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.

Thank you, Mark. As I thought about what I'd say here today, our core earnings certainly seem to take a backseat to providing you with some of our thoughts as to how we plan to move forward during these unprecedented times brought on by the spread of the coronavirus and subsequent shutting down of the US economy. By way of background, let me start off by reminding you that ladder has been somewhat concerned for several quarters now that the post-financial crisis recovery was nearing its end toward the fourth quarter of 2019. and we began taking steps to position the company for the possibility of a downturn. While we believed a recession might be coming, we had no reason to think we'd be in a depression-like environment just 90 days into 2020. At the end of 2019, we started looking into the possibility of issuing another unsecured corporate bond to further decrease our reliance on overnight mark-to-market repo facilities as a continuation of our strategic planning for years prior to make more prevalent use of unsecured debt to fund our company. In late January, just eight weeks before the pandemic began to negatively impact global markets, as Pamela and Mark touched on, we did issue $750 million of seven-year corporate bonds at a fixed rate of 4.25%. Our fortunate timing on this issuance allowed us to enter into this sharp downturn in March as well prepared as I think we could have been for what we're experiencing today in the midst of a global pandemic where over 30 million jobs have been lost in just the last month alone. Over the last several years, our constant attention to liability management has proven to be very helpful during these difficult times. While we went into this recent downturn in a position of strength, given the severe negative financial impact on the economy from this health crisis, we took additional decisive steps to further strengthen our liquidity and our ability to take advantage of the wide opportunity set that we see today. It was a humbling experience to watch our team of highly experienced people execute plan after plan to raise our liquidity profile during what was probably the most illiquid month in U.S. market history. bringing our unrestricted cash on hand from $358 million at the end of March to our current cash position of approximately $830 million. Despite having not been in the office together for the last seven weeks, we were able to process loan payoffs, sell numerous whole loans, sell securities, pay down debt, move collateral around to execute new credit facilities and a CLO without a single person getting on an airplane. Words cannot express how grateful I am for their efforts, and all the while caring for the safety and security of their families during this pandemic. Because of our capital structure, we also have over $2.6 billion of unencumbered assets, comprised primarily of first mortgage loans. So when one of our loans pays off, there is a reasonably high probability that the payoff will result in a further increase to our already ample unrestricted cash holdings. We plan to methodically lower our leverage over time with a balanced approach towards making new investments in a highly selective manner. Our AAA short duration securities portfolio got a lot of attention in March, but we expect near-term payoffs and sales from this inventory of assets to provide liquidity over the next few quarters, further reducing debt. I would note that our inventory of securities has decreased by $248 million in April, And if defaults increase in the mortgage pools supporting these securities, it is likely that the impact of accelerating defaults will cause safeguards known as senior over-collateralization tests to be triggered, redirecting additional cash flows to protect these AAA securities, paying them off sooner than we originally anticipated. We believe that the return of principal tied to these AAA securities is a near certainty as these already short securities season over time. Most of the AAA securities we own have approximately 50% subordination in the debt structure alone, with the equity from the individual borrowers on the mortgage loans providing an extra buffer against potential losses, usually by another 30%. As we look towards the future, none of us knows what to expect as the economy tries to reopen and hopefully gradually move past this global health crisis. And while we at Ladder might have been more pessimistic than most going into this crisis, I suspect we're more cautiously optimistic than most about the prospects of our economy in the years ahead. There certainly has been a lot of damage to the economy, but we're somewhat encouraged by the sheer size of the various government packages that have been implemented. The amount of stimulus put into the economy is huge, and it seems like more stimulus may be on the way if needed. We think this economic support and a whatever-it-takes mindset will prevail over time and restore our economy to strength and stability. While one has to assume that there may be many permanent changes as a result of the nation staying home for a couple of months, we think some of these changes might be very helpful for some property types in commercial real estate. As citizens return to the streets, the population at large has gotten much more used to using Zoom for group discussions, streaming entertainment, ordering things online, and because of scarcity in some essentials, we will see an accelerated march towards e-commerce, with supply chains being brought back to the United States, resulting in more demand for manufacturing and warehouse facilities. This won't bode well for shopping malls and movie theaters, but we also learned that the neighborhood grocery stores, convenience stores, and restaurants may be far more integral in our lives than we might have thought in recent years. When the new normal begins to unfold, we'll be in a world with much lower interest rates and much lower gasoline prices and some reluctance on the part of the population to get on cruise ships, mass transit, airlines, and travel outside of the U.S. So drive-to hotels might be able to tap into this vacation behavior and recover more quickly than many think. Business-oriented hotels may see less demand. as will medical offices, as workers and patients have now adopted alternative methods of conducting group meetings and visiting doctors. A couple of years ago, Ladder migrated our preferences for lending towards multifamily industrial and office assets and away from hotels, big box retail, and malls. Partly as a result of these changes, we were able to sell mortgage loans secured by multifamily properties in strong locations in the middle of the market volatility in March. This change made long ago provided us with the ability to turn mortgages into cash quickly when we wanted to. While these are truly challenging times, we hope we have conveyed a sense of optimism today. We have taken many of the right steps to allow us to navigate through what is to come over the next couple of years. I'm enthusiastic about the potential of our new relationship with Koch Industries. They're smart. and they recognize the inherent strength of our platform and our space, and like us, expect this to become a very target-rich investment environment in the foreseeable future. I sometimes point out to our people that the U.S. is a very resilient population, and we will get through this. While we have never seen a global pandemic and a near-complete shutdown of the entire economy, we do know what the cause of the downturn was, and we have some idea that it will end at some point in the near term, hopefully as a result of efforts from our gifted scientists and doctors. We're all thankful that our biggest fears about this virus, its infection, hospitalization, and mortality rates, fortunately, have been mitigated. While the unknown is always very scary, the worst of the health crisis is hopefully behind us, and we're cautiously optimistic that the fears we have about economic collapse are also probably overstated. Let's hope so. Thank you for listening today. Stay safe, and now we'll take some questions, and I'll turn the call back to the operator.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Also, in order to accommodate as many questions as possible, we do ask that you please limit yourself to one question and one follow-up before rejoining the queue. Once again, that is star 1 if you'd like to ask a question. We'll take our first question from Steve Delaney with JMP Securities. Please go ahead.

