Steve DeLaney: Good morning, Brian, Pamela and everyone. Nice to be on with you, nice to see the market rewarding you, 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 getting ahead a little bit. But any thoughts about the CMBS conduit lending market? Obviously, weak on a quarterly basis, on average about 750 million in 2023. More importantly, very weak profitability. Kind of, 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.
Brian Harris: 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. That 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 BPCE [ph] mechanics, where yields are in the 20s.
So if you’re to collect a 20% something 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, 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 options of — it kind of went out the door pretty comfortably. And that should give a lot of people a lot of comfort, then 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 what — this is how it looks right before a really good opportunity occurs. Back in, I don’t know what year exactly but around ‘9 or ’10, 2009, 2010, we were making over $100 million a year on 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: Okay, thanks for that. And I just would add in, I think you’re using your buybacks selectively. Obviously when you do that you’re retiring permanent capital but also to Steven’s question, when you pay out a dividend you’re getting rid of permanent capital too. I think 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.
Brian Harris: 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. Thank you very much.
Operator: Next question, Jade Rahmani with KBW. Please go ahead.
Jade Rahmani: Thank you very much. Just a follow-up to Sarah’s question about multifamily. 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. It’s a boom and bust asset class. And the ease of build creates excess supply, which results in lower vacancy. 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 do 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.
Brian Harris: I’m going to actually call on Craig Robertson to answer part of this. But I would tell you just — 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 Sunbelt. 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 as they — even if they parked with their low rate mortgages in Boston, Philadelphia and New York. But as far as our Sunbelt exposure goes, it appears to be doing okay.
The stress is, 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 I — we’re not seeing problems with rents, if they’re not quite where we wanted 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. So if the rents are being achieved, or nearly achieved without actually performing those improvements.
So Craig, I don’t know if 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 land 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 very feel very comfortable at where we own them at our bases 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 has held up across the portfolio. And I think we’ve 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.
Jade Rahmani: 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% of 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 pro forma 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-sevens and plus depending on the asset.
Jade Rahmani: And that’s on a debt yield basis?
Craig Robertson: That’s on a debt yield basis. Yes.
Jade Rahmani: Okay, so I mean that could present challenges for the equity within that. Those debt yields don’t leave that much room.
Brian Harris: Yeah. Yeah, we both — the equity calculations on properties that were purchased 2 to 2.5 years ago are less rosy than they were 2.5 years ago for sure.
Craig Robertson: The pain has been highlighted in the equity and there still has been positive returns when the business plans are completed. And that’s been manifesting in our payoffs.
Jade Rahmani: Okay, so as a base case, let’s say a property gets to 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?
Brian Harris: We expect the sponsor to purchase a cap and reload reserves if required, and possibly even pay down the debt to a place where the lender, us is comfortable. If they don’t, then 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 off down and accomplish everything other than restoring our lease to the equity. But it is what it is. I mean, it’s more expensive to own real estate today than it was 2.5 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, 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 core ROE from 2.5 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 their first ROE recalculation didn’t pan out the way we wanted it to? Or do we just say, let’s not face this. And then as Pamela mentioned, we do — we take great pride in not calling defaults 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.
