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Operator
Good morning and welcome to Ladder Capital Corp's earnings call for the fourth quarter of 2023. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter and year ended December 31st, 2023. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K, for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our Earnings Supplement presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and Earnings Supplement presentation for definitions of certain metrics which we may cite on today's call. At this time, I'd like to turn the call over to the latter's president, Pamela McCormack.
Pamela McCormack
Good morning. We are pleased to provide an overview of Ladder's financial performance for the fourth quarter and full year 2023. In the fourth quarter, Ladder generated distributable earnings of $40 million, or 32 cents per share, resulting in a 10.5% return on equity. For the full year 2023, Ladder reported distributable earnings of $167.7 million, or $1.34 per share, generating a 10.9% return on equity. Plata demonstrated notable financial strengthening across key metrics over the course of the year. With a smaller asset base and lower leverage, we achieved higher returns. Our adjusted leverage ratio stands at 0.7 times, excluding investment-grade securities and unrestricted cash and cash equivalents. Distributable earnings increased 13% year-over-year, and underappreciated book value increased to $13.79. Our financial performance benefited from a positive correlation to rising interest rates. with net interest income growing 58%. Our commitment to an unsecured capital structure contributed to this growth, and we benefited from $1.6 billion of unsecured bonds at a low fixed rate weighted average coupon of 4.7%. We increased our liquidity position to over $1.3 billion by year end, with cash and cash equivalents up 67% year over year. In 2023, we received approximately $1 billion in cash from pay downs of loans and securities which was accompanied by a $462 million or 11% reduction in total leverage. Future funding commitments also declined by over $100 million or 36%, and our unencumbered assets increased to 55% of total assets. In addition, dividend coverage also rose to 146% in 2023, reinforcing the safety and durability of our dividend. Furthermore, our credit ratings were reaffirmed by all three rating agencies during the year, with two agencies continuing to rate Ladder just one notch below investment grade. In the face of significant market disruption, the company's actions have notably strengthened our financial position, as evidenced by these positive trends. As we enter 2024, our efforts have left us well-positioned to quickly pivot to offense. Our originators continue to explore the market for new investments in an environment we anticipate will offer compelling opportunities for well-capitalized lenders like Ladder, particularly given the pullback by the middle market banks. Regarding our loan portfolio, we received $727 million in repayments, reducing the portfolio balance by 19% from the start of the year. This amount included the full payoff of 35 loans and approximately $100 million in proceeds from the repayment of office loans. Subsequent to year end, we received an additional $70 million in proceeds from the payoff of four unencumbered loans, including one office loan. We attribute our robust payoffs to our strategy of originating smaller loans in the middle market. This approach borrows access to a broader range of capital sources for repayment, whether through refinancing or asset sales. Our balance sheet loan portfolio stands at $3.1 billion as of December 31st, with a weighted average yield of 9.65% and an average loan size of $27 million. We have limited future funding commitments, totaling only $204 million, with approximately two-thirds of that amount contingent upon a favorable leasing activity or other positive developments of the underlying properties. In the fourth quarter, we successfully concluded foreclosure proceedings resolving two loans on non-accrual. This includes a $23 million loan on a retail property on the Upper West Side of Manhattan, which had been on non-accrual since the second quarter of 2018, and a $35 million loan on a newly constructed multifamily in Pittsburgh, Pennsylvania, discussed on our third quarter earnings call. Lastly, in the fourth quarter, we placed one $15 million loan on non-accrual status. The loan is collateralized by a newly renovated multifamily portfolio in Los Angeles, California, and we anticipate taking title to the asset during the first half of 2024. As Paul will discuss, we did not identify any specific impairments during the quarter and increased our general CISO reserve to align with our assessment of current market conditions. Heading into 2024, we expect to pivot to offense while continuing to actively monitor our loan portfolio. Despite the liquidity pullback from regional banks impacting our market, We believe that the long-term advantages for non-bank CRE lenders like Ladder, stemming from reduced competition for lending in our space, outweigh any short-term obstacles. In the meantime, we're continuing to work with our well-capitalized sponsors who, in most cases, we've seen investing new capital into their assets, expecting more palatable interest rate environment later this year. That said, as we have consistently demonstrated, even during the challenges posed by COVID, we make a clear distinction between a default and a loss. As a well capitalized and experienced real estate owner, we possess the capacity to proficiently own and manage the underlying real estate. Our ongoing objective will be to maximize our value at our conservative loan basis, particularly as we navigate the upcoming quarters with the current higher for now interest rate environment. Turning to our securities and real estate portfolios. Over the course of 2023, we received $196 million in pay downs in our securities portfolio. and acquired over $88 million of new positions, ending the year with a $486 million portfolio comprised primarily of AAA securities earning an unlevered yield of 6.82%. Our $947 million real estate portfolio, mainly comprised of net lease properties with long-term leases to investment-grade tenants, contributed $50 million in net rental income in the fourth quarter and $59 million in 2023. In summary, We entered 2024 with a strong balance sheet, substantial dry powder, modest leverage, and a well-covered dividend. As the commercial real estate market continues to reset, we remain focused on optimizing the credit of our existing loan book, and we are well-positioned to deploy our capital for the right opportunities that we believe will present themselves as transaction activity rebounds. With that, I'll turn the call over to Paul.