Good evening, everyone. First, I'd like to say I hope you and your families are all well, and congratulations on your defensive efforts. Brian, other than cash, which you've done a good job with, other than cash, if you had to put money to work near term, meaning 30 days or so, what do you see as the best opportunity in the market near term, next couple months?

Single asset securities. That's like AA, single A, and triple D bonds. Yes.

AA, single A, and triple D. And that's because you're essentially the buyer is underwriting a loan and you have less downgrade risk in a single asset deal. Is that correct?

You know, we don't know what's going to happen. I think what you're really seeing, though, is the triple D's got really low, like down to the 60s at one point. And if you go into a depression, that might very well be the right price. Right now, those triple Bs are probably in the low 80s. They've rallied 30% in just a matter of weeks. And I would say a triple A on the exact same hotel, if it happens to be close to the Hotel Coronado, Maui, Four Seasons, they're $0.92 on a dollar. So if the triple Bs are – if the hotel opens – in the hands of a strong owner, somebody like Blackstone or a strong player, it's very unlikely that they're worth nothing. So the BBB, maybe those will probably be more volatile than others, but these assets are pretty liquid, I think, and I think they got overcooked to the downside pretty hard.

Thank you for that. And my follow-up is quick. The new deal in the market this week in CNBS, the GS&S deal, How do you think it's going generally? I know you don't like to comment on other people's deals, but how is it going in the sense of reopening new issue? How important is the Fed putting seasoned AAAs in TALF, possibly benefiting the new issue market just from a competitive standpoint? Thanks.

I think the TALF has done very little at this point by taking AAA CMDFs. I am, frankly, a little surprised that they've decided to effectively orphan the commercial real estate business. I'm not at all sure why they did that. But I think AAA 10-year securities before TALF were trading at 190 over swaps, and when TALF announced that they would take them, they went in two points to 160 over. The current deal in the market is probably the dawning of what is to come. I mean, a lot of these are Pretty safe assets. They removed a lot of hotels and retail from these deals. It is also a small offering, but it is an unmitigated blowout. And I think they were 26 times done this morning on those bond classes, and they're tightening them. So I suspect, and I can say this because I'm not part of that deal, but I think they're going to get done at around 140, 145 on the 10-year deadline. But I don't think it portends too much at all for the future because all it is is the AAA portion of it. So I think when you make a loan, you have to anticipate selling the whole thing. And while the TALP is very helpful on the AAA portion of it, it's not at all helpful on any other part of it.

Thanks so much for the comments.

Sure. Thank you. And I'll take our next question from Jade Ramani with KBW. Please go ahead.

Thank you very much. Glad to hear from you. Hope everyone's doing well and safe and in good health. Starting with securities, could you give what the current carrying value of securities is? It was $1.931 billion at $331 billion, and you noted the April sale of $200 million. So should we subtract the $200 million from the $1.9 billion or make some other adjustments with respect to mark-to-market?

Yeah, that's about right, Jay. You're talking about a $1.7 billion portfolio size right now.

Okay. And is there approximately five times leverage against that? And can you just convey your sense of confidence in ability to manage that leverage?

