It’s very attractive right now. If you’ve got a 5.3% SOFR and you’ve got a 4.75% here yes, that you can put on a lot of interest carry there. I hesitate to buy longer duration fixed rate instruments because you have to hedge them. And with a flat interest rate curve, it’s kind of difficult to do that and make money. So our attitude is a little bit, what I would say is, it’s what we thought was going to happen. I think we said we thought rates would go up. And we don’t think they’re going much higher from here, but they could go a little higher, and volatility will continue throughout the year. And if we’re talking about China or the U.S. economy will probably be talking about a rallying rates because they’re slowing down in the economies. If we talk about the lack of discipline in the fiscal side of the United States and their Treasury, the way they borrow money, we’ll probably be talking about higher rates.
So I don’t think it’s going to just flat line in between those two. I think it’ll be down on one day and up the next. So I think when I got on the call here, I was looking at about a 4.73, 10-year, that’s probably the top of that for a little while, and it’ll probably head back down. But I think we’ll see it again before year end. So the desire is here. We think it’s very hard to make a bad loan right now. But there is just a real problem with demand here. And it’s because the commercial real estate sector seems to be getting worse. We concur with that thinking, although we do think it is near the end and we think the worst has passed. Did that answer you or too vague?
Jade Rahmani: Okay. Well not overly clear, but I understand it’s a mixed market. But it does sound like you’re recognizing there’s a borrower demand challenge. It’s hard to get deals done. If not that there isn’t appetite from lenders. Wanted to ask you could…
Brian Harris: I’ll give you a further evidence of that. Yes. I mean, if you take a look at conduit deals now, I mean, in the last cycle they were a couple of labels out there that would have two or three names contributing into a deal. We now see conduit transactions with 10, 11, 12 originators, some of them with one loan in the pool. So that tells you all you really need to know about how you aggregate. It’s just not easy. And that has nothing to do with Ladder that has to do with conditions in the market. But when you see 12 originators get together and they allow three or four of them to contribute one loan, that is indicative of a lack of supply.
Jade Rahmani: And putting on your fortune teller hat, do you think that Ladder will do more balance sheet originations than conduit? Is conduit going to be a small part of the business, or do you see a big opportunity there?
Brian Harris: I think the balance sheet side of the business will be bigger than conduit but not because we want it to be. I just think as long as the yield curve is inverted, and I think it stays that way for a bit longer. The conduit business will have its own set of challenges. However, if the yield curve gets steeper and the two year drops and the 10 year rises, that’s when that business will take off.
Jade Rahmani: And then lastly, if I could squeeze another one in on the net lease portfolio, just give your high level thoughts on the portfolio. How are you feeling about that space and the outlook? There has been a little bit of pressure in the Dollar Tree retailer in particular. I know you all have Dollar Generals, but just, tenant demand and what you see about the overall portfolios lease duration?
Brian Harris: We have relatively long-term leases still. Paul, you can start looking that up. I don’t remember it right now. But I know we’ve got quite a bit of time. We have always been cautious around Dollar stores in certain places where we felt like. The Dollar store model originally, I think coming out of Family Dollar, it’s like a single employee and sometimes a tough part of town. And there was a certain amount of slippage theft, if you will, that was accepted. However, in our Dollar General portfolio, that is a curated portfolio largely in rural areas around lakes and fishing areas, where there is wide geography and not tons of supermarkets around. So we see a lot of sales of tobacco products and beer and very little theft.
I just looked at three of our Dollar Generals in Florida. All three of them recently extended their leases for five years. I wouldn’t call them in totally rural areas, but I certainly wouldn’t call them inner city either. But so we’ve been very cautious around that. And when we bought our Dollar Generals, we tended to buy about two out of every 10 we looked at. And so we think that that selection criteria will protect us through this. We do worry about some inner city retail. There’s clearly a few problems in the drugstore chain area, but they’re big companies that can probably make adjustments and figure out a way to get through it. But Dollar, I think Amazon for instance, just figured out how much the top 20 items are that CVS sells, and so they just went at it that way.
But I suspect CVS will now open up a warehouse with those 20 items in it and deliver it to your home just as fast. So, I’m going to let them fight and not get overly concerned about it. But I don’t really feel like we’ve got too much trouble as far as the obsolescence part of this goes. We stuck to drug stores, supermarkets, and a couple of Dollar stores. But the buy-and-large, they’re doing very well.
