LADR - NYSE

Good morning, and welcome to Ladder Capital Corp's earnings call for the first quarter of 2024. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended March 31, 2024. 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.

Good morning. We are pleased to provide an overview of Ladder's performance for the first quarter of 2024. Ladder generated distributable earnings of $42.3 million or $0.33 per share, resulting in a 10.8% return on equity. As of March 31, $1.2 billion or 23% of our $5.3 billion balance sheet was comprised of cash and cash equivalents. During the first quarter, we increased liquidity to over $1.5 billion, up from $950 million last year. We reduced adjusted leverage to 1.5x, down from 1.8x a year ago. We received approximately $400 million of payoffs in our loan and securities portfolio, including the full payoff of 15 balance sheet loans totaling $320 million. These payoffs represents the highest dollar amount of payoffs received since the first quarter of 2022. Following the end of the quarter, another 5 loans totaling $111 million paid off, bringing Ladder's total loan payoffs over the last 12 months to over $1 billion across 48 loans. In February, we celebrated our 10th anniversary as a public company, and we are proud to note that we have not wavered from our commitment to our core objective, driving for the highest possible return on equity, while prioritizing principal preservation and employing modest leverage. This disciplined strategy, supported by our diversified capital structure, has supported Ladder with stability and flexibility across market fluctuations. At the end of the first quarter, our balance sheet loan portfolio totaled $2.8 billion with a weighted average yield of 9.42% and limited future funding commitments totaling $128 million. Our earnings for the first quarter included a $1.5 million or 3.7% gain from contributing approximately $40 million of fixed rate loans through a recent CMBS securitization and providing Ladder with 10-year nonrecourse financing on 5 triple net lease real estate assets. In addition, we've been pivoting back to offense. Our originators are actively quoting new investments, and we are pleased to be back in the process of closing new loans under application. Given the historically high returns on equity generated by Ladder's conduit business, we are looking forward to capitalizing on opportunities presented by a steepening or at least uninverted yield curve, which is when this business works best. As forecasted during our fourth quarter earnings call, we successfully concluded foreclosure proceedings on a newly renovated Class A multifamily portfolio in Los Angeles, California. The only assets consisting of 28 units at a basis of $14 million or $500,000 per unit. Since assuming ownership in February, we successfully completed all renovations, obtained a certificate of occupancy for the property, and commenced leasing. We expect to lease the property to stabilization by the fall. Also in the first quarter, we placed 2 multifamily loans totaling $72.8 million on nonaccrual. The first is a $60.8 million loan secured by a portfolio of recently constructed apartment buildings in Manhattan, New York. The loan defaulted after the mezzanine lender, who made a $13.2 million loan behind our position sale secure. Our current exposure for this loan stands at approximately $385,000 per unit. The second loan is a $12 million loan collateralized by a 56-unit multifamily portfolio in the San Fernando Valley of California. Our current exposure for this loan stands at approximately $215,000 per unit. A receiver has been appointed as we pursue foreclosure to take title to the assets and complete the business plan for renovations and lease-up at the market rent. As Paul will address in more detail, there were no specific impairments identified during the quarter. We modestly increased our general CECL reserve to align with our assessment of current market conditions. We continue to believe that we are adequately reserved for any potential losses. We've also stated in the past that we distinguish between a default and a loss. Ladder's senior management team and Board collectively own over 11% of the company, effectively making us Ladder's largest shareholder. In full alignment with our stakeholders, our goal is to protect our investments by promptly addressing default and seeking the best long-term value for the company. With a robust capitalization and extensive real estate experience, we remain well positioned to navigate challenges such as market downturn or asset depreciation, while executing the necessary business plans to optimize the property value. Regarding our securities and real estate portfolio, we ended the first quarter with a $467 million securities portfolio, primarily consisting of AAA securities, earning an unleveraged yield of 6.84%. Our $963 million real estate portfolio is mainly comprised of net lease properties with long-term leases to investment grade credit and contributed $14.4 million in net rental income in the first quarter. The strength of our balance sheet and stability of our dividend are consistently reflected in our credit ratings from all 3 rating agencies, with 2 of the agencies rating Ladder just 1 notch below investment grade. It is worth noting that Ladder's 2 longer-dated unsecured bond issuances, which totaled $1.24 billion and comprised approximately 1/3 of our total debt outstanding, have an average remaining tenor of 4 years and a weighted average coupon of 4.5%, a rate that is lower than the entire current U.S. Treasury curve. We remain committed to financing our operations through the corporate unsecured bond market and stand prepared to issue new unsecured bonds when we believe the cost of capital is favorable. In conclusion, armed with ample dry powder, conservative leverage and a well-covered dividend, we are primed to go on offense as 2024 unfolds. With that, I'll turn the call over to Paul.