Paul
Thank you, Pamela. As discussed, in the fourth quarter of 2023, Ladder generated distributable earnings of $40 million, or 32 cents of distributable earnings per share. And for the full year in 2023, Ladder generated 167.7 million of distributable earnings, or $1.34 of distributable earnings per share, a return on equity of 10.9% for 2023. Our strong earnings in 2023 were driven by robust net interest income. and steady net operating income from our real estate portfolio and benefited from our primarily fixed-rate liability structure. Our balance sheet loan book continued to receive a healthy rate of paydowns in the fourth quarter, which totaled $167 million. This was partially offset by $11 million of fundings on existing commitments. The portfolio totaled $3.1 billion as of year-end across 116 loans and represented 56% of our total assets. As previously mentioned, in the fourth quarter of 2023, we completed the foreclosure proceedings on two non-accrual loans totaling $58 million. Overall, in 2023, we added three REO assets and sold one $44 million hotel asset previously foreclosed on, which produced an $800,000 gain for distributable earnings, demonstrating our ability to maximize value on assets where we proceed with foreclosure. In the fourth quarter, we increased our CECL reserve by $6 million, bringing our general reserve to $43 million or an approximate 137 basis points of our loan portfolio. The increase was driven by the current macro view of the state of the U.S. commercial real estate market and overall global macroeconomic conditions. We continue to believe the credit quality of our loan portfolio benefits from the diversity in collateral, geography, as well as granularity given our small average loan size. which was demonstrated by the $727 million in proceeds received from PayDown in 2023, including the full payoff of 35 loans. Our $947 million real estate segment continues to perform well, providing a stable source of net operating income to our earnings. The portfolio includes 156 net lease properties, representing approximately 70% of the segment. Our net lease tenants are strong credits, primarily investment-grade rated, and committed to long-term leases with an average remaining lease term of nine years. As of December 31st, the carrying value of our securities portfolio was $486 million. Ninety-nine percent of the portfolio was investment grade rated, with 86 percent being AAA rated. Over 71 percent of the portfolio was unencumbered as of year end and readily financeable, providing an additional source of potential liquidity complementing the $1.3 billion of same-day liquidity we have as of year-end. Ladder same-day liquidity simply represents unrestricted cash and cash equivalents of over $1 billion, plus our undrawn unsecured corporate revolver capacity of $324 million. It's worth noting in January of 2024, we extended our corporate revolver with our nine-bank syndicate to a new five-year term out to 2029. The facility carries an attractive interest rate of SOFR plus 250 basis points on an unsecured basis with further reductions upon achievement of investment grade ratings. This enhancement demonstrates the strength of our capital structure as well as ladder strong relationships with these financial institutions. As of December 31st, 2023, our adjusted leverage ratio was 1.6 times, which was down year over year as we delivered our balance sheet while producing steady earnings strong dividend coverage, and an attractive double-digit return on equity. Unsecured corporate bonds remain the foundation to our capital structure, with $1.6 billion outstanding, or 41% of our debt, with a weighted average maturity of nearly four years and an attractive fixed rate coupon of 4.7%. We'll also note, in 2023, we repurchased $68 million in principal of our unsecured bonds at 83.5% of par, generating $10.7 million of gains. As of December 31st, our unencumbered asset pool stood at $3 billion, or 55% of our balance sheet. Eighty-one percent of this unencumbered asset pool is comprised of first mortgage loans, securities, and unrestricted cash and cash equivalents. We believe our liquidity position and large pool of high-quality unencumbered assets provided Ladder with strong financial flexibility in 2023 and continues to do so as we enter 2024. And as Pamela discussed, it's reflected in our corporate credit rating. That is one notch from investment grade from two of three rating agencies, with all three rating agencies reaffirming our credit rating in 2023. In 2023, we also repurchased $2.5 million of our common stock at a weighted average price of $9.22 per share. And our current share buyback authorization of $50 million. That's $44 million of remaining capacity as of December 31st, 2023. Ladder's undepreciated book value per share was $13.79 as of December 31, 2023, with 126.9 million shares outstanding. Finally, as Pamela discussed, our dividend is well covered, and in the fourth quarter, Ladder declared a 23-cent per share dividend, which was paid on January 16, 2024. For more details on our fourth quarter and full year 2023 operating results, please refer to our earnings supplement, which is available on our website, as well as our annual report on Form 10-K, which we expect to file in the coming days. With that, I will turn the call over to Brian.
