Ladder Capital Corp (NYSE:LADR) Q4 2023 Earnings Call Transcript

Ladder Capital Corp (NYSE:LADR) Q4 2023 Earnings Call Transcript February 8, 2024

Ladder Capital Corp beats earnings expectations. Reported EPS is $0.32, expectations were $0.29. Ladder Capital Corp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 31, 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 supplemental 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 Ladder’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 $0.32 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. Ladder 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 undepreciated 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 yearend with cash and cash equivalents up 67% year-over-year. In 2023, we received approximately $1 billion in cash from paydowns 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, dividends coverage also rose to 146% in 2023, reinforcing the safety and durability of our dividends.

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 disruptions, 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 offence. Our originators continue to explore the markets in 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 includes the full payoff of 35 loans, and approximately $100 million in proceeds from the repayment of office loans. Subsequent to yearend, 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 has afforded access to a broader range of capital sources for repayment, whether through refinancing or asset sale. Our balance sheet loan portfolio stands at $3.1 billion as of December 31, 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 nonaccrual 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 CCEL reserve to align with our assessment of current market conditions.

Heading into 2024, we expect to pivot to office 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 portfolio. Over the course of 2023 we received $196 million in paydowns in our securities portfolio, and acquired over $88 million of new positions, ending the year with a $486 million portfolio comprised primarily of Triple A 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 $15 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 Miceli : Thank you, Pamela. As discussed in the fourth quarter of 2023, Ladder generated distributable earnings of $40 million, or $0.32 of distributed 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 funding on existing commitments.

The portfolio totaled $3.1 billion as of yearend 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 nonaccrual loans totaling $58 million. Overall, in 2023, we added three REO assets, and sold $144 million hotel assets previously foreclosed on, which produced a $800,000 gain for distributable earnings, demonstrating our ability to maximize value on assets, where we proceed with foreclosure. In the fourth quarter, we increase 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 and 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 earnings. The portfolio includes 156 net leased 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 f nine years. As of December 31, the carrying value of our securities portfolio was $486 million, 99% of the portfolio was investment grade rated, with 86% being triple A rated.

Over 71% of the portfolio was unencumbered as of yearend and readily financeable providing an additional source of potential liquidity, complementing the $1.3 billion of same day liquidity we had as of yearend. Ladder’s 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 well as Ladder’s strong relationships with these financial institutions.

As of December 31, 2023, our adjusted leverage ratio was 1.6 times, which was down year-over-year as we delever 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%. I’ll also note in 2023 we repurchased $68 million in principle of our unsecured bonds at 83.5% of par, generating $10.7 million of gains. As of December 31, our unencumbered asset pool stood at $3 billion, or 55% of our balance sheet. 81% 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, is 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 has $44 million of remaining capacity as of December 31, 2023. Ladder’s undepreciated book value per share was $13.79 at 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 $0.23 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.

Brian Harris: 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 intend 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, forgoing the typical mortgage REIT model of using repo lines to lever 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 serve 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 wouldn’t do when we founded Ladder in the fall of 2008. We stay 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 and 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 are 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 US 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 pay-off 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 costs 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 recorded distributable earnings of $168 million in a year where asset base got smaller every quarter, yet we continued 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.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Sarah Barcomb with BTIG. Please go ahead.

Sarah Barcomb: 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 what and when would allow you to be more constructive and start putting that large cash balance to work. Thank you.

Brian Harris: 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’s further evidence that the private markets are in fact, pushing capital into the space. But I would expect that not to last. We’re quoting conduit loans, we’re quoting bridge loans.

We prefer acquisitions to refinances for obvious reasons. But — 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 5.40% T-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 call [ph], we bought $10 million. But I think we’ll probably continue to buy more of those, then we will make loans, but we are indeed quoting loans on a daily basis.

Sarah Barcomb: 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 the 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 here. Thank you.

Brian Harris: Sure. We are — the late ’21 is really the, what I would call the dangerous spot for multi-families, 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 at Ladder necessarily, but generally. I don’t believe we’re quite through this. But we’re, 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. 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 million, $25 million, as opposed to $200 million and $300 million, which are extraordinarily difficult to finance today. So while we might have some uncertainties about the outcomes of what’s come — 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 1, we 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 that could go either way. So far, they’ve been going the right way. However to the extent that — expect carrying costs of these assets continues to stay high, at some point, you do wonder, does a 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 transom.

Sarah Barcomb: Okay, thank you, Brian.

Brian Harris: Sure.

Operator: Next question, Steven Laws with Raymond James. Please go ahead.

Stephen Laws: Hi, good morning. 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, [indiscernible] a week or two ago? Or kind of what type of securities do you find most attractive? I think Brian, you mentioned you just bought some this morning.

Brian Harris: 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, or but more importantly, I think we’re seeing a lack of discrimination in pricing between static deals where 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 can 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 securities [ph] 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 paying — we’re not using leverage unless we need to.

Stephen Laws: Yeah, and then to touch on, whether we talk about the $1.3 billion of liquidity or the $1 billion of cash, what is — when you think of normal operating environment, how much cash or liquidity would you would you hold or pass, in 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?

Brian Harris: I think it’s powerful. And I think under normal circumstances, which, I wonder if we’ll ever see them again, 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 million 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.

Stephen Laws: Yeah, seems like a lot of upside there. And then pretty conservative on the dividend for a payout standpoint. Thoughts around that. Is that something that will need to move up given REIT taxable income as this money is deployed? Or how do you look at your dividend level?

Brian Harris: We think the next move will be up rather than down. However, I don’t want to forecast first of all — we wouldn’t forecast the dividend policy here on a call. But we are 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. Yeah, I think for the most part in the space of discussions around dividends are about who’s cutting them, not who’s raising them.

And yeah, but we’re pretty comfortable. We like having a lot of cash. We are hopeful that we can even issue another bond deals 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.

Stephen Laws: Great appreciate the comments this morning, Brian. Thank you.

Operator: Next question, Steve DeLaney with Citizens JMP. Please go ahead.