Thank you, Pamela. In the first quarter of 2024, Ladder generated $42.3 million of distributable earnings or $0.33 of distributable EPS for a return on average equity of 10.8%. Earnings in the first quarter continued to be driven by strong net interest income from our loan and securities portfolios and stable net operating income from our real estate portfolio. Our balance sheet remains strong as the commercial real estate market continues to reset. As Pamela discussed as of March 31, 2024, Ladder remains highly liquid with $1.2 billion of cash and cash equivalents or 23% of our balance sheet, as our cash position continues its increase since year-end. In addition, our $324 million unsecured revolver remains fully undrawn. The increase in cash was primarily driven by a healthy rate of loan payoffs in the first quarter, which totaled $357 million. Our loan portfolio totaled $2.8 billion as of quarter end across 100 balance sheet loans, representing 52% of our total assets. We did not record any specific impairments in the first quarter. However, we did increase our CECL reserve by $5.8 million, bringing our general reserve to $49 million or approximately 175 basis points of our loan portfolio. The increase was driven by the continued uncertainty in the state of the U.S. commercial real estate market and overall global market conditions. Our $963 million real estate segment continues to generate stable net operating income and includes 156 net leased properties, representing approximately 70% of the segment. Our net leased tenants are strong credits, primarily investment-grade rated and committed to long-term leases with an average remaining lease term of approximately 9 years. As we have historically demonstrated, we have a long track record at Ladder of maximizing the value of assets we own and operate. This skill set as a current owner and operator of real estate, combined with the strength and flexibility of our balance sheet, provide Ladder a solid foundation from which to successfully manage our owned real estate assets. As of March 31, the carrying value of our securities portfolio was $467 million. 99% of the portfolio was investment grade rated with 84% being AAA rated, and over 76% of the portfolio was unencumbered and readily financeable, finding an additional source of potential liquidity, complementing the $1.5 billion of same day of liquidity we had as of quarter end. Ladder's same day liquidity simply represents unrestricted cash and cash equivalents of over $1.2 billion, plus our undrawn unsecured corporate revolver capacity of $324 million. As discussed in our prior call, in the first quarter of 2024, we extended our corporate revolver with our 9 bank syndicate to a new 5-year turn amount to 2029. The facility carries an attractive interest rate of SOFR plus 250 basis points on an unsecured basis with potential rate reductions upon achievement of investment grade rating. We believe this enhancement demonstrates the strength of our capital structure as well as Ladder's long-standing relationship with these financial institutions. As of March 31, 2024, our adjusted leverage ratio is 1.5x and has continued to trend down as we delevered our balance sheet, while producing steady earnings, strong dividend coverage and attractive double-digit return on equity in the first quarter of 2024. Unsecured corporate bonds remain the foundation of our capital structure with $1.6 billion outstanding or 43% of our total debt, a weighted average remaining maturity of nearly 4 years and an attractive fixed rate coupon of 4.7%. In the first quarter of 2024, we repurchased $2 million in principle of our unsecured bonds at 90% of par, generating $0.2 million of gains from the retirement of debt. As Pamela discussed, we remain committed to the corporate unsecured bond market as our primary source of financing. We're prepared to issue new unsecured bonds when we believe the cost of capital is favorable. As of March 31, our unencumbered asset pool stood at $3.0 billion or 57% of our balance sheet. 81% of this unencumbered asset pool is comprised of first mortgage loans, securities and unrestricted cash and cash equivalents. Our significant liquidity position and large pool of high-quality unencumbered assets continues to provide Ladder with strong financial flexibility. We believe this is reflected in our corporate credit earnings, which are 1 notch below investment grade from 2 of 3 rating agencies. Ladder's Undepreciated book value per share was $13.68 as of March 31, 2024, with 127.9 million shares outstanding. In the first quarter of 2024, we repurchased $647,000 of our common stock at a weighted average price of $10.78 per share. Subsequent to quarter end in April, Ladder's Board of Directors approved and increased the Ladder's share buyback authorization to $75 million. Finally, our dividend remains well covered. And in the first quarter, Ladder declared a $0.23 per share dividend, which was paid on April 15, 2024. For details on our first quarter 2024 operating results, please refer to our earnings supplement, which is available on our website and our quarterly report on Form 10-Q, which we expect to file in the coming days. With that, I will turn the call over to Brian.

