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Operator
Good afternoon and welcome to Ladder Capital Corp's earnings call for the second quarter of 2022. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended June 30, 2022. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to gap figures in our supplemental presentation, which is available in the Investor Relations section of our website. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.
Ladder
Thank you, and good evening, everyone. For the second quarter of 2022, Ladder generated distributable earnings of $43.7 million, or $0.34 per share. In June, following five successive quarters of earnings and portfolio growth, we increased our quarterly dividend by 10% to 22 cents per share. Rising rates continue to provide a strong tailwind to our earnings given our $4 billion predominantly floating rate loan portfolio and large component of long-term fixed rate unsecured bonds in our liability structure. As Paul will discuss in more detail, our earnings in the quarter were again supplemented by real estate sales, with our assets continuing to sell at a significant premium to undepreciated book value. In the second quarter, we originated $371 million of loans, including 17 balance sheet loans totaling $365 million. More than 40% of those loans were made to repeat ladder borrowers. 77% of our second quarter originations were either multifamily or manufactured housing, with our multifamily originations focused on newly constructed properties. Our balance sheet loan portfolio continues to be primarily comprised of lightly transitional middle market loans with a weighted average loan to value of 68%. Due to the significant loan payoffs we received and our recent focus on newly built multifamily assets, our hotel and retail concentration in the balance sheet loan portfolio ended the quarter at 5% and 6% respectively. Further, in July, we received an early repayment of our largest hotel loan of $57 million, reducing our hotel exposure to less than 4%. Our real estate portfolio continues to contribute meaningfully to distributable earnings by consistently producing double-digit returns on equity. The portfolio is primarily comprised of net lease properties with an investment grade tenants and is financed with long-term non-mark to market debt. Our securities portfolio ended the quarter with a balance of $617 million. On the asset and liability front, our balance sheet has never been stronger. The credit quality of our portfolio is very solid and 84% of our capital structure is comprised of equity, unsecured bonds, and non-recourse, non-mark-to-market debt. Approximately 50% of our assets are unencumbered, with 76% of those assets being comprised of cash and readily financeable senior secured first mortgage loans. Also in July, and despite volatile market conditions and tightening credit standards, We successfully extended, upsized, and reduced the cost of our evolving credit facility with our nine bank syndicate, which now stands at $324 million. With $2.9 billion of unencumbered assets, strong liquidity, a low 1.8 times adjusted leverage ratio, and 80% of our loan book now comprised of post-COVID originations, we are well positioned to continue to grow earnings by taking advantage of attractive opportunities in our space. In conclusion, Our multi-cylinder business model is working, and we are very pleased with our positioning from a credit, earnings, and dividend perspective as we head into the second half of the year with the wind at our back in a rising interest rate environment. With that, I'll turn the call over to Paul.
Paul
Thank you, Pamela. As discussed in the second quarter, Ladder generated distributable earnings of $43.7 million, or $0.34 per share. Our three segments continued to perform well during the second quarter. Our $4 billion balance sheet loan portfolio is primarily floating rate and diverse in terms of collateral and geography. During the second quarter, loan origination activity outpaced payoffs as we added a net $161 million in balance sheet loans. As Pamela discussed, approximately 80% of our balance sheet loan portfolio was originated in the last 15 months with floor set at the time of origination. Therefore, our interest income continues to rise from increases in rates. This benefit is complemented by our liability structure of which over 50% is fixed rate, including $1.6 billion of unsecured corporate bonds, with our nearest maturity in October of 2025. The second quarter also included a $3.1 million reversal of previously recognized provision upon the successful resolution of a non-accrual office loan in Delaware. Our $1 billion real estate portfolio also continues to perform well and includes 158 net lease properties, representing approximately two-thirds of the segment. Our net lease tenants are strong credits, primarily investment grade rated, that are committed to long-term leases with an average remaining lease term of 10 years. During the second quarter, we sold two properties, a multifamily property in Florida and a student housing property in Oklahoma, which produced a net gain of $15 million, and were sold at an aggregate 30% premium to undepreciated book value. Turning to our securities portfolio, as of June 30th, our $617 million portfolio was 85% AAA rated, 98% investment grade rated, with a weighted average duration of approximately one year. Moving to the right side of our balance sheet, our capital structure remains anchored by a conservative combination of unsecured corporate bonds, non-recourse CLOs, and