Pamela
Thanks, Paul. We were happy when 2023 came to an end and also very pleased with our financial results from start to finish. I credit our success to having gotten our company ready for turbulent markets in the years leading up to 2023. I tend to highlight our differentiated liability structure with a large component of fixed rate debt. when explaining why things went well at Ladder during the year. But in truth, it's more complicated than that. Over 10 years ago, we decided to finance our business with a greater concentration of corporate unsecured fixed rate debt, foregoing the typical mortgage REIT model of using repo lines to level returns, even though floating rate repo finance was cheaper at the time when we issued the bonds. We realized after what happened to the U.S. banking system in 2007 and 2008 that there would be fewer banks, larger banks, and more highly regulated banks. So we felt the usual bank financing models in use might need some shoring up as they were becoming more and more problematic in an increasingly more volatile world with less cushion against market shocks. While we never saw a pandemic coming or the enormous global central bank intervention that took place in response to it, these items only served to cement our case to manage our company with safer debt, even if it came at a higher cost using less leverage. Just as we had indicated we would do when we founded Ladder in the fall of 2018. We stayed true to that model, and while it was helpful that we got the timing and direction of the Fed's hiking cycle correct, our constant vigilance around avoiding credit mistakes has really been the linchpin to our success. While not perfect by any means, we believe we were better than most in our approach towards lending over the last three years. Although we're not without some headaches in these difficult times, our disciplined approach in keeping our exposure and assets at a reasonable basis has served us well once again as it has for the better part of our lengthy careers. In March of last year, after a few banks failed largely due to a basic lack of understanding about duration on the part of bank CEOs and regulators, the funding model for regional banks in the U.S. changed. These changes may very well be permanent. If banks don't compensate savers with appropriate interest rates on deposits, we now see how easily savers can and will move their savings to where their capital is treated better. At Ladder, we own over $1 billion of T-bills that earn approximately 5.4% and mature in less than 90 days. This is not as a result of any plan we have, but rather a luxury we enjoy because we issued about $1.3 billion of fixed-rate unsecured bonds with an average rate of just 4.5% with a remaining average maturity of about four years. We now have a rather barbelled asset base of T-bills at 5.4% and a loan portfolio that earns an unlevered return of approximately 9.7%. This combination allows us to cover our quarterly cash dividend using only modest leverage during these precarious times in commercial real estate while the deficit at the U.S. Treasury is spiraling out of control. Our fortress-like balance sheet allows us to turn our attention to getting through the current downturn in commercial real estate values in the aftermath of soaring interest rates and with a banking system with little appetite to finance new commercial real estate loans. We've navigated this environment with considerable success so far. In 2023, as mentioned earlier, we received $727 million in proceeds from paydowns on balance sheet loans, which did include the full payoff of 35 loans. We also received $196.1 million of principal paydowns and payoffs in our CMBS and CLO securities portfolio, further increasing our liquidity as a result of our low leverage business model. Because of our high level of liquidity, we are able to work with our sponsors on loans that are having difficulty refinancing. However, if we share this benefit with those borrowers, the borrowers too must pitch in with additional capital to keep the asset in their control. We've been fortunate so far, having modified some large loans after substantial new equity was posted to create more time to resolve stress from higher rates. In 2023, we received $119 million in additional equity from our borrowers on 56 loans. We have also received additional credit enhancement in the form of well-heeled sponsors providing full recourse on some of our larger loans outstanding. In our equity portfolio, our largest office property is triple net leased for another eight years with decades worth of extensions available to the tenant. who happens to be one of the largest banks in the United States. In this case, the tenant is currently putting the finishing touches on buildings that we own that they rent at a tenant cost between $250 and $300 million, including construction of a new 1,400 space parking deck so they can concentrate even more employees into these buildings. We're just not worried about that one. I'll wrap things up here by thanking our employees who worked so hard last year in a daily environment of falling asset prices. We reported distributable earnings of $168 million in a year where our asset base got smaller every quarter, yet we continue to produce double-digit ROEs while holding substantial levels of cash. We feel the Fed is at least done raising rates for the time being. If they do begin to lower rates, this will come as welcome relief to property owners. With less competition for lending assignments from regional banks, private credit is indeed moving in to take part in this vast addressable opportunity. And we have every intention of taking advantage of our already strong position in mortgage lending and plan to deploy our large cash holdings into something more interesting than T-bills. Thanks for listening. Operator, we can open the line for some questions now.
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question comes from Sarah Barcom with BTIG. Please go ahead.