Thanks, Paul. During the first quarter, Ladder continues to successfully navigate our business through the current credit cycle, accompanied by continuing tension in the Middle East, rising interest rates, persistent inflation and constant revision to predictions of what the Fed will do next. With regard to interest rate changes, we have not been significantly impacted due to the nature of our fixed rate liabilities that are termed out for years and our general low-leverage approach to managing our business. During the quarter, we were pleased to have reentered the loan securitization business, which we had been absent from for years. We are hopeful that we will continue to contribute loans to conduit deals in the quarters ahead, as this has historically been a high ROE business for us at Ladder. We also restarted our loan origination business, and we expect if market volatility and interest rates improved even marginally, our pace of loan closings should pick up in the quarters ahead. As 2024 began, in just the first 4 months, we've received loan payoffs or paydowns totaling $468 million with another $76 million in securities payoffs. We've received return of principal of approximately $544 million year-to-date. That pace of payoff in a rather low leverage company creates more liquidity at a time when new investments can be made at the highest interest rate in over a decade. Last week, the big banks reported that they were largely easing up on additional loan loss reserves, because they believe that potential problems are limited and manageable. From Ladder's perspective, we generally feel the same way and believe we are adequately reserved for potential problems we foresee. While always cautious, we believe the lending market is thawing out and borrowers are beginning to accept that rates will simply be higher for a while, and they will need to plan accordingly as the year of free money seems to have come to an end. Armed with strong liquidity and a disciplined credit model, we look forward to the rest of 2024. We can now take some questions.

[Operator Instructions] Our first question comes from the line of Sarah Barcomb with BTIG.

I was hoping we could dig into originations a little bit. It sounds like you're out in the market, looking at new deals. I was hoping you could talk about the deals that you're looking at? Any color on the asset cost or pricing? And could you maybe give us some of your expectations for volume just given acquisitions might not pick up to the extent that we were expecting maybe 6 months ago, especially coming off this inflation trend today. Just hoping you can give us some color there.

Thanks, Sarah. This is Brian. I will answer the volume question, but I'm probably going to punt over to Adam Siper, if that's okay, regarding originations that we're seeing. So we have seen originations pick up a little bit, but it was a pretty low bar going from 0. So we do have a couple of loans under application. We've been quoting a lot more. A lot of deals are falling apart, I think, largely as a result of where rates are going. And recently spreads begin to move a little bit wider also. So I would say our volume will be fairly muted for the year, although we're hopeful that it's not -- I think, it's a condition of the market, not a condition of Ladder. And so I would -- if I would have to throw out an estimate now, I'd probably throw out $400 million for securitizable instruments in 2024. But that has a wide left and right margin, I'll just warn you. So -- and Adam, if you want to address what you're seeing? He's our Head of originations and can fill you.

Sure. Thanks, Brian. So we are definitely seeing a little bit of a slowdown based on the recent rate uptick, but there are still loans that need to be refinanced, that are either maturing construction loans for new multifamily property. And we also have a, I'd say, a handful of industrial acquisitions that we're still pursuing that tends to be off-market and tougher to reproduce those opportunities, but highly attractive when we do find them. But we're also still seeing a benefit from the bank pullback, which is contributing to both balance sheet loan opportunities and conduit opportunities. And I think that will continue for the next 12 months. So like Brian say, cautiously optimistic.