Jade Rahmani: Thank you.
Operator: Thank you. Our next question comes from the line of Steve DeLaney with JMP Citizens. Please proceed with your question.
Steven DeLaney: Yes. Good morning everyone, and congrats on a strong start to 2024. Great to hear about the conduit business. I just want to circle that up a little bit. Pamela, did you mention that the gain on sale on that $1.5 million loan was about 370 basis points?
Brian Harris: She’s on mute. And yes, it is 3.6% and it was on $40 million. I think $41 million. Pamela, are you there?
Pamela McCormack: Yes.
Steven DeLaney: I apologize. $41 million of loan, $1.5 million gain. Got it. And how $400 million, obviously a big number. I know historically this has been your highest ROE business segment. And can you give us some sense of how that might ramp between first half of this year and back half? Just in terms of very rough numbers, just trying to get a sense, how that might step up over the next three quarters of the year?
Brian Harris: It’s pretty slow right now, Steve. I mean, I won’t tell you it’s not. So given the fact that we’re almost in May, I’m going to have to tilt everything to the back half of the year. But that has a lot to do with things that don’t impact us, that are not impacted by us. So, if you had asked me that question a month a half ago, I would’ve told you the next quarter is going to be pretty aggressive. But the rate at which the tenure has moved higher has more or less, it always has that impact. It sort of slaughters the new origination pipeline, and people sit on the fence thinking rates are going to go back where they were two months ago. And maybe they will, maybe they won’t. But there’s always this little pause that takes place when there’s been a move.
And that’s, we’re in that pause right now. However, the demand side of the conduit business, if you can produce the collateral and the bonds, there’s plenty of demand. So rates are high, spreads are not terribly wide. But rates are high, and so there’s a good bid out there. So it’s a good time to be in the business. We just can’t meet the raw material side of the business.
Steven DeLaney: Yes. Got it. Okay. Well, that’s helpful to the fact, just understanding that your goal for the year is very much backend weighted. So we’ll be careful on that. Lots of stuff has been covered. So I won’t belabor things. But just stepping back big picture for a minute, definitely obviously applaud the buyback and the reset there. With respect to the dividend, I realize we’re coming out of a period of stress and it’s premature to start thinking about turning to offense from defense or reducing your cash holdings. But what would it take for management and the Board? Your last increase was late 2022. What would you want to see, as this year moves on or into next year to get, to make you comfortable, you’ve got good dividend coverage based on this quarter’s earnings. What specific one or two things would you like to see or to be confident to increase the dividend?
Brian Harris: Well, we discuss this all the time and there’s plenty of discussion about should we raise our dividend and [indiscernible] what’s going on in everywhere else. But yes, I think the reality is to be more comfortable. We have to be, have a little bit broader situation going on in the stock market. Most of the stock market gains that have taken place, and I don’t mean on the REIT side, I’m talking about just in general, is multiple expansion through falling earnings. And as you know few stocks are driving that train a little bit. So that that doesn’t feel like a healthy setup there. Interest rates continue to rise and as with a high eight dividend, which is very safe because we just have a lot of cash and very low leverage.
And the amount of inside ownership that we have, we have every incentive to raise the dividend if we think it’s helpful. Right now, we believe and we have demonstrated that we can drive earnings at levels well in excess of our dividend, and that should be a formula for a rising stock price. So because of the volatility in the marketplace that exists, there’s always opportunities that pop-up suddenly and you don’t really get a warning, they just sort of get there. So, there’s lots of ways for us to drive earnings. But I think that the overriding issue that probably would make us all feel better is if I could turn on the TV one morning and not hear about real estate. The amount of time and ink dedicated by the media to commercial real estate, saying the same thing over and over and over.
We’re at a point where it almost feels like the bottom, because I was taught a long time ago when you can’t hear another thing about something that makes you feel worse, you’re probably at the bottom. I kind of feel like we’re there at this point. So, I mean, I’m not uncomfortable. We raised our dividend now. I wouldn’t be afraid of covering it. It’s pretty easy to do, especially with all the cash. But what I’d like to do that we’re not holding onto our cash so that we can cover our dividend, we’re holding onto our cash so that we can buy investments that last for an extended period of time and are sustainable. And we do think that option is there and we think it’s coming. We’ve seen it here and there, but it’s not widespread. And that won’t happen until the last of the sellers have thrown in the towel on their real estate holdings.