Sarah Barcom
Hey, good morning, everyone. Thanks for taking the question. So you mentioned in the prepared remarks that you're positioned to quickly pivot to offense, and there's a vast opportunity for private credit here. So should we expect Ladder to start originating new loans as soon as this quarter? Or are you waiting for the Fed to start cutting rates? I'm just looking for more detail on you know, what and when would allow you to be more constructive and start putting that large cash balance to work. Thank you.
Pamela
Thanks, Sarah. Yeah, you should expect us to start originating loans this quarter. And in full transparency, we've actually been quoting loans through the fourth quarter also. Admittedly, though, we have not been overly successful in getting applications signed. Interestingly, because oftentimes we are losing... the loan opportunity to either an insurance company at lower rates and lower proceeds because the borrower has decided they prefer the lower rate or else we've been getting beat by names of companies that we've never heard of. And so that further evidence that the private markets are, in fact, pushing capital into the space. But I would expect that not to last. We are quoting conduit loans. We're quoting bridge loans. We prefer acquisitions to refinances for obvious reasons. And that probably limits the amount of opportunities because most of what's in the market right now is refi. But as acquisitions pick up, I think you could expect us to be more active. And there is no deliberate plan on our part to be hoarding capital at this point. However, sitting with a 540T bill rate, and able to buy securities in the CLO and CMBS world at attractive levels. We've been adding there, mostly on the security side. In fact, while we've been on this, we bought 10 million. But I think we'll probably continue to buy more of those than we will make loans, but we are indeed quoting loans on a daily basis.
Sarah Barcom
Okay, great. Thanks. I appreciate the comments on the competitive set there too. That's interesting. Maybe just going back to the in-place portfolio for my follow-up, just because the specific CECL remains pretty low relative to peers and we don't have risk rankings on a loan level here. I was just hoping whether you think there's certain aspects of your portfolio that could maybe start to become a bigger concern if rates remain elevated throughout the course of the year or for longer. So maybe you could comment on the performance of your 2021 and 2022 vintage multifamily assets. Those kind of stick out to me. Could we start to see more keys coming back there? Appreciate any comments there. Thank you.
Pamela
Sure. The late 21 is really what I would call the dangerous spot for multifamilies because cap rates were quite low. and leverage was quite high available in markets. I think we're going to continue to see some stress in the system through the first half of this year. And when I say in the system, I don't mean that ladder necessarily, but generally. I don't believe we're quite through this, but we feel like we're getting near the tree line here as we exit the forest. And so I would anticipate if I actually think rates are going to go down a little bit here from what we've been hearing and cap rates have gone down for sure. because of the forward nature of purchasing caps. So what we have right now is a deterioration in the equity ROEs and not necessarily blowing up the debt column yet or taking losses over there. So as long as rates stay here or go lower, I'm pretty optimistic. If for some reason rates start going higher, and I think the events of the New York Community Bank this week is a reminder to all of us that that could possibly happen. You know, I do think we've got another six-month slog. I don't necessarily get overly concerned about where we stand relative to other people in our CECL reserves because we have focused on small loans, and when I say small, not terribly small, about $20, $25 million, as opposed to $200 and $300 million, which are extraordinarily difficult to finance today. So while we might have some uncertainties about, you know, the outcomes of what's on our books right now, I can only reflect back on the last 12 months, which certainly was no picnic in the markets. And we got 35 payoffs. And since January 1st, we've got another 70 million in payoffs. So those are the indisputable parts of the conversation around smaller loans and diversification. And we're pretty optimistic, although we certainly do have some stress points in the system that could go either way. So far, they've been going the right way. However, to the extent that... carrying costs of these assets continues to stay high, at some point you do wonder, does the sponsor simply run out of money? So far, I think the sponsors who have ability to hang on are hanging on. However, if it got materially worse or if they simply exhausted their equity availability, then yeah, we might see some properties come across the transit.
Sarah Barcom
Okay, thank you, Brian. Sure.
Operator
Next question, Steven Laws with Raymond James. Please go ahead.
Steven Laws
Hi, good morning. I wanted to follow up on Sarah's question. Can you talk about the relative returns you're seeing in new loan originations versus securities? Did you buy any securities out of the MF1 CLO a week or two ago, or what type of securities do you find most attractive? I think, Brian, you mentioned you just bought some this morning.
Pamela
Right. We have been primarily focused on either transactions that we've owned for a while that we kind of like and we're adding to it. But more importantly, I think we're seeing a lack of discrimination in pricing between static deals where you know every loan in the pool and managed deals where, depending on how much time, you might not know any of the loans in the pool. So we have been focusing on the static end of things. And as I said, we bought something this morning that was a 2021 deal. And it is static. And we know all the loans in the pool, they're performing fine. So those returns, I can't speak to the new issue market because I think that, I mean, I could speculate as to what it is, but we didn't buy those bonds. So I don't know. But the assets we are acquiring in the security business on the static side are yielding high teens, low 20s if we lever them. However, given the cash pile that we've got, we haven't even been levering those. So you'll notice that a good part of our interest expense has disappeared. The secured debt that we carry has gone down because we're just paying off repo which is quite expensive, and we're not using leverage unless we need to.