Okay. And maybe switching gears to the in-place portfolio. Also just keeping in mind the high inflation trend and the uptick in rates. What is your expectation to foreclose on more multifamily or maybe office assets later this year if rates stay where they are? And could you give us an update on recent sponsor decision-making in this environment? And maybe some debt yields on the multitenant assets where you could foreclose?

Sure. Craig, when we get to debt yields on multifamily, I'm go probably -- will hand it off to you. But the macro side of that is, I would expect to have more foreclosures. I've long said that the second half of 2021 and the first half of '22 was really the 12-month period in time where if you bought things, you might have some trouble. Usually, 2 years later is when that trouble arrives, because the first year is usually already funded in the second year revolves around some success. So coming up to, I would say, at the end of the third quarter this year is when I would expect perhaps that commentary to change, mainly as a result not of what I'm seeing, but of the calendar. Just late '21 into early '22. Multifamily, we switched in late '21 to newer properties. And the problem that they got into, if it wasn't a newer property was, it was a rehab in the end of '21 or early '22, you had a lot of construction cost overruns, labor costs went up and then you got hit with insurance and additional operating expenses. So kind of a double whammy hit at the sector, and that's why I think that there is quite a bit of giveback. We believed that we would do better with newer properties that could not have cost overruns and simply has to be leased, evidenced by an $80 million loan that paid off this quarter on a brand-new property in Ohio. That's part of the calculations we've reported today. But facts are stubborn things, rates are quite a bit higher. I have never understood what the Fed is looking at when they say inflation is falling. And I don't see it now either. And so I suspect that rents continue to rise, and that will be helpful. But the insurance side of the multifamily sector is particularly problematic. So I suspect it will continue. However, if you've got enough cushion built in as a REIT that is a hybrid REIT with mortgages and properties, I'm not overly concerned about owning some of these like the one Pamela, I think addressed a little bit here out in California, where, yes, we took title to it very quickly. We finished light rehab of a few units and got a CFO and now it's on the market. I think we're 50% leased already. That does not appear to be a problem to us. We put into default in the quarter, a $60 million New York City apartment complex, 3 buildings, ground-up construction, brand new. I have never seen a New York City brand-new apartment building being handed back to a lender, but we may in this case, it's not there yet. And the 2 loans that Pamela mentioned, one was that $60 million and the other one was, I think, a $12 million property. Yes, we do have a mezzanine lender in the big one. Again, showing a little bit of restraint on the part of Ladder, because when the loan was made, obviously, we were asked for a bigger loan than we provided. A mezzanine lender provided a $13 million -- $12 million or $13 million mezzanine loan, which has been wiped out. So in the world of thinking about losses, the equity looks like it could be wiped and the mezzanine didn't defend. So if we did take title to that property in the near term it would be at under $400,000 a unit on a brand-new apartment building in Manhattan. Those are not bad numbers, and the rents in Manhattan have been continuously rising throughout the entire time. So we're not overly concerned about the word foreclosure. As oftentimes said on these calls, a default is not a loss. And that's why we've been hiking our CECL reserves, but we don't have specifics. Because, one, we don't want to indicate to anybody that we've got room in the payback amount when the loan comes due. But second of all, it's more of a macro conversation than an actual situation that we're observing. We are -- whenever there is a problem in multifamily, every time we issue a foreclosure notice or default notice, the phone rings and somebody wants to buy it. A lot of times, it's the buyer that sold it to the party that we made the loan to. So I think there's going to be a lot of salad mixing going on here at the end of the year. And I think there'll be quite a few properties, handed back to lenders. But I think the cautions lenders will not really be absorbing particularly large problems, as far as losses go. And in fact, some of them may turn into very nice wins because they may be acquired. Again, newer property, always a good thing in a housing shortage. So that's where we've been comfortable. Craig, I think you've got some debt yields on assets we have taken back. Can you flush those out?