mortgage debt, with the corporate credit rating one notch away from investment grade from two of the three rating agencies. As of June 30th, we had total liquidity of $483 million, and our adjusted leverage ratio stood at 1.8 times. As Pamela mentioned, in July we successfully extended, upsized, and reduced the cost of a revolving credit facility. The facility was extended for five years to July of 2027, upsized 22% from $266 million to $324 million. And furthermore, the interest rate was reduced to SOFR plus 250 basis points, with further reductions upon achievement of investment grade ratings. This upsize of our revolver adds an additional tool to our financial flexibility that complements our large pool of unencumbered assets. As of June 30th, our unencumbered asset pool stood at $2.9 billion, and 76% of the pool was comprised of first mortgage loans and cash. During the quarter, we repurchased $6 million of our unsecured corporate bonds at an average price of 88.6% of par. Also during the second quarter, we repurchased 400,000 shares of our common stock, at a weighted average price of $10.11. And in July, our board of directors increased the authorization level for our share buyback program to $50 million. Our underappreciated book value per share was $13.57, a quarter end, while GAAP book value per share was $11.84, based on 126.8 million shares outstanding from June 30th. Finally, as Pamela discussed, in the second quarter, we declared a $0.22 per share dividend, representing an increase of 10%, which was paid on July 15th. For more details on our second quarter operating results, please refer to our earnings supplement, which is available on our website, as well as our 10Q, which we expect to file tomorrow. With that, I will now turn the call over to Brian.
Pamela
Thank you, Paul. The second quarter was a continuation of what we've seen over the last five quarters. We produced strong earnings from different parts of our multi-cylinder business model and benefited from our carefully constructed capital structure after correctly forecasting the Federal Reserve's hawkish stance to battle soaring inflation. In our last call, we indicated that we felt the Fed would have little choice but to raise rates into a slowing economy and that latter would benefit from aggressive rate hikes. So far this year, the Fed has increased the federal funds rate by 225 basis points and is likely to continue to hike rates through year end. Because our earnings are positively correlated to rising short term rates, we're experiencing a tailwind in our distributable earnings. I'd like to point out one item that illustrates one component of our earnings momentum. Over the last 12 months, our top line interest income has increased to $65.3 million in the second quarter of 22 from $37.6 million in the second quarter of 21. However, our interest expense actually has fallen over the same period from 45.2 million in 2021 to 42.7 million in the second quarter of 2022. This kind of operational efficiency is helping to drive our earnings, and we're very pleased to report an after-tax annualized return on average equity of 11.3% in a very volatile second quarter. We expect the bulk of our earnings in the third and fourth quarters to come from growing net interest margin from our loan and securities portfolio and net operating income from our real estate portfolio. Our highly curated real estate holdings are expected to continue to deliver strong returns in the years ahead, and as cap rates rise, we expect to add to our real estate holdings over the next couple of years. For the second half of the year, we expect the market volatility to continue as the market wrestles. with the inflation versus recession question that central bankers are trying to manage. As the Fed has raised rates and slowed the U.S. economy, they've also strengthened the U.S. dollar, making earnings more difficult for multinational companies. Ladder does not own any financial investments outside of the United States, so we don't need to manage any exchange rates. As we look to the third and fourth quarters, we have ladder on very firm footing with plenty of liquidity to deploy into a wide array of investment opportunities that invariably present themselves after a rapid rise in interest rates like we've experienced this year. We intend to take full advantage of market dislocations and feel very optimistic about our earnings in the quarters ahead. As the Fed cools the U.S. economy, our decades of experience will guide us in our lending efforts, staying focused on job want. Always protect the principal column. I'll now go to Q&A.
Paul
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate the line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Steve Delaney with JMP Securities. Please proceed.
Steve Delaney
It's on the great quarter and the progress on the balance sheet. As always, I think it's important that we look at your earnings and try to at least identify the gain revenue because clients will always ask us that. It's great that you have it. But the 34 cents, it looks like the... There were gains on real estate of about $0.12, so let's call it down to $0.22. But then you had some loss on your investment securities that looked like about $0.02. So something in the $0.24, $0.25, if we were to look at your earnings X gains, is that a number that you feel is reasonable?
Paul
Yeah, we didn't have any losses on securities this quarter. I think you might be looking at our mark-to-market on our loan sale. That really should be looked at offset by our hedging gains.