Steven Laws
Yeah. And then to touch on whether we talk about the one-three of liquidity or the billion of cash, when you think of normal operating environment, how much cash or liquidity would you hold or pass another way? How much of your liquidity do you expect to deploy? What's the incremental earnings power when you think about all of that once that money is deployed?
Pamela
I think it's powerful, and I think under normal circumstances, which I wonder if we'll ever see them again. But going back, I think, to end of 2019 is the last time I can imagine that I could say that was when we were in normal times. But in normal times, if we can go that far, I would say we would carry about $50 to $100 million in cash. And as long as we've got the revolver, which, as Paul mentioned, we've extended for another five years with all of our lenders. That's plenty of day-to-day liquidity. So we could, in theory, depart with $1.2 billion in cash. If you run that leverage at even one-to-one, that's $2.4 billion in assets. If you ran it to three-to-one, it's $3.5 billion in assets, with all assets unlevered yielding 6%, 7%. So that's powerful earnings power.
Steven Laws
Yeah, seems like a lot of upside there. And then, you know, pretty conservative on the dividend from a payout standpoint. You know, thoughts around that? Is that something that we'll need to move up given retextable income as this money is deployed? Or how do you look at, you know, your dividend level?
Pamela
We think the next move will be up rather than down. However, I don't want to forecast. First of all, I wouldn't forecast a dividend policy here on a call. But we're not planning that right now, nor do we feel that we are pressed to do that for any regulatory reasons around REIT accounting. The main reason being, we think capital is important right now, and we do think capital availability allows us to do a lot of things that will exceed our dividend. And so, as a result of that, we think this is the kind of market where investors would want us to hold on to cash that we can invest at higher yields and drive the dividend later as opposed to now. I think for the most part in the space of discussions around dividends are about who's cutting them, not who's raising them. But we're pretty comfortable. We like having a lot of cash. We are hopeful that we can even issue another bond deal before the end of the first half. And if we do, then we'll have an extraordinary amount of liquidity, in which case we'll probably be forced to lower our returns a little bit. But right now, we're being very, very cautious and very discerning on what investments we will and won't make.
Steven Laws
Great. Appreciate the comments this morning, Brian. Thank you.
Operator
Next question, Steve Delaney with Citizens JMP. Please go ahead.
Steve Delaney
Good morning, Brian, Pamela, and everyone. Nice to be on with you. Nice to see the market rewarding your strong report this morning in sort of a choppy tape. Just curious, Brian, you've talked about the balance sheet lending capacity kind of opportunistically. This is getting ahead a little bit, but any thoughts about the CMBS conduit lending market? Obviously, weak on a quarterly basis, an average of about $750 million in 2023. More importantly, very weak profitability. There's got to be a lot of good floating rate loans out there where property owners are just maybe waiting for a break in the 10-year and then they'll try to hit a 10-year fixed rate loan. What's your view of conduit lending over the next one to two years and should we expect Ladder to be involved? Thank you.
Pamela
Sure. Ladder will be involved and we do expect it to pick up. It has been picking up. It's very reminiscent of 2008 when we started. You had a very, very slow securitization business with very low volumes because spreads were quite high. In this situation, it's not that spreads are high. Spreads are okay. It's that rates are high when you set the indicator. So at the end of the day, it's just the cost of money, and that's what really drives that formula. The other thing that's going on right now is there's really little differential between a five-year and a 10-year on the credit curve. And so the sponsor, the borrower, wants to borrow 10 years, whereas the lender wants to lend for five years. But that gets very tricky because when you make a five-year loan in the conduit business, you start running into BP's mechanics where yields are in the 20s. So if you're to collect a 20-something percent return over five years as opposed to something lower in the 10-year category, I think that's the tension going on right now between five and 10 year. The lenders want five, the borrowers want 10. I do believe the borrowers will win that argument. And ultimately you will see a 10 year product coming out because there's plenty of investors looking for duration. I think evidenced yesterday by the largest 10 year ever auctioned off, it kind of went out the door pretty comfortably. And that should give a lot of people a lot of comfort in that you can go out 10 years on the curve The bigger problem I think right now is really the difficulty that the sector is having with work from home, even in multifamily, which is intuitively a stable category, but expenses are just going through the roof and insurance as well as taxes. So it's a difficult market, but it always does come back and it always does defrost. And I would say this is how it looks right before a really good opportunity occurs. Back in, I don't know what year exactly, but around 2009, 2010, we were making over $100 million a year in the conduit business. I would not rule that out. I think we're going to need a normalization of the yield curve. We almost started getting there until recently, but I think that this is probably going to be a second half of the year conversation more than a first half of the year.