Yes, sure, Brian. When we look at the overall portfolio, on our multi portfolio, at about 85% occupancy portfolio-wide were in the high 5s to low 6s on debt yield. We see that stabilizing in the mid-7s. As Pamela mentioned, we've taken a significant amount of payoffs over the past 12 months and over half of that's been in multifamily, and that's been in that same low 6s debt yield in place when those pay off. So we feel very good about the debt yields we're seeing and the path to getting these assets stabilizing into that mid-7s debt yield territory.

And Sarah, I'll just finish up -- finishing the question you asked about borrower behavior and what our observations are. It's fairly consistent. They are largely grumbling, not happy with interest rates. And obviously, if you move 500 basis points into the lender column and out of the equity column, that will cause grumbling. However, they're standing behind them for the most part. They're buying caps. We prefer not to have anybody guaranteeing caps. We prefer the actual cap because we want to rely on a third party as opposed to the rent roll for those payments getting made. So -- yes, but they're standing behind them. And in particular, we've had some positive activity, I would say, on the office portfolio. We have a property on California, where was requiring some additional reserves and a very wealthy individual simply guaranteed the loan and the whole thing. So it wasn't -- and put up the right reserves that he needs to finish it, but also guaranteed the principle and interest really to get out of all the discussions around how to continue. And we have another property in Westchester where the sponsor sold a different property and paid us down partially as we had requested and posted a reserve of $17 million. So again, showing commitment to the asset, I wouldn't say in the best mood, but still protecting the asset. So we feel pretty good about there. So overall, if they have the ability, they will. A lot of the assets that are defaulting, the sponsor simply does not have any more capital.

Our next question comes from the line of Stephen Laws with Raymond James.

I guess, first off, congrats on your 10th anniversary that you mentioned Pamela. Seems like yesterday, we were all at a dinner just ahead of your IPO, but a nice milestone for you guys. You touched a lot on originations. I appreciate the color there. As I think back to kind of almost 10 years ago, you guys did some other things that we don't really see in the portfolio. You bought some attractive assets through distressed lenders. It seems like you may be getting some of those back from distressed lenders. But as you think about the amount of capital deployed, you have to deploy, if you thought about looking at buying existing loan pools at some discount or looking to buy hard real estate assets? Can you talk about any investment opportunities being outside of newly originated loans and securities investments.

Sure. I think in our last call, somebody said to me, what's your favorite investment today, and I probably said CLO AAAs. Because, one, they're liquid; two, they're safe; and three, you can sell them whenever -- you can finance them pretty comfortably. As a company that's not terribly leveraged, the last one doesn't matter that much. But I would tell you this time around, we're really beginning to see attractive equity opportunities where a property is being sold to somebody. And the -- it might have seller financing or it might not. And it's being sold at a fraction of what it was purchased for just 2 or 3 years ago. And the harder part isn't really the purchase, the hard part is the financing side of it. And then I think there's a further bifurcation in that, does the asset have cash flow or does it not? And if it doesn't have cash flow that doesn't fit comfortably into a dividend-paying REIT. But if it does have cash flow with some even longer-term leases sometimes, that's really what we're focusing on. So if I would predict further, I suspect you'll probably see us buy a couple, might even see us buy a couple of office buildings, because some of them are pretty attractive. We're not really an operator of office building, so we'll probably do that in conjunction with someone else. But we are starting to see opportunities there that we're drawn to and we think is beginning to look more attractive than CLO AAAs and treasuries at 5.5%.

You think that's a '24 event or do you think those opportunities really more early next year?

I think it will be a '24. But -- I mean, that's not going to be a deluge of them, but you might see one or 2 before year-end. We've got a couple in front of us, right now. We are not under contract with anything, but we are staying up late and walking around buildings at midnight to see who's walking around them with us. So yes, I suspect we'll do something before year-end. But I will point out -- don't misunderstand me, we do not have anything under contract, right now.

Sure. One other question, if I may. When you think about, obviously, a lot of liquidity, a lot of excess liquidity. Where do you want to operate? Hard to say normal in this world. But in normal times, what is the right amount of liquidity and when you think about returns available today as you deploy what you consider excess liquidity, how much earnings accretion can you or incremental earnings power can be generated once this money goes to work?