Steve Delaney
You're absolutely right. It was the sale of loans. It was not your securities.
Paul
There's some G&A to be net off those numbers. We did have a reversal of a provision when we resolved a non-accrual loan at a gain effectively. So I think you're in the ballpark, Steve, maybe slightly lower in the run rate.
Steve Delaney
Okay. Well, that's very helpful. Thank you. We'll try to clarify that in our note. And then I guess, Brian, this thing cuts both ways on the interplay between interest rates and cap rates. I'm curious, well, obviously you mentioned on your real estate side and you're obviously still finding some gains and Your timing may have been earlier in the quarter before everything blew out as it has. But it sounds like you still think you will realize some. On the other hand, you may be opportunistic if things get really crazy with cap rates and buy more. On your loan portfolio, are you starting to see any signs that borrowers who have projects that are reasonably completed and may be considering an investment sale process are just deciding to extend their loan with you and ride this out. And I guess the question is there, could there be less turnover in your portfolio, which I would think would be something of a benefit on really good, almost fully developed properties?
Pamela
Yes. We're not running into too many extensions right now because that 80% portfolio is new. If you remember, it's probably... Got it. Yes. in the second quarter of 2021. So we're not even near the first maturity date on 80% of the portfolio. That said, I can speak generally. And I think what's going on right now is, you know, properties that were purchased a long time ago, in particular apartment buildings, you know, those rent increases have been attractive enough that they're keeping everybody in the game. And regardless of rate, it probably doesn't matter. What has gotten into trouble are the guys who bought the three and four caps in the last 12 months and anticipating are going to have a period of rehab and maybe a Class C going to a Class B building and raising rent 30%, 40%. I think that portion of the population, when you throw in gas and gas, Just general inflation around food and shelter. I think there's a limit to how far you can push those rents. A lot of people are having a problem, but I do think some of the equity numbers are not penciling out on the recent purchases where people were paying up. And what really happened is when the Fed lowered rates effectively for 10 years, financial assets inflated. And it's important to realize that what you're witnessing right now, when you said everything blew up, all you're seeing is the Fed trying to slow down the economy and and the economy is slowing down. So it's the opposite of them lowering rates and creating all kinds of liquidity and puffing up financial assets. Now you're seeing the opposite. But this feels very much like a constructive situation. It doesn't feel like, you know, no one can fix this. This feels like exactly what they want to happen. Housing prices were getting a little crazy. If they really want us, if it's going too slow for them, or if the pace of decline in the economy is too fast, they can easily slow things down and sell less mortgage-backed securities and do lots of other things. So I think it's a pretty healthy economy, and this should be a shallow recession. And it feels very much under control at this point.
Steve Delaney
I think, no question, they waited too long. But since they've acted aggressively, the 10-year has come down 80-some basis points from a top of 350 on June 14th. to where we are today at 267. So you've got to give the Fed some props for that. Thank you for your comments, Brian.
Pamela
Steven, you know what? I would just add also, I know that we talked about how credit spreads got really wide, especially in the CLO business. I think that was a function of a technical, and I think we've talked about this, where the two-year was just galloping higher and LIBOR wasn't moving. I know at the end of today, the two-year is at 286 and three-month LIBOR is at 78. So all the spread widenings, I think, that you saw, which if I pretend they were done for technical reasons because the world was too far below the two-year, I think you're going to see a sharp reversal and a tightening in spreads here.
Steve Delaney
That's awesome, caller. I think everybody will appreciate that. Thank you, Brian.
Paul
Our next question is from Jace Ranani with KBW. Please proceed.
Jace Ranani
Thanks very much. Brian, where are you seeing the best relative value? You noted that as cap rates increase, you think the latter would be looking to buy more real estate. In the past, you've also bought back bonds, and I think that some of the mortgage REIT bonds might be attractive. Where would you look to incrementally allocate capital?