Steve Delaney
Thanks for that. And I just would add, again, you know, I think you're using your buyback selectively. Obviously, when you do that, you're retiring permanent capital. But also, to Stephen's question, when you pay out a dividend, you're getting rid of permanent capital, too. I think, you know, anything around 80% of book or lower, you need to buy the stock and not increase the dividend. That's just one person's, one old man's view. Thanks for your time.
Pamela
Yeah, I would say... Steve, just also, if you look back at our stock repurchases, they kind of kick in at a certain level. And I think if you actually do a little review of that history, you'll find your comment to be pretty prescient.
Steve Delaney
Yeah, yeah. Thank you very much.
Operator
Next question, Jade Hermani with KBW. Please go ahead.
Austin
Thank you very much. Just a follow-up to Sarah's question about multifamily. You know, I was reviewing a report on multifamily, and it's called Multifamily Mortgage Credit Risk Lessons from History, and there's some comments in there that stand out. You know, it's a boom and bust asset class, and the ease of build creates excess supply, which results in lower vacancies. So, I think in addition to the expense headwinds you noted, There's also pressure on new lease rent, and probably occupancies will dip in the Sunbelt market. So can you comment on multifamily Sunbelt exposure, what you see happening there? And just framing expectations, I mean, I think that with upcoming maturities in some of these low cap rate deals, there inevitably will be a lot of pressure when it comes to qualify for a refinance.
Pamela
I'm going to actually call on Craig Robertson to answer part of this, but I would tell you, I assume when you say Sunbelt, I don't know if you're talking about ladder or general, but however, I don't think the Sunbelt is going to have nearly the problems that a lot of people think, and it's mainly because of the demographics of the United States. The baby boomers continue to retire, they continue to age, and there is no shortage of people moving to the Sun Belt. And I think as long as the stock market is plumbing all-time highs and as long as home values are quite high, you'll continue to see that go on even if they part with their low-rate mortgages in Boston, Philadelphia, and New York. But as far as our Sun Belt exposure goes, it appears to be doing okay. The stress, if there is any, is coming from management that has too many assets at one time and they're struggling with it. You have to keep them focused. And also the operating expenses. The rents are okay. And I do believe there is some overbuilding that has taken place in a few places, principally Austin, Texas has quite a bit. But even we're beginning to see some parts of North Carolina look overbuilt too. But we're not seeing problems with rents. If they're not quite where we want them to be, they're awfully close. And in many cases, those rents are being achieved without the requisite improvements that were supposed to be made. So a lot of the future advance money is not going out the door. And so if the rents are being achieved or nearly achieved without actually performing those improvements. So Craig, I don't know, do you have anything on our particular Sunbelt exposure you want to share?
Craig Robertson
No, I mean, hard to add much to that. I think when we look at the Sunbelt exposure, the rents really are holding up. We tended to lend on either newly built product or product at lower leverage points. So I think when we look at how the assets are performing, we still feel very comfortable at where we own them at our basis and at the yields that the properties are generating. And when we have had short-term blips in sponsorship, it's been possible to write them by examining the business plans, reevaluating, and take them through. So occupancy is held up across the portfolio, and I think we have avoided largely a lot of the markets where that focus is right now, and they're exhibiting some of the stress, and Austin is a great example of that.
Austin
So I assume you're implying that there's little Austin exposure. Can you just comment on the debt yields that these properties are at or soon to be at based on your underwriting?
Craig Robertson
Yeah. Right now, our multi-portfolio shows a debt yield in the high fives at 85% occupancy with business plans still ongoing. We see those going up as they continue to lease. As I said, we're in mid-80s occupancy with lease up and turns going. And when we proform it forward, even with current expense levels and current rents, we see those normalizing at levels that we're very comfortable with in the mid-7s and plus, depending on the asset.
Austin
And that's on a debt yield basis?
Craig Robertson
That's on a debt yield basis, yes.
Austin
Okay. So, I mean, that could present challenges for the equity, wouldn't it? Those debt yields don't leave that much room.
Pamela
Yeah. The equity calculations on properties that were purchased two to two and a half years ago are less rosy than they were two and a half years ago, for sure.
Craig Robertson
But our experience has been that the pain has been highlighted in the equity, and there still have been positive returns when the business plans are completed. And that's been manifesting in our payoffs.
Austin
Okay. So as a base case, let's say a property gets to a 7% or 6.5% debt yield, just allowing some inflation pressure. What do you think happens in that situation when the loan comes up for maturity?