Maybe just do the quick math calculation, if we're 1.5x adjusted leverage, could we go to 2.5x? Sure, easily. We've always said we like running our leverage between 2x and 3x. We've rarely said, we like 1.5x. But to go to the question of how much liquidity is enough, the answer is more. So we're very comfortable with our liquidity picture right now as interest rates rise and markets deteriorate and others get under stress. I mean we do have a couple of levers we can pull to create earnings. One is buying stock back. Another is the bond side of the world, where on both of our bond issuances that mature in '27 and '29 we actually deliberately borrowed more than we thought we were going to need. So -- because we certainly didn't plan on having $750 million coming due on one day. So there's a lot of opportunities there, and we kind of look at that versus the rate of payoffs and what the actual price is. And I think I've said a few times on these calls that, if the dividend and the yield on bonds is the same, you should probably buy the bond because you're going to have to buy that one day anyway. Currently, our bonds are yielding between 7%, 7.5%, and our dividend is in the high 8s. So we'd probably lean more towards stock at this point, if we were to transact on Ladder instruments. I think we have enough capital. It's a little -- you could eat that -- those words on a fork later on if you're not careful. So I hesitate to say how much excess liquidity we've got, but we could easily turn this inventory and add another $1.5 billion, and you can pick the return levered or unlevered you want on that. And obviously, we can ramp up these earnings relatively quickly. I thought we would do it a little more quickly with securities, but there really just hasn't been a lot of new originations creating new securities. We have been buying them, but they're not coming at a pace that, yes, we were hoping for.

Our next question comes from the line of Jade Rahmani with KBW.

In terms of the current originations environment, could you give any color on your attitude today versus 1 quarter ago? I mean, clearly, the company is sitting on a very strong liquidity position early in the year at CREFC, everyone was super bullish about volumes picking up. Would you say there was not an opportunity to ramp up originations in the quarter? You passed on a lot of deals you didn't like or the market was too competitive? And how does that compare with where things are today?

Sure. Yes, if you remember, Jade, back in January at CREFC, this is a world where people had decided that the Fed was going to cut rate 6 or 7 times. That is just 4 months ago. And all of that has been changed at this point. We never thought that. I wouldn't say that our attitude has changed at all. I think we'd like to originate more loans than we have originated. But that desire will not overwhelm our credit discipline. And we have seen several quotes be accepted, transactions about to happen that fell apart. And I think one of the things that has happened, especially in the near term here, interest rates have moved very quickly higher in the part of the curve where most of the securitized exits take place. So some of it is just market conditions. It's very attractive, right now. If you can -- if you've got a 5.3% SOFR and you've got a 4.75% here, yes, than 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 -- 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 before talking about China, or the U.S. economy, we'll probably be talking about a rally in 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 lining between those 2. I think it will be down 1 day and up the next. So I think I -- when I got on the call here, I was looking at about 4.73, 10 year, that's probably the top of that for a little while and it will 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 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 it's too vague?

Well, clear -- 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. That there isn't appetite from lenders. Wanted to ask you if you could --

I'll give you further evidence of that. Yes, I mean, if you take a look at conduit deals now, I mean, in the last cycle, there were a couple of labels out there would have 2 or 3 names, contributing into a deal. We now see conduit transaction with 10, 11, 12 originators, some of them with 1 loan in the pool. So that tells you all you really need to know about how you aggregate it. 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 3 or 4 of them to contribute 1 loan, that is indicative of a lack of supply.

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?

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 2-year drops, and the 10-year rises, that's when that business will take off.

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 portfolio's lease duration?

We have relatively long-term leases still. Paul, you can start looking at it. I don't remember it right now. But I know we've got quite a bit of time. We are -- 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, is like a single employee and in sometimes it's 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 3 about our Dollar Generals in Florida, all 3 of them recently extended their leases for 5 years. I wouldn't call them a totally rural area, 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 2 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 is clearly a few problems in the drugstore chain area, but they are big companies that can probably make adjustments and figure out a way to get through it. But I think Amazon, for instance, just figured out how much the top 20 items are that CVS sells. 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 drugstores, supermarkets and a couple of Dollar stores. But by and large, they're doing very well.