I'll let Mark answer the question on the leverage, but it's very comfortable that we can manage that leverage. I think a mistake that got made is we've always said we use more leverage on AAA securities and we use very little leverage everywhere else in the company. That seemed to be overlooked for a little while there. So we did receive some market calls that were frankly a little bit larger than I would have expected. However, we had no problem with them. And I think another item that seemed to be overlooked completely is that we had just received $750 million dollars from a bond offering that we did on an unsecured basis that settled at the last day of January, like six weeks before this problem began. So when I was asked a few times by people as to, you know, are you having trouble meeting margin calls, my question was, what do you think we did with the money in six weeks? So I think that we were rather prescient in getting ahead of a potential problem. As, Jade, you know that I've been somewhat concerned for several quarters now about complacency, never saw this coming. But the volatility involved in a two-year AAA bond is just not the same thing as a 30-year mortgage. And so we were being looped into a discussion with organizations that use only repo financing that were longer in dated or non-investment grade or non-AAA securities and unable to meet margin calls. And frankly, I've been dying to get on this call because I could not believe that anybody thought we were having a problem.

Okay. Okay. So if, you know, just going over lessons learned, let's say cities start to open up, states start to open up and there's a resurgence in coronavirus, we could you know, hypothetically go through a repeat of what happened in March and early April. Do you stress test for that to make sure the same thing doesn't repeat itself?

Absolutely right. Yes, you do. And, you know, were we comfortable with what was going on in March at the end of a quarter? No. But I used to use as a third standard deviation 2008, 2009. I now use March of 2020 because it was far more volatile than I had ever seen in my career. On the other hand, I would like to point out that if we were to return to that period of time, we're now five times more cash in our hands than we were when it happened, and we didn't have a problem when it happened. So I think the lesson is, yes, more cash if you're going to carry such a big portfolio of securities. Even though we believe they're safe, short, and not terribly price volatile, that doesn't mean the rest of the world believes it. And in addition to that, because we had just done an offering of $750 million, we felt pretty ready for any kind of a downturn that was taking place. And if it were to happen again, first of all, we have a smaller portfolio. It is marked differently. It's just down, again, by four points at this point. And these bonds, as Mark said, they're only 28 months in average maturity. So in three months from now or four months from now, they'll be even shorter than that. These assets also should perform better if there are more defaults. And a lot of people don't fully understand that. And, you know, in addition to that, we have real first mortgages, unencumbered loans, We have $1.25 billion of them and $830 million in cash. And while we did sell some apartment loans, and by the way, there was some reference that we had sold some non-performing loans. We did not sell any non-performing loans. We sold some apartment loans, and people were not able to visit the property, get on an airplane, or go to a lawyer's office. And we had loans maturing in early March. I'm sorry, in early April. And they were very low coupon. Some of our largest loans were maturing, and we got a little concerned that perhaps this problem and volatility was going to prevent them from paying off. So we sold some loans to get cash ready in case they didn't pay off, and they all paid off. So we sold some securities, we sold some loans, and we got payoffs on assets. And ultimately, we were in an incredibly heavy cash position throughout most of the month. But yes, we will, lesson learned, we will absolutely carry more cash with a securities portfolio of that size, rather than wanting to go out and get it. We will have it on hand.

Okay. Two more just quick ones, and I apologize for asking this many questions, but I think investors really need information. Do you have an estimate of the current undepreciated book value per share? Should we just take the 1401 that you provided and subtract the, I believe you said that there is a loss of $16 million or so, which is $16.7 million, which is $0.14 a share, be about $13.87 for a gas at what current book value is?

That's a fair estimate. I would say this, that we have seen the securities market improve somewhat. So some of that mark that we took at the end of the quarter could come back. But I think that if you want to start at that point, you're not going to be that far off.

Okay. And then just finally, can you comment on the FHLB? You noted further reduction in the amount outstanding. Are you comfortable with the current balance and the – the likelihood of sunset and amortization of that balance down, or will you be looking to further reduce that?

Hey, Jay, this is Pamela. I think, as you know, our membership was subject to a February 2021 sunset date. So over the past few years, we gradually reduced our borrowings to a peak of $1 billion at $331 billion. Since then, in anticipation of the pending sunset, we further reduced our borrowings to $487 million in connection with our efforts to replace recourse marked market debt with non-recourse debt that doesn't contain any marked market provision.

Okay. And was the FHLB a significant source of margin calls during the quarter?

No, not really. I mean, they have more of an over-collateralization concept that sort of protected us from that.

Okay. Thanks for taking the questions, and nice speaking with you.

Thank you. Thank you. I'll take our next question from Rick Shane with J.P. Morgan.

Hey, guys. Thanks for taking my question. Can you hear me? Yes. Excellent. Hey, seems like a lot more than eight weeks ago that we all spoke. I hope everybody's doing well. Look, when we think about this, I think we see it in three stages. There's the liquidity stage that we're just emerging from.

There's going to be a transition phase where I think in all likelihood outcomes are going to be determined by sponsor behavior. And then ultimately there's the underlying performance of the properties.

Given the breadth of your portfolio, the attractiveness is that it's highly granular, but that also means that you're in discussions with an enormous number of sponsors. What sort of feedback are you getting and where are your concerns?

