the Nemours loan, which was previously marked down by $10 million in the third quarter of 2018. The remaining $0.5 million impairment charge was related to a $7.6 million hotel loan that defaulted in the fourth quarter of last year. During the quarter, Ladder acquired $438 million of securities investments that were partially offset by $151 million of amortization and sales activity. At March 31st, our securities portfolio stood at $1.93 billion, 99.9% of those securities were investment grade, 91.6% were rated AAA or backed by a U.S. government agency, and together they had a weighted average duration of 28 months. Batter also acquired $6.2 million of real estate comprised of five small net lease properties and sold two office building investments, resulting in a $750,000 core gain In Q1, our real estate portfolio continues to be a source of consistent income and cash flows and a strong source of recurring earnings. Letter ended the quarter with total assets of $7.33 billion. Total unencumbered investments, including cash, were $2.59 billion at quarter end, and unsecured bond debt outstanding stood at $1.9 billion. reflecting an unencumbered assets to unsecured debt ratio of 1.37 times. Consistent with our focus on senior secured assets, as of the end of the quarter, 98% of our debt investments were senior secured, including first mortgage loans and commercial mortgage-backed securities secured by first mortgage loans. Senior secured assets plus cash comprise 81% of our total asset base. Our strong cash position, Large portfolio of unencumbered investments and an ongoing focus on investments in senior secured assets reflect our continued emphasis on liquidity and stability in our portfolio to mitigate risk in the current environment. As a result of Ladder's investment activity and election to maintain robust cash balances over quarter end in response to adverse market conditions, Ladder ended the first quarter with an uncharacteristically high 3.79 to 1 adjusted leverage ratio, which was inflated by a $622 million cash balance, of which $358 million was unrestricted. As the result of actions I will cover in a moment, Ladder currently has approximately $830 million of unrestricted cash on its balance sheet and an adjusted leverage ratio of approximately 3.4 to 1. That same ratio computed by netting out cash from debt would be approximately 2.8 times. As Pamela partially noted, in March, in connection with the recent market volatility, Ladder elected as a precautionary measure to fully draw down on the company's $266.4 million unsecured revolving credit facility at the outset of this crisis. The company timely satisfied all margin calls from securities repo counterparties in cash and has since received the large majority of those funds back in the form of margin rebates. The company successfully rolled securities repo maturities and extended 41% of the maturities out to mid-July and an additional 43% out to September and beyond, leaving Ladder with $1.2 billion of securities repo debt at March 31st. At quarter end, the company marked down the value of its securities portfolio by $78.2 million. Also reflecting the increased level of market uncertainty, at quarter end, the company increased its CECL reserve by two and a half times the previously announced estimate to $30.1 million, which further reduced our shareholders' equity, albeit on an unrealized non-cash basis. As a result of the non-cash items related to securities valuation and CECL, as of March 31, GAAP shareholders' equity declined to $1.5 billion, resulting in GAAP book value of $12.31 per share and undepreciated book value of $14.01 per share. With that said, Ladder has also begun to de-lever and take advantage of alternative financing that reduces future exposure to margin calls, and funding uncertainty in the near term, affording the company the flexibility that will likely be necessary to allow the commercial real estate and credit markets to recover. Specifically, in April, $210.5 million of maturing loans were repaid at par, and $409.4 million of loans and securities were sold at a four-point discount at par, resulting in a total loss of approximately $16.7 million. It is important to note The loan sale transactions all were executed on a cash basis within periods of less than 72 hours without the benefit of property inspections by the buyers. Also, in April, Ladder reduced its securities repo financing by $140 million to $1.05 billion. Ladder established a new $206.5 million Coke facility and executed the $310 million CLO financing with Goldman Sachs Bank. In our ongoing efforts in anticipation of the February 2021 FHLB membership sunset date, we used a portion of the proceeds from the CLO transaction, in addition to proceeds from securities and loan sales, to reduce outstanding FHLB advances by 52% since March 31, resulting in a current balance of $487 million. Following our January $750 million unsecured bond issuance and our recent efforts to reposition Ladder's balance sheet to wind down the FHLB and increase our use of non-mark-to-market secured debt with enhanced flexibility, we anticipate a 68 basis point increase in Ladder's overall weighted average cost of funds in comparison to our weighted average cost of funds at December 31, 2019. As a result of all this financing activity following quarter F, our total debt has been reduced by $280 million to $5.4 billion, while unrestricted cash on hand has increased by approximately $470 million. Of equal importance, debt subject to mark-to-market provisions was decreased by 29%, or $783 million. Of the remaining mark-to-market debt, more than two-thirds is related to financing of short-thoration, highly-rated securities, which have already experienced a severe downside valuation scenario that, in the end, resulted in manageable margin calls that Ladder absorbed on a timely basis in March. Finally, in our efforts to address capital preservation in a comprehensive manner, Ladder also reduced expenses by modifying selected vendor contracts and employee benefits and reducing headcount. We expect those actions to result in approximately $3 million of savings per year. While we continue to face headwinds related to the COVID-19 crisis, our ability to adapt and maintain flexibility is a clear testament to the strength of our balance sheet and the importance of our historical focus on maintaining significant equity and unsecured bond debt and a large pool of unencumbered assets comprised primarily of first mortgage loans. Now, I will turn it over to Brian.