Steven DeLaney: Yes. Hard to push a rope, and if you do raise it, you’d like, if you do raise the dividend, you’d like to think the market, the stock market would reward you for that. And this sentiment in this market towards real estate, it probably wouldn’t or it might certainly might not?
Brian Harris: Yes. Well, I don’t think it would. We tend to try to reward our shareholders for taking the chance of holding this real estate company too. But I think we’re doing a good enough job with it right now. And I think we’re demonstrating a discipline in our returns, but just because a quarter or two went by where volumes were low, and that doesn’t mean we start popping capital out the door. And we’ve always had a pretty respectful relationship with our bond holders also. So we usually, when we buy our stock back, raise our dividend, we also buy our bonds back too at the same time to keep everybody aware of the fact that we’re watching all of it.
Steven DeLaney: Yes. We noticed that. Well, thank you Brian, for the comments.
Operator: Thank you. Our final question this morning comes from line of Matt Howlett with B. Riley Securities. Please proceed with your question.
Matthew Howlett: Thanks for taking my question. Hey, just a quick one, Brian. I mean, I thought, I think it’s a pretty bold statement just to go and say we think commercial real estate cycles at a bottom where the worst is over. I think some of the banks have said that. But if that’s true, my question to you, how should we model this general CECL reserve? I know it’s not part of distributable. But people do look at it, we look at it every quarter. And if there is onerous assumptions in it today moving forward, if the worst is over, is that going to come down? Should we look at basically what you have in place as being maybe released at some point?
Brian Harris: I think, as I said the state of commercial real estate, when I say the worst is over. But I hope it doesn’t sound contradictory. But we still believe it is getting worse. But we just think it’s getting worse at a slower pace. So a lot of the, you’re not going to be surprised by anything in commercial real estate now. If you own a loan and it’s on your books, you know if it’s going to be a problem or not. So we feel like we’ve got a very good handle on what can and can’t go wrong here. Having said that, depending on what the government does, wide world events and also technology. These things can and do change pretty quickly and that long maintained that would be effectively the absence of the regional banks in the refi market.
The opportunity set is huge for when you get comfortable that real estate values are no longer falling. But when we go to our CECL reserve, if I had to guess, and again, this is just a party of one here, I’ll bet you we add a little more to it next quarter. But I don’t think we’ll add another $7 million to it. Depends what happens. But it gets easier when you take $500 million in principal payments. And because we can debate all you want about what the office sector is doing or what our loan inventory looks like, but we can’t really debate too much about what $500 million in payoffs means. So and with a 1.5x levered company, this drives liquidity too. So it’s a little, I don’t want to be glib about it, but it’s kind of a good spot to be sitting in because, we used to sit in the bank at zero with hundreds of millions of dollars every time we got payoffs.
Now it’s almost 5.5% you get, if you buy AAA CLO, you get 7%. So these are reasonably comfortable times for highly liquid investors. And I think you’re going to see that bear out. But I don’t, when I say, I mean commercial real estate, as long as you’ve still got people selling things for 25% of what they were sold at, purchased at three years ago, you haven’t really hit the sentimental bottom yet. But on the other hand, for when you read all these stories about this stuff happening there, when you look at the amount of real estate in the country, it’s very little of it is doing that. It just catches a lot of headlines. A lot of famous people are involved. And you have to let that blow through and not get overly concerned about it. This does look like a fairly normal real estate cycle to me, somewhat amplified in its impact by the fact that we had 10 years of zero interest rates.
So we had plenty of time to gin up the leverage. Although nothing compares to what we saw in late 2021 and early 2022, once we get through 2024, there’s just not a lot of new production after 2022. So naturally things will be slowing at that point, and people that are going to hang on to their assets are going to hang on to them. And those that are going to lose them are going to lose them. And I think you’re seeing some pretty widespread damage in the mezzanine sector and in the multifamily sector where people bought very tight cap rates and now they have high expenses even though rents have doubled. So we’re not calling the bottom. We just don’t. It’s just not, I don’t hear anything that shocks me anymore. And when somebody puts up a big reserve, or when somebody sells a building at a very low price that you’re going to see that.