Well, it's a little early because it is early in May still. The April collections were... Phenomenal. Shockingly good. And I think we had one loan that missed the payment and then the rest of them were fine. I would expect naturally to be in conversations more than others with hotel operators as well as mall. We don't own any mall loans, but mall will have problems completely here. You're going to see some big names probably filing. Also, just general retail because they don't have the reserves. The neighborhood retail store, nail salon, pizza place, they may have to get into a forbearance conversation. We have had some. Frankly, not as many as I would have thought. I don't know if that's because they're trying to avoid the conversation or if they're just going to meet the payment. interest rates are reasonably low. Our bridge loan portfolio, which is really where I look when I think about the question you just asked me, we have a floor in that book of 6.2%. So that's close to 600 over LIBOR right now. And I do believe there are scenarios, especially where a lot of our cash flows, a lot of our loans are a little more seasoned because we began to get a little concerned a couple, maybe about 18 months ago. So we keep things short, we keep things with high floors, and a lot of our transitional assets are already transitioned at this point. So the question will be really the tenants that they put in, how are those performing, and are they able to refinance us out? So I will tell you, I look, my fears, the conversations should mostly take place in hotels and retail, but I think you could get into several conversations. We also have had some crazy conversations with very, very wealthy people and well-heeled organizations that have plenty of capital that have indicated they might not want to make a payment, however they did. So we're dealing with a little bit of that, too. But I look at the three stages the way you do also. You know, liquidity was first of all. That was March. I think that was the first quarter event. I don't think you're going to see that again. I know Jay just asked what if we're back here because infection rates spiked. I think everybody got a chance to deal with what March looked like, and they're a lot more ready for that possibility right now, and I think that a lot of forced selling took place, and I don't think too many people will become forced sellers at this point. And then, yes, you get into the who knows what's going to happen next, and I don't think anybody knows that. We've never dealt with this before. I'm a little more optimistic about I see energy prices down. I see interest rates live or at 25 basis points. I don't see a lot of real estate changing hands at that point. There's plenty of ways to restructure and add reserves. You can carry real estate with interest rates so low. So that's the second phase. And then I think the third phase will be the opportunity phase. I don't think you want to charge out there and start buying real estate right now because you don't really know what's coming. But to the extent that the relationships between owners and lenders breaks down, there might be some great opportunities. I would say the short-term opportunities are on the screen in the bond world because things just get sold and they don't always make some sense. I think that in time, you'll actually have an opportunity really to seize on some real estate purchases. And I think I like that better than being a lender right now because lending, I think, is going to be a little broken for a little while. It's very hard to finance things. And as we said, the government has decided AAA CMBS, and that's it so far. So I think that will cause a lot of debt to be – restructured and also a lot of opportunities to come out of it. And we've seen downturns and recoveries. This could be a quick recovery. I think if the word vaccine shows up in anybody's vocabulary here in the next year, we might be, I don't think we'll go back to where we were, but I do think that we could do a little bit better than most think. Pamela, because we're dealing with TV screens here, I've never done this before, Pamela wanted to add something. So I'm gonna say, go ahead.

All I was really going to add is just when you look at ladder, I think that was one of the points we tried to make in the script, 46% of our assets are in balance sheet loans. So, you know, as opposed to some of our peers who have 100%, we have this diversified business model. and we believe the securities are overlooked in terms of the credit enhancement there relative to any loan book at the AAA level. And the last thing I would just say is, like everyone else, we are doing hand-to-hand combat on loans, but we are limiting the conversations. You're talking about deferrals of interest, and there's a lot of reserves in place to accommodate that. So nothing today, I think it's just the question for everybody is how long does this go on?

Got it. And thanks, Pamela. And I'm curious, the comment was made that some well-heeled borrowers sort of, you know, agitated a little bit. Do you think that that's brinksmanship, or do you think that's an indication that they're seeing rationale for strategic default?

I think it's brinksmanship.

I think it's brinksmanship.

And some result of that was 99% of our books bought for one loan paid last quarter. So that's all talk.

Got it. Okay. Hey, guys, thank you very much. Nice to hear everybody's voice.

Okay.

You too.

We'll take our next question from Tim Hayes with B Riley FBR.

Hey, good evening, guys. Thanks for taking my questions and hope you're all doing well. My first one, And, Brian, I know you mentioned that 99% of borrowers were current in April, but just curious how many borrowers in the loan portfolio or tenants in the real estate portfolio have initiated conversations or outright requested forbearance at this point, and what actions, if any, have you taken to grant some relief?

I'll defer that. Rob Perlman, who's on the phone, he runs asset management. Do you have that information, Rob? I don't have it.

I would say about 20% have made requests across the linebook, but we're dealing with those, as Pamela said, on a one-off situation.

Okay. And maybe if you could touch from a high level of kind of the types of things that you're considering doing in order to work with some of these borrowers or tenants and and provide some relief, whether it's, you know, reducing kind of structure on the loans or periods of interest or principal deferment, deferral rather, anything like that.