Pamela
It is a target rich environment right now. It is hard to find things that are not very attractive at this point because a lot of the steam has been taken out of some of the prices. So I'll go in order. I think like in the short term, when we purchased some of those bonds, we had some corporate bonds outstanding. The short bond that's doing 25 for us, we were purchasing that between 91 and 92. The 2027 was around 82. And the 2029 was actually around 78. There was an Apollo of 2029 trading in the low 70s at one point. And these weren't trading at those discounts because anybody thinks that the companies are having a problem. That's just where BBs are trading with eight years of duration or seven or eight years left on them. So we took a little advantage of that. However, the yield that we were looking at on all three of those were really around eight to nine. And as I said, we had an 11.3% return this year on assets, in the quarter rather. And we're not having any trouble hitting a double-digit number across the board. I think in the short term, one of the easiest places to add will be in the static CLO portfolios of A-class bonds, because you know what the collateral is. It's not going to change. And I think we saw one last week where a complete multifamily deal traded the AAA's price at 275 over LIBOR, or the DM of 275. That levers to about a 24 return. And it is 90% levered, but you can lower that if you feel like it. But the action in those deals is about 85% levered. So it's clearly an attractive buy. The other one that I like in particular and where we've been trying to find them, we have found a few lately, are the AS bonds from 2019 because they have the A class in front of them paying off or else there's very little left. And in some of those cases, the subordination level is in the 70s. So they're effectively insulated from credit losses, but they're still underloved because they have office buildings and a few hotels and some industrial properties. But we're looking for those, and we really like them. In the long term, I would say the stretched senior business is going to come back, meaning a lot of the deals that are getting done today are 65%, 70% leverage. It's just the right thing to do when you've got declining rents or any form of liquidity disruption. But I think that when they come up with a refi or another little hidden landmine in a lot of these deals is the LIBOR cap. LIBOR caps are a lot of them. LIBOR moves so fast that a lot of the caps from 2020 are at 1.5%. And if they come up for an extension and LIBOR is at 3% when they have to buy a 1.5% cap, these get extraordinarily expensive. So I think that there's going to be opportunities there. We actually had a situation where we sold one of our properties and the cap that we had put in place just a year earlier was worth 20% of the gain that we took. when we unwound the contract. So it's a little wonky, but there are plenty of opportunities out there. And I think, unfortunately, I think the least attractive one is the actual loan origination process. But I think that's going to correct itself very quickly because I do think these, I don't think you're going to see A classes on static or A classes on CLO deals at 275 and 8. I think that's going to snap in pretty hard.
Jace Ranani
So putting that in context with respect to Ladder, should we expect the company to be buying more securities? Should we expect the company to slow originations and pivot that way? What do you think this votes for Ladder's plans for the rest of the year?
Pamela
Well, I think we did slow origination a little bit inadvertently. We didn't do it on purpose. What happened was rates moved up so quickly that some transactions just fell out because the yields were falling apart on the equity side. Others did get to the finish line, but at slightly lower prices. But, no, I think we're going to pick up on origination because we believe they're going to tighten in the CLO. And we're pretty comfortable with what's going to happen, and so we're going to move our spread in on origination. And as far as security, I would love to add a lot of securities where they've been pricing in the last two months, but I don't think we're going to be able to. We might get $100 million or $200 million, but I don't think we're going to be able to buy, you know, a large amount of AAA bonds that are yielding 21%. Okay.
Jace Ranani
And in terms of the real estate portfolio, do you anticipate continued sales for the rest of this year or steady state? What's realistic to expect?
Pamela
Well, things are for sale at ladder often if people want to buy something. Again, it's the 1031 market sometimes drives pricing. But we felt that cap rates were quite low and interest rates were very low. So we put in our portfolio in places, especially in some of the high dollars per foot assets that we own. But the way we look at real, we like cap rates wider when we're acquiring, but we also have to have an accompanying low interest rate in order to create the right spread to lever the return. So I think we will be adding, because I think cap rates are just going higher And I know a lot of that has to do, I don't know if I, if the stretch senior is a lot of people are writing 65% loans and we will too, but if you want to write a 75% loan, you know, we could do a 65% senior and a 10% Mez and just push it together into a first mortgage. And I think we've got that kind of flexibility. So I think that's another really good opportunity. It's not for everybody, but it's going to be on the best credits. I think we'll do that.