Pamela
We expect the sponsor to purchase a cap and uh reload reserves if required and possibly even pay down the debt to a place where the lender us is comfortable uh if they don't then you know we'll see if they want to try to bring in an additional layer of debt through the mezzanine market we are seeing that a little bit but which would pay us down and accomplish everything other than you know restoring roes to the equity but It is what it is. I mean, it's more expensive to own real estate today than it was two and a half years ago. That's not our fault. It's not their fault. It just is a fact. And we're not overly concerned with it. And like, for instance, you know, we foreclosed and took title to a property in Pittsburgh, which is mostly multifamily and brand new. There is nothing wrong with where we own this property. In fact, we're considering if we can take it to Freddie Mac right now. However, the sponsor either did not have the capital or did not feel it was worth his while to continue feeding a poor ROE from two and a half years prior to that. So as I said earlier in my comments, what we're really experiencing and seeing now so far is most of the pain is on the equity side, and the sponsors are deciding, do we put more money into this, even though the first ROE calculation didn't pan out the way we wanted it to? Or do we just say, let's not chase this? And as Pamela mentioned, we take great pride in not calling default losses until we believe we have evidence of loss occurring. But so far, all the pain that is existing, not all of it, but most of the pain you're seeing is really on the equity side. And as I said, we're almost through it. 2021 was when we started seeing extraordinarily leveraged properties be purchased at three, three and a half caps. That was right around the time where ladder capital switched to doing fixed rate two year loans with fees in and fees out. And we attracted brand new properties coming off construction loans. And so as a result of that, that's the season we're dealing with right now. We're dealing with fixed rate loans that are maturing, that are doing just fine and they're brand new. And so the borrower has to figure out how to refinance it, pay it down, or extend it. And we're happy to work with them on that if they're performing fine. But, you know, I think still the ROE calculation is just not what they had hoped it would be.
Craig Robertson
Agency refis are in the mid-fives. There's prep available, and the sponsor can also sell the assets at the debt yields we talked about, and we're seeing that as well.
Pamela McCormack
The only thing I wanted to add is of our payoffs this year, 40% were in multifamily. So agree with your comment, but caveat that you're seeing sponsors defend, especially when it's not a widely syndicated asset and they're invested in the asset. We are seeing them pay off, and we are seeing them defend. And as Brian said, we're comfortable at our basis in any event, and I think some of this could actually lead to opportunity.
Austin
It probably will. Thanks very much.
Operator
Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Next question comes from Matthew Howlett with B. Reilly Securities. Please go ahead.
Matthew Howlett
Yeah, hey, thanks for taking my question. Just to follow up on the theme around credit, I mean, I look at the headlines every day on commercial real estate, you know, Barry Stern, like I said, they're saying a trillion in losses for the office sector, and I look at the fear in the stock prices, even the lenders, but your portfolio is holding up well. It's managing higher interest rates. You've taken very few properties back. I mean, what's the disconnect? I mean, Brian, you talked about the sponsors are still holding on. Do we, you know, for a while now, do we really need to see rates just come down, cap rates come down for this to all work out and not see this crisis and defaults that some of the headlines are suggesting?
Pamela
I actually don't think that's it. I think what you're seeing, the headlines in particular, tend to be focused around large cities and media centers. And there was a lot of lending that took place in Washington, D.C., and some of the larger gateway cities. And, you know, those cities are struggling with something other than high interest rates. There is a work from home component of that. There's a criminal element taking place. There's people, a wealth exodus taking place in some of these states. It's a tax situation where people are moving out of certain northeast cities down to Sunbelt. So those are fixable. It's not like they can't be straightened out, but the market is resetting, and that's going to be painful. So the disconnect, I think, at Ladder is that we have smaller loans. We do have some large loans. We have a couple of loans over $100 million, and two or three of them, actually. Two of them are in Miami or Aventura. We feel good there. It's probably the best office market in the United States. just a high degree of caution and a lack of belief that large institutions would not get, a lot of people thought they would never give properties back, but they're economic animals. These are non-recourse loans and they're handing them back. And ultimately it'll reset, find a new level. And the good part is we are seeing those buildings trade. I mean, and if you start seeing banks selling commercial real estate mortgages at very deep discounts, That's going to add a little more pressure too. But I think you have to really look at where the lending has taken place. And I don't think Ladder will ever be accused of competing in the most competitive markets with other lenders. In fact, we prefer flyover states and smaller populations, which we always felt that the pandemic would actually broaden out the workforce and allow people to stay in St. Louis. stay in Memphis and stay in Houston rather than move to Los Angeles or New York. So I think that is the disconnect if there is one. And having said that, there's pressure on all of it. But still, the work from home item, we're not really talking about a big difference because Friday was already gone. So a lot of people are at three and four days a week. You're seeing a lot of companies go to five days a week now. But the real problem is places like Washington, D.C., where the federal government is still operating under an emergency COVID protocol. They are not back at their jobs. They do not go to the office. And Starbucks and McDonald's are closing, you know, in certain cities, not because there's anything wrong with the city. It's just that everyone's staying home. So it's also probably one of the reasons that apartments will hold up more than people think. And we don't think the apartment situation is nearly as bad as a lot of people think. The problem with the apartment situation was people were financing three caps at a time when they probably should not have been. If they started looking at them as six caps, that normalizes very quickly.