So we're talking about doing what everyone else is doing. Right now we are only in the discussion about a potential deferral of interest and the use of reserves, nothing further at this point.

Okay. I would point out, Sam, also that, you know, We have a couple of loans scheduled for maturity this month, and so far they look like they're paying off. We've been asked for payoff statements. We'll see. But so far, so good on that count.

That's a good update. Thanks, Brian. And then how many tenants in the real estate portfolio are eligible for either PPP or some other government program and And how significant of an impact would you say that stimulus has on the credit outlook for those companies, or for those tenants, rather? Excuse me.

We don't have a great sense today. We know a number of borrowers were trying to apply for it. I think we'll have a little more color into that after our next payment date in May 6th.

Okay. Okay. Got it. And then, you know, Brian, I know you touched on kind of what is top of mind in terms of capital deployment, if you had an extra dollar to spend, but from a high level, can you, and I know there's a lot of uncertainty in the market ahead, but can you just touch on your different segments and comment on which ones you expect will be net users and net providers of capital over the course of the year?

It's a tricky question. It's not because I don't know the answer. I don't know that I want to divulge everything that we're thinking here. I cannot stop seeing opportunities. It's one of the reasons I'm very happy to be somewhat aligned with the Koch Industries people, and I think that some of these opportunities will be very big. I think there's a lot of money being raised, so I don't know if it's going to be as big as I might think if all that money does get raised. but I think it's time to get a little untraditional in how you go about doing things. I think the conduit business might come back and might be okay, but if you're going to sell AAA 10-year securities at a 2%, 2.25% yield, it's kind of hard to make a lot of money in that business. I suspect you might be a better borrower in that business if you wanted to make a lot of money So I would lean us towards real estate, especially any kind of real estate that's having a debt problem. And that might show up in the form of, you know, somewhat just providing a mezzanine on a pay down and taking an equity interest in things like a kicker. So a lot of structured finance, I think, is a good possibility. On the screen, the securities, and I would be out of my mind to not tell you that I think some of our bonds are ridiculously cheap. so I don't think I'm letting the cat out of the bag there, but Ladder has taken great steps to make sure that we have a lot of unencumbered assets if a situation like this were to occur. We've got funds maturing over the next seven years, and I can't figure out how to make a loan that makes more money than if we were to retire some of that debt at some of the prices I've seen them at.

Got it. Yeah, that's That's helpful. Thanks, Brian. And then one last question from me. If you could just provide maybe a little bit more detail on the terms of the Koch facility, advance rates or spread, assuming it's a floating rate facility. And then, I'm sorry if I missed this, but is there a negotiated price that Koch's entitled to when acquiring a 3% stake, or is that at market? Pamela, I'm going to, if you don't mind.

Yeah. I can give you – so the COAP facility, and Mark can give you sort of – we have a weighted average blend across the funds, across our initiatives over the last few months. But I can just tell you for the COAP facility in particular, it is – you know, it's matched funding, non-recourse, and has a lot of flexibility to modify loans. We really – took the line, as Brian said, in many ways as insurance, and I think we negotiated it early on in the crisis as a way of getting flexibility to deal with the loans in the best manner we think we can to protect shareholder value. So there's a lot of flexibility in terms of making modifications in the best interest of the loans. And that was the intent of the line.

Okay. I think that Oh, go ahead. Sorry. I was just going to say, elaborate and say that really, when you look at us, uh, and the financing we've done over the course of the past three months, uh, between the bonds, the COO and the Coke deal, you know, you're talking about $1.27 billion of financing that we arranged. Um, the weighted average cost of that is about five, a little more than five and a half percent. And, um, You know, in that we're talking about long-term funding, $750 million of it's unsecured. The secured parts that are the CLO and the Coke deal, as Pamela said, non-mark-to-market, you know, non-recourse flexibility to deal with borrowers. So I think we've really strengthened ourselves in a lot of ways there.

I would agree with that. And thanks for the tidbit on cost there, Mark.

Thank you. We'll now take our next question from Stephen Wallace with Raymond James. Hi, good afternoon.