Our next question comes from the line of Steve Delaney with JMP Citizens.

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?

Yes. She is on mute. And yes, it is 3.6%, and it was on 40, I think $41 million. Pamela are you there?

I apologize, $41 million of loan, $1.5 million gain. Got it. 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 3 quarters of the year.

It's pretty slow right now, Steve. I mean, I won't tell it's not. So given the fact that we're almost in May, I'm going to have to tilt everything for 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'd asked me that question a month a half ago, I would have told you that 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 slaughter the new origination pipeline and the people sit on the fence thinking rates are going to go back where they were 2 months ago. And maybe they will, maybe they won't. But there's always this little pause that takes place when there's going to 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 that are not terribly wide, but the rates are high. And so there's a good bid out there. So it's a good time to be in the business, but we just can't meet the raw material side of the business.

Okay. Well, that's helpful to the fact just understanding that your goal for the year is very much back end 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, I 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 holding. 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 1 or 2 things would you like to see to be confident to increase the dividend?

We discuss this all the time, and there's plenty of discussion about should we raise our dividend, and the hell with what's going on in everywhere else. But yes, I think the reality is, to be more comfortable we have to 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, there's multiple expansion through falling earnings. And as you know, there are a few stocks that are driving that train a little bit. So that doesn't feel like a healthy setup there. Interest rates continue to rise and with the high 8 dividend, which is very safe, because we do have a lot of cash and very low leverage. And the amount of insider 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 -- but 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 the overriding issue that probably would make us all feel better is that 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, its -- we're at a point where it almost feels like the bottom. Because I was told 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, not uncomfortable to raise our dividend now. I wouldn't be afraid of covering, and it's pretty easy to do, especially with all the cash. But what I'd like to do is, that we're not holding on to our cash so that we can cover our dividend. We're holding on to our cash so that we can buy investments that last for an extended period of time and are sustainable. And we do think that opportunity 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.

Yes, hard to push a rope. And if you do raise -- if you raise the dividend, you'd like to think the market -- the stock market would reward you to that. And this sentiment in this market towards real estate, it probably would or might certainly might not...

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 2 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 bondholders 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.

Yes. We noticed that.

Our final question this morning comes from the line of Matt Howlett with B. Riley Securities.

It's just a quick one, Brian. I mean I thought it's a pretty bold statement just to go and say we think the commercial real estate cycles at a bottom or the worst is over. I think some of the banks have said that. But if that's 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, if we look at basically what you have in place as being maybe released at some point?

I think, as I said, the state of commercial real estate, when I say the worst is over, but -- and I hope it doesn't sound contradictory. But we still believe it's 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 book, you know if it's going to be a problem or not. So it's -- we feel like we've got a very different 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 I've long maintained that, with the effectively the absence of the regional banks in the refi market, the opportunity set is huge for when you get comfortable that real estate value is 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 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 get 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 0 with hundreds of millions of dollars every time we got payoffs. Now it's almost 5.5%. If you buy a 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. And -- but I don't -- when I say -- I mean, commercial real estate, as long as you still got people selling things for 25% of what they were sold at -- purchased that 3 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, 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 so you have to let that blow through and not get overly concerned about it. We -- 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 0 interest rates. So we have plenty of time to gin up the leverage, although nothing compares to what we saw in late '21 and early '22. Once we get through '24, 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, you're going to see that. And with SOFR at 5.3 something percent and you have to buy a cap that gets a little expensive, and I understand why some people are just reevaluating the investment decision there. So I think it'll pass. Though, I don't think it's a giant corner of the earth that is going to default. I think there's -- you've all heard the numbers, you don't need them from me as to what's coming due in the next few years. But things that were purchased 5 and 6 years ago, and if they're not office buildings, yes, they're probably fine.

Well, certainly your Ladder is certainly in an envious position with all the excess capital. I appreciate all the color and congrats on really good quarter.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Harris for any final comments.

Just thank you look for paying attention to us today. I know it's a difficult day in the market and getting a lot of mixed signals. But we feel pretty comfortable and we appreciate you taking the time to understand us. Thank you.