Jace Ranani
And then in terms of credit across the portfolio, uh and illumining you know potential or probable recession what's been the company's approach are you buckling down in terms of asset management making sure that credits across the portfolio look good how do you feel about the credit uh standpoint uh i think you know with the credits in great shape right now and i think you have to go back 18 months to see like how we got there uh we had originated some loans that were not in the multi-family area
Pamela
because we thought they were very attractive and nobody was making those loans. And we got most of those into two CLOs that we did last year. And those are financed for a long time. So it's match funded in that regard. Around November, we felt that multifamily was, a lot of people thought that spread widening was a year-end phenomenon. We did not believe that. So we moved to focus on new, apartment buildings that were coming off construction loans, and we would take the lease up risk. And I would say, if you'd asked me this question in March, I would have told you that the two property types I'm pretty comfortable with are apartments because housing prices, you know, the whole day's exchange. Housing prices got crazy. People couldn't have the down payments to purchase the property at a newer price. So what happened is they stayed in their apartment, and then you had the two graduating classes of college kids because they Before, nobody moved in because of the pandemic. This year, they all graduated. So you had a lot of demand going on. And then people who sold their homes because they were trading at such high prices, they also moved into apartments. So the apartment market is very, very attractive. And rents will go higher. I think at the lower end of apartments, it's going to be harder because the income is being zapped by gasoline prices, food prices, and rent. But on the higher end, though, I think there's a lot of room where people can afford those things. And even in the senior housing area, the cost of living adjustment is going to be very high this year. And most of those cost of living adjustments in Social Security are going to be passed through rent, I think. So how are we preparing for it? We started preparing for it last November when we moved to newer multifamily. Today, we see less proceeds because rates are higher. And, um, but we're very comfortable. And as, as Pamela mentioned, we had three payoffs in the, in the end of the quarter and in the first week of July, where we had a modified hotel loan for $57 million. And that paid off a year early. Um, it was not levered. We had, uh, the Delaware office building, which had been a defaulted loan that we had been managing and we wound up reversing three and a half million there. And in addition to that, we got a payoff on a mall, which was about $28 million that was also unlevered. So we took in $112 million in cash in a couple of weeks. And while that hurts a little bit on your side, we think it's readily replaceable because we haven't warranted you on those assets.
Jace Ranani
Thank you. Yep.
Paul
Our next question is from Ricardo Chinchilli with Deutsche Bank. Please proceed. Hey, guys.
Ricardo Chinchilli
Thanks for taking the question. I was wondering if you could comment on how you feel your liquidity position is for a recession at this point in time and try to compare your position and your strategy towards this next recession versus the prior recession? And maybe, you know, what policies have you implemented to be prepared? Or what lessons did you learn from the last recession that you are thinking about, you know, applying into this next recession, particularly when looking for opportunities where to, you know, make incremental gains? And if you don't mind, can you tell me the last recession you're talking about? The big recession? The last recession. 2008, maybe.
Pamela
In 2008, I'll call it the great recession where effectively residential homes were over levered. I was running the global commercial real estate group at UBS and my team and I had been backing down the portfolio for a year and a half at that point. When we left UBS, we left around June of 2008, we were actually up close to $200 million. And that wasn't because we were making that much money. That was because we were selling everything. So if that was a telegraph recession, I thought it didn't really save anybody. You saw first defaults on subprime mortgages in residential areas 20% in the first month. I always question the wisdom of making loans to individuals that the only thing you know about them is they don't usually pay their bills. Uh, so we, we avoided that and we got out of that pretty clean for the most part. I wouldn't say all the, certainly they were just buying things in bulk and securitizing that. Uh, and so it was mostly a residential mortgage problem, I think. So that's when we set up ladder, you know, that team, the team and I left and, um, the team that I left with set up the company through private equity that ultimately went public. So the, Many of the individuals at Ladder were with me in 2008 at that time. As far as going into this recession, we are very low leverage, relatively. We're one notch below investment grade at two of the three rating agencies. That's been a long-term goal. Most people who know us have been saying that for, I don't know, eight years or so, getting laughed at a lot eight years ago, not getting laughed at anymore now. So... We have plenty of cash. We just extended and upsized the revolver, the unsecured revolver to $324 million. And my team did a great job on that. And we have lots of cash. And we have great access to the corporate bond market. And I would just point out that we have one of the differentiating features of Ladder. We have $1.6 billion in corporate bonds outstanding, none of which are due until 2021. The bulk of them are not due until 2025, 26, or 29. And the rate on the $1.3 billion that's due in 27 and 29 is, on average, about 4.5% fixed. So as LIBOR goes higher, and we're now running low to 6.5% and 7% at the bottom line because we're still paying 4.5% on that $1.3 billion of corporate bonds. And that's really the operating leverage we keep talking about. And it's showing up. I mentioned in my comments, you know, what has gone on with the top line interest income line versus our interest expense. So I think we're as well positioned as anyone. And we do believe this is going to be a mild recession. Again, the Fed caused this. They did this on purpose. And, you know, It was very expensive to hire people. You couldn't get enough people. Housing prices were out of control. Gasoline was flying. And so they wanted to slow the economy down. And I know that a lot of people haven't seen a recession like this, but this is a little bit old-fashioned, and it's not something to be afraid of. This is not an over-leveraged situation where there's... I think China is having a 2008-style downturn in their real estate sector. But... There's going to be a relatively shallow recession and a quick recovery. And I don't really think it's a great idea to have zero interest rate for 10 years, so hopefully we won't revisit that again.