Brian, I guess I wanted to follow up on a couple of your previous comments, but clearly balance sheet strength and leverage is down. Securities have continued to decline a little bit, I think $1.7 billion. Mark mentioned, I think, to Jade's question earlier. Where do you, you know, in the loan portfolio too, you've executed some sales. Do you view the portfolio today with the information we have in the deck as kind of where you want to see it? Should we expect it to continue shrinking in the coming weeks before it stabilizes? Or do you really see that going the other way where, you know, some things are starting to look attractive, whether it's repurchasing your debt, as you mentioned, or some other options? Kind of how do we think about that? I know everything can change tomorrow morning. I realize that. But as you sit tonight, how do you think about the portfolio size and where we move from here? Yeah, I think it was always designed to be a source of liquidity, to tell you the truth. It may not have worked out that way completely, especially in March. However, you know, we did keep it short. It's not hedged. And it doesn't require a lot of attention. I think on the money side of it, it is money good. I can't fathom a scenario where we don't get return of principal. It's probably the one thing that we do own that I can say that about, that I have no doubts about the return of principal. I think over the next couple of months, and I could be wrong here. This is kind of speculating on my part. But I don't think people fully understand these over-collateralization tests that take place. And I think these portfolios are put together, and CLOs, they're kind of used as financing, even though they are true sales. So if you take a look at the issuers of some of these transactions, a lot of them are our peers, by the way. So we own the AAA portion of a lot of the loans that they've originated. But when a loan goes bad in those portfolios, typically it gets pulled out and another one gets put in if it's a managed CLO. But if 30% of the loans go bad at one time, I think you're going to have – to have a lot of conviction to start writing hundreds of millions of dollars of new loans and removing non-performing loans at par from the portfolio. So I think these triggers, if you will, which forces the cash flow that goes to the sponsor presently, which is actually quite a bit of money because a lot of these loans have floors, but the bonds, you know, they have a floor of zero on live work. So there's another test called the coverage test, and those are designed to have 120% of coverage of the investment grade bonds rate. Most of these CLOs have 300% coverage, and that's because LIBOR has fallen so rapidly and so low. So if you do have – the over-collateralization test is a very thin margin in most transactions, And, you know, we look at one where there's a $41 million loan in default, and if that loan goes 60 days delinquent, the trigger kicks in, just one loan. And so I think it won't happen right away. I think May you may start to see 30-day delinquencies in some of these schools, and in June you'll start seeing some 60s, and maybe you'll see some repair work done to try to stay in the game. But if we do open the doors of the economy and it doesn't go well, I think that the defaults will be overwhelming to the point where they won't be able to replace them or restructure them, and that will send a hell of a lot of cash flow right to the AAA, and that will hyper-amortize the balances. So we're kind of in a wait-and-see mode here. We do sell periodically. It's not a functioning market. It's not working great. But with 28 months on average life, If we had to, we would hang and just hang onto it. On the other hand, I would love to get my hands on capital and do something else with it right now. But I still think it is a bit of a wait-and-see model where we have to take a look and see what happens when everyone goes outside. And so it sure looks like things are cheap, but that doesn't mean they are. And there's been a lot of payroll protection plans, but if the people in the restaurant are getting a paycheck and the restaurant gets evicted, I think that there's another shoe there. So we like the way our portfolio is composed. I don't particularly like having that much of a position not earning a lot of carry in this target-rich environment. So I'm not overly happy with my own performance in putting those on the balance sheet, but I am certainly not worried about them from the standpoint of this becoming problematic to us. Great. And that leads to our next question, Mark, which I wanted to touch base. You know, page S8 provides the book value roll forward. You know, Given the unrealized nature of a lot of the securities portfolio markdown, how much of that, I guess here it's lumped in, includes with other comprehensive income, but how much of the book value mark should we view as unrealized that is potentially reversible or recoverable as we move forward?

Yeah, so we ended up at the end of the quarter taking a $78.2 million reduction in the value of that securities portfolio. We have realized, I think, $6 or $7 million of those losses in the security sales that took place in that $16.7 million, so we're not going to recover that portion. The rest of it, if we see a return to the types of valuations we saw pre-crisis, which were like clockwork around PARP, then the rest of it could be recovered. And, of course, these are short-duration securities, so they will amortize rather rapidly. And as they amortize, we're going to be recovering that at par as well. So we're pretty optimistic. We've got to wait and see what the market does. In terms of the rest of the book value, obviously part of it is CECL. And baked into it was the initial CECL reserve that we added on Gen 1, which is the $5.8 million. You'll see that on the chart. That's just that small piece. But then don't forget, we also had the portion of another $18.5 million or so that ran through the P&L that also had that impact. So there's a lot of non-cash impacts on our equity in the first quarter.

Yeah, I appreciate the clarity on that. And lastly, Pamela, just one quick question.

I wanted to follow up on the FHLB, but I think there's $60 million of assets related to your membership there. When that facility matures, do you intend to remain a member of the FHLB network? Do you sell that membership position? How does it work around your FHLB stock on the balance sheet?

The answer is we don't have the option to do either. The membership's sunset. So like every five-year captive member, it will terminate.

But we get it. You were talking about the stock. Oh, I'm sorry, the stock?

Yeah, we get the full return of the stock. Yeah. We get that back in stages as it pays down, but by the end of the facility when we pay it off, we will get back all of it.

Okay. In cash. Appreciate it. Thank you. And we'll take our final question from Mark Streeter with JP Morgan.

Okay, the bond guy gets to go last, but I agree with you, Brian, that the bonds are cheap here. You mentioned the orphaning of the commercial mortgage market, so maybe the Fed or the Treasury are listening. What would you like to see, Brian? Is it an expansion of health, a PPIP, some sort of public-private investment partnership? What should the government do to help?

