Ladder Capital Corp

Greetings and welcome to the Ladder Capital Corp second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Michelle Wallach, Chief Compliance Officer, Senior Regulatory Counsel for Ladder Capital Corp. Thank you. You may begin.

Thank you and good afternoon, everyone. Before we begin Ladder Capital Corp's earnings call for the second quarter 2020, as the pandemic persists, we continue to wish that all of you listening tonight and your families are well and remain safe. Turning to our earnings call, with me this afternoon are Brian Harris, our company's chief executive officer, Pamela McCormack, our president, and Mark Fox, our chief financial officer. Brian, Pamela, and Mark will share their comments about the second quarter, what they're currently seeing in the third quarter, and we will then open up the call to questions. This afternoon, we released our financial results for the three and six months ended June 30th, 2020. The earnings release is available in the Investors' Relations section of the company's website, and our quarterly report on Form 10-Q will be filed with the SEC later this week. Before the call begins, I'd like to remind everyone that this call may include forward-looking statements. Actual results may differ materially from those expressed or implied on this call. and we do not undertake any duty to update these statements. I refer you to our most recent Form 10-K and Form 10-Q for a description of some of the risks that may affect our results. We'll also refer to certain non-GAAP measures on this call. Additional information, including a reconciliation of these non-GAAP measures to the most comparable GAAP measures, is available on our website. ir.lattercapitals.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. For the second quarter, Ladder produced core earnings of $12.8 million, or 12 cents per share. As Mark will elaborate on further, these amounts exclude a $16.9 million COVID-related adjustment. Our undepreciated book value per share increased by 16 cents from the prior quarter to $14.17 per share. Since the onset of COVID-19, our primary focus has been on strengthening our balance sheet by increasing liquidity and reducing leverage. Our access to the unsecured debt markets allowed us to finance a large portion of our capital base with long-term flexible capital and limit our use of the shorter-term secured funding most commonly used in our industry. During the second quarter, we reduced marked market debt by $1.1 billion, or 39%. On a net basis, we reduced our total debt outstanding by $727 million, while increasing our liquidity and unrestricted cash balance by $468 million. Liquidity is an asset we value, and we have a lot of it. While we will continue to be prudent and thoughtful about the current economic climate, We look forward to redeploying our substantial cash holdings. The strength and flexibility of our multi-cylinder business model will be evident as we commence redeployment. We have the ability to make commercial real estate investments throughout the capital stock and the right team, experience, and platform to provide the new loans and rescue capital we expect to be in high demand as a consequence of this crisis. We expect conduit lending on high-quality stabilized assets to return for us, which should add additional interest income and periodicization gains. In addition, any new balance sheet loans that originate should add to our recurring interest income on a nearly dollar-for-dollar basis since we're already flush with liquidity. Turning to our balance sheet, as a result of our recent efforts, we are pleased to further report that as of today, we have over $750 million of unrestricted cash, $2.6 billion, or 40% of our total assets are comprised of unencumbered assets, including cash and $1.26 billion of first mortgage loans. Over 75% of our capitalization is comprised of equity, non-recourse debt, and long-term unsecured debt with staggered maturities extending through 2027. And finally, total repo debt for both securities and loans accounts for just 25% of Ladder's total debt, with only $375 million of loan repo outstanding across our entire portfolio. Turning to our balance sheet loan portfolio, which currently accounts for just 44% of our assets, We have over 150 loans in the portfolio with an average loan size of $19 million, which provides significant credit enhancement through granularity and diversification across sponsors, property types, and geographic locations. Performance of the portfolio remains strong with a 98% collection rate in July. With a weighted average LTV of 68%, our borrowers continue to have significant equity invested, and we've been pleased with the strong level of commitment they have expressed in defending their assets. No specific loan loss provisions were required in the second quarter. Looking more closely at this portfolio, 76% of our balance sheet loans are lightly transitional, where the assets are close to stabilization and require minimal capital improvements. Our balance sheet loans have a weighted average seasoning of 18 months, with just a little over 15 months remaining to initial maturity and 27 months remaining to final maturity. Further reflective of the lightly transitional nature of our portfolio, We have less than $150 million of future funding obligations over the next 12 months and less than $250 million in total, all of which we can comfortably meet with current cash on hand. The majority of these future funding obligations are conditional and are subject to the achievement of predetermined good news events, like tenant improvements and leasing commissions due upon the signing of new leases that enhance the cash flow and value of the underlying collateral. We continue to have limited exposure to hotel and retail loans, which comprise only 14% and 8% of our balance sheet loan portfolio, respectively. Currently, almost half of our loan portfolio remains fully unencumbered, and our exposure to mark-to-market financing on hotel and retail loans is just 1% of our total debt outstanding. Turning next to our securities portfolio, as of June 30th, our securities portfolio stood at $1.5 billion, we reduced the portfolio by 22%, or $424 million in the quarter, and we paid down securities repo financing by $276 million. Since quarter end, we paid down an additional $80 million securities financing as we further delevered. As Brian will elaborate on later, we have seen liquidity, pricing, and financing for our securities portfolio all steadily improve, and we continue to expect our portfolio of almost exclusively short duration AAA-rated commercial mortgage-backed securities to pay off at par given their super senior position. Moving on to our real estate investments, this portfolio continues to be a strong source of recurring earnings for Ladder. Our $1 billion real estate portfolio is predominantly comprised of triple net lease properties with 12-year average remaining lease terms. We're pleased to report a 100% collection rate on our triple net lease portfolio in July and a 97% collection rate on the equity portfolio overall. Our triple net lease portfolio is almost entirely leased to necessity-based businesses, including dollar stores, grocery stores, drug stores, and wholesale clubs that have performed well over the long term, and particularly so during this COVID-19 crisis. We expect the net lease business to continue to be an important part of our strategy going forward. In conclusion, we look forward to benefiting from the competitive advantage we expect to have as a result of the substantial liquidity we've built up. We are using our in-house origination capabilities and national footprint to monitor the macro environment and investment opportunities on the ground in our space as we seek situations with compelling risk-reward dynamics. We remain cautious but optimistic. We are in this for the long term, and while our hearts are certainly with all of those who have been impacted by this pandemic, we're also excited about the substantial opportunities that will likely arise from the crisis for the company and for our shareholders, with whom we remain fully aligned. With that, I'll now turn the call over to Mark.