Ricardo Chinchilli
Perfect. That was very helpful. Thank you so much for taking the question.
Paul
Sure. Our next question is from Eric Hagan with BTIG. Please proceed.
Eric Hagan
Hey, thanks. Good afternoon, guys. Hope you're well. So for loans that are maturing this year, I imagine some sponsors that have typically relied on financing from the CMBS market or an asset sale. So in cases where those options are either unattractive or uneconomical, what do you think is the source of takeout, if you will, in those kinds of situations? Thanks.
Pamela
Well, if it's in a CLO, I think the issuer is going to be very accommodative in modifying the terms. just keeping it going. But to the extent that it's on any line or if the loan is due at a bank, I think the banks, especially with regulators, are going to be less tolerant. And so as a result of that, I think the for sale sign will go up on the property or else, as I mentioned earlier, that stretch senior concept, whereas the guy's going to say, I can't really refinance the loan I had, even though I didn't do anything wrong, that rents are doing what they're supposed to be doing, but interest rates have just eclipsed all of the income we've gained. Taxes in certain places are going higher. And so a lot of the effort on the part of the equity sponsor has been for naught. Whereas I do think from the lender's perspective, you're going to have a situation which I would think, you know, when you have cap rates in the sixes and sevens, this is more normal. And there's less leverage and people who can't meet their maturity date with the full balance might very well wind up in a in a first mortgage with a mess, or as I oftentimes call that a stretch senior. And those are, those are attractive because it isn't like the properties are falling out of bed in value. They're simply drifting down because cap rates are going up because interest rates have moved. But once interest rates stop climbing, the other value tends to stabilize, uh, pretty quickly. And, um, with the dollar being very strong, I think there's a whole lot of international interest too that might make this a very interesting scenario going forward. We really like what we see coming here. It may be a little difficult for some of the equity guys that are not well capitalized, but the debt guys should be fine.
Eric Hagan
That's a really interesting perspective. Thank you. In the net lease portfolio, can you discuss how well matched the underlying lease term is with the mortgage financing that you have against it? And does that have any bearing, I mean, the matching, have any bearing on the assets that you choose to sell? And then in cases where there's maybe a more meaningful mismatch in term, how do you think investors should approach the value that they're getting there?
Pamela
Well, it's a big portfolio. It has 168 triple properties. But I will say that, for instance, I know that we have four BCA's wholesale clubs. And we've owned them for 10 years, and they're in CMBS deals, and they're open to prepayment without penalty in September. So that's about $45 million worth of mortgages that have been out there for 10 years. I believe even at higher interest rates, given the fact that in those 10 years, B-Day Hotel Club went from a private company to a public company. Obviously, the pandemic didn't hurt them, and so the cap rates have really collapsed there. And so we've got a reasonable gain there if we want to sell them. However, we also have a fortunate scenario that if we refinance them, we'll probably refinance into higher proceeds and do a cash out refinance. And the cash flows are excellent. And the lease terms are 10 years. The average lease term is 10 years. So we're pretty comfortable with those assets and we can do either with them. Once we put them into another CMBS deal, we can't really sell them because the prepayment penalty is too high, although the loans are assumable. So it's a little hard to talk generally. We don't usually sell things if there's large prepayment penalties, or if we do, we ask the buyer to pay that prepayment penalty. And for the most part, they've been accommodating that. So we don't have a lot of leverage in that portfolio And the reason most buyers do pay that premium penalty is because they're able to borrow more than the debt that we put on those assets. So we like that portfolio. We've been selling it. We'll always sell it if it feels like the price is right. But we're happy to hold it forever. We think that we have assets and tenants. And we actually pay very close attention to dollars per foot in case we get the thing back vacant. So overall, we've been selling here and there. but not at all a concern. We think we are filled with options. With five, six years left on the mortgages, we're not selling those. The prependent penalty is simply too high, although going down as rates rise. So the real estate book has ample gains in it. I think we've taken quite a few of them at this point, but when people are buying cap rates very tight and they're able to finance themselves at very low interest rates, I think you have to sell them sometimes. I sometimes say I love our real estate assets, but it's like the kids going off to college. You're going to miss them, but you have to go. And that's the way we approach it. That's very interesting.