Well, I think the governor has actually done a pretty good job overall. I'm not at all sure why there's been such a radical departure from commercial real estate from the last go-around of South, because it almost feels willful and on purpose that they would leave it out. What they should do, I think, is what they have done to really stabilize areas elsewhere, like corporate bumps, and I think that they should take investment grades CMBS and CLOs, whether they're managed or not, because there is a financing problem in these sectors, and you will not get lending started in the United States unless that financing situation corrects itself. I think you would have to be out of your mind to write a bridge loan right now unless you had a rate of 12% and didn't plan on leveraging it at all. And what we've tried to get the market to understand is this is the business that, due to regulation, banks don't really support because if you want to take a Class C multifamily project in Houston with 400 units and you want to upgrade all of the housing with new air conditioning and new floors and new appliances, this is done through the bridge loan market. And in 2008, there was a big cry for more private investment, and at this point, it's If the commercial real estate sector is left on its own, there is going to be a downturn of significant proportion that will ultimately wash into some of the banks because the refinance market for a lot of these assets is simply not there. Now, with LIBOR at a low rate, that's fine. You can carry these things for a little while, but as I said, they keep trying to figure out how to keep employees paid, but if the employer doesn't open I don't think it's very helpful that you've gotten checks to the bartenders, waitresses, and counter people. So I think I don't understand why they're taking junk bonds, ETFs, and BBBs of unsecured bonds in the corporate world and not taking AA's and AA's in the secured world of real estate. I also think that there is a tremendous lack of understanding that they don't believe or don't understand that CLOs are mortgages, commercial real estate, CLOs, and mortgages. They think that they're levered loans that don't have anything backing them. And I think the other misunderstanding is that if they were to make eligible single asset securities, that they're somehow helping wealthy people. And the only help that wealthy people get is one that's triple Bs traded 30 cents on a dollar, and the billionaire that owns the building buys those bonds, and the pension fund in the 401k gets drilled. and the REIT. So I think that is a misunderstood, and I don't know if it's deliberate or not, but it has been an orphaned class. Their efforts to help, the first attempt they made was to make CLO AAAs and CMBS AAAs eligible in the primary dealer credit facility, which was not helpful at all because the only one that could borrow under it was a New York Fed bank, and they weren't interested in upsizing their positions at all. And so then they moved the house expansion to take AAA CMBS, but that was it. So I think that they should expand it. If they don't, we're going to have very high-cost mortgage debt in the commercial real estate space.

Okay, great. Thank you. And just want to shift gears and talk about, so the Call it $2.7 billion of unencumbered assets. A little less than half are the first mortgage loans. And when we drill down into that, just looking at page S7 of the slide deck, it is a little bit more skewed towards hotel, retail, and mixed use. You add all those up, it's about 61%. So how can the bondholders get comfortable with... the quality of those loans and sort of the risk in that unencumbered pool being skewed towards those property types. Anything you can give us about loan-to-value or loan performance specifically there?

Yeah, I think, well, first of all, they're first mortgages. So I've learned over the years in my new role as a corporate fund borrower that but a lot of times the unencumbered asset test is called a rock pile. And ours is not a rock pile. These are first mortgages, and they are skewed a little bit more towards things that we didn't want to get in a lot of conversations with finance people about, and we always want our finance lenders to be comfortable. But I would say that by virtue of the fact that we have so much cash, And in addition to so many first mortgages, as opposed to the tail end of something pledged to somebody else or a mezzanine loan or a land loan, you know, I think that we are an upgrade to what many people carry in that area.

I would just add to that. The only thing I would add to that is, you know, I think that I'll say this. Why not? Everyone else is. There's a lot of a look at unencumbered assets, and when you look at laddered unencumbered assets, we are unequivocally and unapologetically superior to all other unencumbered asset bases in the space. We are primarily first mortgages. We have over $500, $600 million of office and mixed use mixed into that, $146 million of multifamily mortgages. It is, there is of a billion and a quarter, there's only like $400 million of retail and hotel. So I would say we feel really well positioned. And when people talk about liquidity there, I want to put my hair out because, you know, retained equity interest in CMBS and CLO transactions is not liquidity. These are first mortgages and cash primarily.

Mark, I would also point out, Mark, that When a loan pays off at ladder, and we've seen several in the teeth of this problem, 50-50 chance it's in that group of loans that is performing quite well. I know that the two loans I was talking about earlier that look like they're going to pay off this month, neither one of them are encumbered assets. While I certainly understand the the suspicion to, oh, you know, you might be hiding your problems over here. I will put that portfolio up against anyone else's unencumbered asset portfolio.

Right. Just to keep them on one last thing, if I may just add one point, the LTV on these are between, you know, 67 and 70%. So you have a big equity cushion and a lot of room. So the way I would think about them, you know, is to think about the modest advance rate against them alone would produce a nice sizable portion of proceeds?