Matthew Howlett
Absolutely. So, Brian, do you feel what's happening with New York Community Bank Corp, I mean, is this a is this going to fuel a crisis like 08 or 09? And it doesn't sound like it. And do you view it as like an opportunity for ladder? I mean, it's more of these banks have to sell assets, retreat from the lending. I mean, how do you, do you think it's going to go down?
Pamela
I offer a layman's opinion on that. I have no inside information, nor do I really think I have it figured out, but you have to, there's something going on there because New York community bank was part of the solution to, around Signature Bank. So you have to assume before the FDIC allowed them to participate in taking assets and deposits from Signature Bank, they took a look at them. And so they must have been healthy less than a year ago. So what happened? Now, they do have large loans. And there was some discussion about how one of the loans that caused a big headache was a co-op loan in New York. That is nearly inconceivable to me because co-op loans rarely borrow money, and if they do, it's usually 20%, 30% leverage. But they do have a lot of rent-controlled loans on their balance sheet, and they probably have some office loans that are probably a little too big for them. So I struggle with it. There seems to be a disconnect there. Something happened later about when they started looking at their portfolio. This isn't Signature Bank. and Silicon Valley Bank having 10-year assets that if they sell one, they have to mark the whole book and their capital goes up in flames. This is something different. And I do think they have some defaults that I can't imagine I didn't know about them, but I do view this as rather idiosyncratic to them. However, I do think lenders with high concentrations of rent-controlled apartments and rent-stabilized apartments given the changes that have taken place in some of these cities. Those are going to be problematic. I don't think they're going to be problematic to the point of putting them out of business. I do think there'll be some losses there, though. And as far as opportunity goes, yeah, I don't know. I mean, we've actually bought loans from New York Community Bank in the past, not in this round. They're a pretty good lender from what I know of, and so Signature was a little bit more aggressive, but not bad at all. And, you know, we wouldn't have any trouble buying loans from them if they wanted to sell them. But my suspicion is they're going to want to sell office loans in New York, which might be a little less comfortable for us.
Matthew Howlett
Yeah, I know what they're at with some packages now, at least on the residential side and other stuff. Last question, you referenced the bond deal in the first half of this year. You've been masterful in how you've structured the balance sheet. Are you Would you be talking about a CLO or an unsecured deal? Just curious, would you want to go tip a little bit towards more floating rate debt? Or do you feel like the way you have it structured now, the fixed rate debt, the unsecured debt, you want to keep it exactly the way you've done it?
Pamela
I think the common idea is, first of all, no, I don't see a new CLO deal going out until we start originating more loans. We have two out there right now. They're just coming off their managed period, so they'll start paying down soon. but as far as a new issue that would be a fixed rate unsecured hopefully longer than seven years because we do have a 2029 outstanding which will come due and we'd like to always you know take out more term rather than inside of the the longest maturity we've got but given the liquidity situation we've got we're frankly not going to borrow money unless it's cheap and you know much to people who invest in mortgage REITs right now want to lend money because it's expensive. And so there's a little bit of a disconnect there. However, we did see some signs of life there. There was a mortgage REIT that did issue a billion dollar unsecured the other day at a pretty attractive term. What's that? Silver 7%, correct? We're looking at the same one. Yeah, that's right. I think the name of the company was Mr. Cooper. And that's tightened about 50 from where the top was. So there has been a real lack of supply in that market. And I'd like to get involved in that if we can and issue more unsecured corporate debt. However, this recent pop in spreads, rates, and noise around New York Community Bank has probably dashed that for a little while. But I do think as we get out towards, you know, if the yield curve starts getting a little bit more normalized where the two-year falls again, Yeah, we might very well go then. We have to be able to lend money at rates higher than we're borrowing it at.
Matthew Howlett
Right. Right, exactly. I saw the same thing that you saw. And look, we'll just wait for that. You guys have plenty of options, and I really appreciate the answers. Thanks, everyone. Sure.
Operator
I would now like to turn the call over to Brian Harris for closing remarks.
Pamela
Long year, difficult year, successful year at Ladder. Thank you to our investors, our employees, bondholders, and we appreciate you staying with us. It was a stressful time, but we tend to do well in those periods of time, and we are very optimistic about the future here. We think that most of the difficulties are going to be ending around June or July, and then things will be a lot better from there. And we're hoping to hit a point where all of our products are contributing to our earnings each quarter. So thank you all, and we'll see you at the end of the first quarter.
Operator
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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