Eric Hagan
Thank you very much. Appreciate it.
Paul
As a reminder to start one on your telephone keypad if you would like to ask a question. Our next question is from Matthew Hallett with B Riley. Please proceed.
Pamela
Thanks for taking my question. You know, Brian, on the, you know, last quarter you talked about the four cents impact of library 150 at the end of June. Now we're, we're, we're too close to two and a half. Can you just talk a little bit about the cadence on what to expect in third and fourth quarter, given the Fed hike this week, and then we're probably maybe 50 bips, you know, September. Yeah. I mean, last quarter in our last call, I think we were, we were talking, it's funny. We mentioned, I think if our estimates were the Fed raised, uh, And we kind of talk about the Fed funds rate in LIBOR as if they're the same. So forgive me there. But they do track together. And so no one thought, I think at the time in April, we were talking that the Fed would raise rates 200 basis points by year end. We did. However, we did not think they would do it before the end of the next quarter. And so they did that all very quickly. These 275s have really been a little bit of a surprise. Not a surprise in the last week, but certainly from the April perspective. And at that time, I think on a gross basis, 100 basis points, given where we were with our portfolio, would probably add $0.16 a share. And 200 basis points would add $0.36 a share gross. So I always knock off about 15% of that for expenses. And so at $0.36, you would maybe call it $0.28 or $0.29 a share. And the other part of that was that we had an estimate of what would pay off going into that. And the second part was we had an estimate of what we would originate going into that also. I think the origination part of that conversation has been a little bit slow, but I don't think it's a problem. I think it's just delayed because there are transactions that we're working on right now that have been going on for a while, but the loan proceeds are just not as high as they were three months ago. So there's some price negotiations going on. So I'm pretty comfortable that the market is a little rate-shocked because it moves so quickly. However, I'm relatively certain through many years of experience that the commercial real estate market will do just fine with rates at 6%. I don't think that's going to be a problem. It just takes a little while for those rates to set in. So I do anticipate, and I think the Fed will keep raising rates. I think they're probably going to get to around 3% by the end of the year. Yeah, I would expect our top line interest income to keep rising. And as you know, our fixed rate, $1.6 billion, does not rise with it. So it's just additive, and there's a lot of operating leverage as a result of that. But we have to pick up the imagination a little. Gotcha. How inclined are you to keep raising the dividend? I mean, obviously, you covered the dividend next to the real estate, change from the real estate sales this quarter. And I know there's obviously, you know, going into what you think will be a potentially soft planning, but a minor recession, how much do you want to you know, raise the dividend? I love raising the dividend. I'm one of the biggest shareholders in the company. However, and Paul, you can chime in here or Pamela, but I'm pretty sure we're covering the dividend now out of interest and expect to cover it again in the third and fourth quarters. And, you know, unless the Fed starts cutting rates or we stop originating loans, I don't see that ending. So I suspect we've got an attractive runway here. And I will never get tired of raising the dividend as long as the funds are available. And I think we've really built a machine right now that has the ability. People say, what are you going to raise the dividend to? I say, tell me where the Fed's going. And I have all the confidence in the world in our origination machine as well as our credit standards. So we'll get that right. And I think the world is simply less liquid than it used to be. And that just benefits lenders. And I think we're one of them. So I'm very optimistic about the quarters ahead here. And I think just what's the update on the investment grade? I mean, I'm a little surprised to hear the bonds, your bonds returning that much of a discount when you're, you know, a notch away from investment grade. It just sounds, seems so ridiculous to me. But where are you in terms of the rating agencies? And, you know, I know these are the line, if you could go down, if you get the upgrade, just where, How important that is to you and how close are we? Well, I won't speak on behalf of rating agencies. I'll speak on behalf of my opinion. We have some general guidelines as to how rating agencies, and they have different guidelines, but we generally understand how they look at it. So we don't think we're too far away from that if we wanted to do it. Rates got too high for us to attempt to get that done. But like I said, instead of that being a problem, we made it into an opportunity and we acquired some of our funds back. But the rating agencies don't stand still. Some of them will take a look at what they think or whatever recession is that's coming. But given that 80% of our assets, we took a lot of payoffs after the pandemic started