Mark, we've always had a very, very high quality unencumbered asset portfolio. And actually, if you look at that same page that you're looking at, which is, I think, S7 of the supplement, you'll see another statistic that's cited there, 1.72 times. And what that statistic is, is it basically goes and figures out what that ratio would be if you deducted the cash from the unencumbered asset pool and you deducted the cash from the requirements that you have to meet. And when you do that, you come up with that 1.72 ratio, meaning that the remainder that you have to meet is met by 1.72 times. So we looked at that ratio for this quarter, and we looked and calculated it back since the first time we were using this calculation. That ratio is within 0.11 of the best ratio we've ever had, and we've always had a very, very strong unencumbered asset pool. So it's a very high-quality pool when you look at it and say, I've got first mortgage loan, and I've got a big amount of cash.

And you're not requiring, you know, because it's not loaded with mezzanine and B pieces and tail interest, you know, on term loan Bs, then as a result of that, if something goes wrong, we don't have to go take out that first mortgage to go perfect our interest. It's just a straight discussion, and it might be a restructure or a foreclosure, but it isn't us writing big checks to take collateral.

Okay, great. Thank you. Let me just sneak in one last one. I know everyone wants to go home, but just, you know, back when cash was lower, the unencumbered asset coverage was getting close to that 1.2 times covenant threshold. Then you obviously improve some cash, move things around and so forth. So when we just look at sort of the excess cash that you have right now and this excess coverage of the unencumbered pool here, how do we think about, Brian, going back to, you know, trying to play offense versus maintaining some of this cash for defense in case, you know, something happens and obviously you don't want to be running the company at 1.2 times coverage on this unencumbered pool. So how do we think about the capital you have today? How much offense can you play and how much do you need to reserve, if you will, as cushion?

I think we want to, you know, rule of thumb that I generally walk around with is we want to carry about 25% of our, anything that's callable in cash because anything can happen. So we have way more than that. However, I would also tell you that I think there are scenarios here that exist in the current market, not necessarily having to do with ladder capital, but just having to do with double B space right now, given what's going on in the petroleum sector with oil. Who knows what it's doing today? But there are scenarios where you could buy back some of the corporate debt and create a very large gain on sale and at the same time lower your debt. So that's certainly something we'd have to look at. In addition to that, we can easily, if we want to convert some of these securities, I would say if we had to sell these securities today, we would take a small loss associated with it. But given that we don't think that's necessary, we haven't done it. But I'm hard-pressed to figure out that we should be writing a lot of loans right now because of the complete lack of financeability other than AAA, CMBS. I wouldn't say complete lack, but it's not very comfortable. You can't get a lot of banks in that business at this point. They may return to it, but some of them have gotten a little bit squishy around it. I think the better thing to do is to borrow money with interest rates really low. Banks probably pretty conservatively lending into the space. I think that's the way we borrow anyway. That's not uncomfortable for us. I think that we will try to get into the offensive game through the real estate door, possibly in helping people that have debt problems, and we can take kickers or mezzanine. But that would be the offensive nature that I would see. And in addition to that, because we have such a short book of bridge loans, and we hardly have any conduit loans. We have about $100 million of those. What's going to happen over the next couple of years, we think, let's not go to an Armageddon scenario, but let's say things improve somewhat. We do come out of this with interest rates very low, and our bridge portfolio is mostly through its transition. We have not been aggressively writing bridge loans. We don't have construction loans, so we don't have a whole lot of future advances going out the door. CashSense tends to stay pretty stable here. And what will happen because, you know, half of our – of so many unencumbered assets, as loans pay off and as securities pay off or get sold, this creates more liquidity, and that is where we'll find the offensive power. So with $830 million, that's probably excessive, and we can certainly start waiting in to do some things. But I think that we'll always carry a little bit more cash than we were carrying in March. But given the short nature and the high floors in our bridge portfolio and the liquid nature and short term of our securities portfolio, we should be taking in a lot of cash over the next couple of years. And I think that will provide us plenty of opt-in for new investments.

Okay, great. Thanks for taking my questions. I appreciate it.

Yep.

Thank you. That concludes our Q&A session. I will now return the call to Mr. Brian Harris, the company's chief executive officer.

With that, I know this was a longer call, but I think that was the longest quarter I've ever went through, too. So thank you for being on with us today, and I will apologize that we could not convey a lot of information to you at a time when I really wanted to. But I would like you to understand that we didn't lose our minds. We are conservative by nature. And the one fact that I think was left out was everybody forgot we raised $750 million on January 30th. So keep that in mind. And when you see some of the press articles that come out that sometimes we just can't figure out where they come from, maybe just go back to the basics and how we go about running this company. Okay. All right, so thank you. I look forward to talking to you all again. Stay safe, and hopefully we'll be allowed outside soon.

Thank you, and that does conclude today's conference. Thank you all for your participation. You may now disconnect.