because we had very high floors and we had very good credits when the Fed lowered rates. We got paid off more than most. So I think you might remember, it wasn't that long ago, we were holding $2 billion in cash. And so we simply moved that $2 billion into the loan category. We're only levered 1.8 times. So we are going to maintain rational leverage and hopefully allow us to have the option of making a run at going to an investment grade level with an issuance. But a lot of things have to fall into place there, and none of them are promised. we feel pretty good about it we we've studied this uh ad nauseum and we understand where we have to be as long as the goal posts don't move too much but um as far as the bonds getting down and trading that low uh that that was indiscriminate selling and um you know we were not singled out as one of the bad ones or the good ones and they were they were simply selling everything as high yields sold off as the figures of recession take hold, which surprises me because so much of the high yield complex is energy related. A lot of it was being caused by energy crisis, but I'll never figure out what makes ETFs mutual fund to sell things, but rather than fight with it, I'll just try to take advantage of it as it presents itself. When we see yields in the eights and nines on our own paper, we can beat eight or nine roe pretty easily so i can make a case for not buying them back but um given that we're uniquely positioned to take a 20-point game the night we buy the bond which no one else can do because they'd have to wait for the principal to come to them in eight and seven or eight years um you know sometimes that's a little tempting it's also by the way one of the unique features of ladder in that, you know, we, we have that ability to go buy a lot of our tech back in the open market at deep discounts. If you're on a repo line, you don't have that opportunity. I mean, we'll see the peers, but I doubt many, many of them bought back their, you know, their good, but after that, or there's some of the securitization that I'm glad to see ladder doing it. I, you know, my message to the board would be, you know, Keep buying back both debt and stock when it's, you know, when it's there for you. I think that's one of the benefits of being internally managed. We try to always buy them both because we don't want bond investors thinking, we don't want equity investors thinking we're just, you know, taking care of the bond guys and we don't want bond investors thinking we just buy stock back. But in this case, given the sell-off that took place, it was the worst half year in 40 years. uh in the stock market so that presents great opportunities and we had plenty of cash so we could buy a lot uh you know we spent a little bit but we were doing very well in the overall portfolio but if those if those opportunities present themselves you should expect us to wait in there and and that's i also want to point out during the pandemic when our bonds sold off uh you know we bought them too we bought about 100 and uh and those those were the 27s that are out there now There used to be 750 of them out there, and now there's 650. So those are very nice instruments to have in the open market. And if the overall market gets shaky and you're in good shape, and we always try to be on the front foot, and as I said today, we are on the front foot. And we're not against buying other people's instruments either. When the whole sector gets sold off for no reason, we'll step in there and take advantage of it. That's what I mean. We've got a dividend in the low sevens. We've got yields on our bonds in the sevens. And so should we buy them back? Yeah, they're pretty cheap. But we can make so much more by investing money right now. And I think that's how we best serve our shareholders. And just one follow-up on that. Do you think some of the bigger REITs could have problems, mortgage rates, with big hotel or big office exposure, and there could be an opportunity for you guys to step in somewhere? I don't know. I don't pay too much attention to other companies. But, you know, the sector is the office market. We're going to have to see where it goes. I'm generally optimistic. I think that come September, I think the country is getting one more summer in, even though most people are acting like there's nothing wrong out there. No one's in the office. I think in the fall, the office market will come back. I think the hotel sector is doing fine right now. The only reason you're not seeing a lot of financing there is because they don't have 12 months of trailing 12 cash flows. But once they do, I think hotels should be just fine. Thanks a lot. Thanks for answering my questions.
Paul
Sure. We have reached the end of our question and answer session. I'll turn it back to Brian Harris for closing comments.
Pamela
I don't have too much to say other than we're focused on our plan. Our plan has come full circle at this point, and did what they were supposed to do. We're set up to take advantage of it, and rates are higher than slender, and we really do look forward to the year ahead. These are good times for us, so thanks for staying with us and listening to us, and we'll stay in touch.
Paul
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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