LADR - NYSE

Good morning, and welcome to Ladder Capital Corp's Earnings Call for the Third Quarter of 2024. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended September 30, 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. We refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our earnings supplement presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.

Good morning. We're pleased with Ladder's results in the third quarter of 2024. During this period, Ladder generated distributable earnings of $37.7 million, or $0.30 per share, resulting in a return on equity of 9.8%, supported by modest adjusted leverage of 1.6 times. Ladder has maintained a steady book value throughout the broader volatile commercial real estate market, and our balance sheet remains robust, with significant liquidity to pursue new investments. As of September 30, 2024, Ladder has $1.9 billion in liquidity, with $1.6 billion, or approximately 30% of our balance sheet, comprised of cash and cash equivalents. We successfully closed a $500 million seven-year unsecured corporate bond offering in the third quarter. As of September 30, 57% of our total debt consisted of unsecured corporate bonds, and $3.7 billion, or 68% of our total assets, were unencumbered. Both Moody's and Fitch rate Ladder just one notch below investment grade, and in conjunction with our latest bond offering, S&P upgraded our corporate credit rating by a notch, and both Moody's and Fitch revised Ladder's outlook to positive. We're optimistic about achieving investment grade status, which we believe will enhance our market position and attract a broader range of investors. Our loan portfolio continues to stay down, and as of quarter end totaled $2 billion or 38% of our total assets, with a weighted average yield of 9.33% and limited future funding commitments of $58 million. We’ve begun transitioning from CUSIPs to loans, a typical approach at the start of a recovery, while remaining selective in our pursuits. In bridge lending, we're focused on two areas. First, new acquisitions with basis resets and attractive dollars per square foot for any asset class across the U.S., and second, on refinances or recapitalizations for newer vintage properties and lease-ups. Acquisition activity has increased significantly, and we are actively issuing term sheets and closing loans. While it will take time to gradually close these transactions and enhance earnings in the coming quarters, we are well capitalized to pursue these new investments, and our transition back to making new loans has begun. Additionally, we are quoting 5 and 10-year CMBS loans and special situation opportunities, including note-unknown financing and triple net acquisitions. Given the increased transaction levels, improved clarity around valuation and underwriting, and reduced competition in the middle market, we are optimistic about the investment landscape. In the third quarter, we received $492 million of paydowns in our loan portfolio, representing the second-highest quarterly payoff level in the company's history. After quarter end, we received an additional $64 million in loan repayments, and we originated a $24 million first mortgage loan secured by a multifamily property in Phoenix, Arizona. Year-to-date, we've received $1.1 billion in total loan paydowns, including the full repayment of 50 loans, reflecting the credit enhancement and liquidity provided by our middle market lending strategy. In the third quarter, we took title to an office property in Oakland, California, with a carrying value of $7.5 million, or $132 per square foot, representing 37% of the basis of our institutional sponsor. Before assuming title to the asset, we wrote off $5 million of the loan balance due to a specific loan impairment. As of September 30, 2024, our remaining general fee for reserve stood at $52 million, which we believe is adequate to cover any potential loan losses. We continue to monetize owned real estate. During the third quarter, we sold a multifamily property in Texas with a carrying value of $11.5 million for a $300,000 gain above our basis. In addition, we placed another $9.7 million multifamily property under contract for sale at a price above our basis that is expected to close in the fourth quarter. Turning to our securities and real estate segments, we continued to purchase AAA securities in the third quarter, acquiring $422 million with a weighted average yield of 7.1%. We ended the quarter with an $853 million securities portfolio, primarily consisting of AAA-rated securities earning an unlevered yield of 6.8%. We further continued to add to this portfolio in the fourth quarter, purchasing an additional $57 million of AAA securities. As of September 30, the portfolio was entirely unlevered. Our $946 million real estate portfolio generated $14.1 million in net rental income during the third quarter, mainly consisting of net lease properties with long-term leases to investment grade rated tenants. In conclusion, with significant liquidity, a strong balance sheet, conservative leverage, and a revitalized origination team, we believe we are well positioned to capitalize on the opportunities ahead. With that, I'll turn the call over to Paul.

Thank you, Pamela. In the third quarter of 2024, Ladder generated $37.7 million of distributable earnings, or $0.30 per share of the distributable EPS, for a return on average equity of 9.8%. Our earnings in the third quarter continue to be driven by net interest income with stable net operating income from our real estate portfolio, generating a strong return on equity while holding a significant cash balance. As of September 30, 2024, Ladder's balance sheet was comprised of 30% cash and cash equivalents, or $1.6 billion, with $1.9 billion of total liquidity including our $324 million unsecured revolver, which remains fully undrawn. As of September 30, 2024, our adjusted leverage ratio was 1.6 times, with total gross leverage of 2.3 times, which has trended down over the last 12 months as we've delevered our balance sheet and amassed a large liquidity position. Our loan portfolio totaled $2 billion at the quarter end across 62 balance sheet loans. The portfolio received meaningful paydowns during the quarter, totaling $492 million and included the collection of deferred interest of $7.5 million upon the payoff of a loan collateralized by a mixed-use property. Separately, distributable earnings in the third quarter included the write-off of an allowance for loan loss of $5 million allocated to a loan on an office property we took title to during the quarter in Oakland, California, with a carrying value of $7.5 million. Additionally, in the third quarter, we increased our CECL reserve by $3 million to a CECL general reserve allowance of $52 million for an approximate 256 basis point reserve on our loan portfolio as of September 30, 2024. The carrying value of our securities portfolio was $853 million at quarter end, with net growth of 77% in the third quarter. 98% of the portfolio was investment-grade rated, with 91% being AAA rated. The entire portfolio of predominantly AAA securities is unencumbered and readily financeable, providing an additional source of potential liquidity, complementing the $1.9 billion of same-day liquidity as at quarter end. Our $946 million real estate segment continues to generate stable net operating income in the third quarter. The portfolio includes 155 net lease properties, over 70% of which are investment-grade rated tenants committed to long-term leases, with an average remaining lease term of eight years. As Pamela discussed, Ladder issued $500 million of unsecured corporate bonds that closed in the third quarter. And as of September 30, 2024, 57% of our total debt was comprised of unsecured corporate bonds, with a weighted average maturity of approximately four years, at an attractive weighted average fixed coupon rate of 5.2%. With the closing of this capital raise, both Moody's and Fitch placed Ladder on positive outlets. Moody's upgraded and unnotched the rating on our bonds to Ba1, aligning our bonds with our corporate credit rating, one notch from investment grade. We believe the rating agencies appreciate the prudent capital management Ladder has exhibited during the post-COVID inflationary period. With these actions, Ladder is closer to our long-held goal of achieving an investment-grade credit rating, which we believe will open Ladder up to broader opportunities, along with the access to the investment-grade bond market, with the goal of achieving a more attractive cost of capital and enhanced return on equity to shareholders over time. As of September 30, our unencumbered asset pool stood at $3.7 billion, or 68% of total assets. 85% of this unencumbered asset pool is comprised of first mortgage loans, securities, and unrestricted cash and cash equivalents. Overall, we believe our significant liquidity position, large pool of high-quality unencumbered assets, investment-class capital structure, one notch from investment grade, provide Ladder with strong financial flexibility and meaningful access to capital to allow for focus on deployment of capital within our three segments, based on the best risk-adjusted return. As of September 30, 2024, Ladder's undepreciated book value per share was $13.81, which is a net of $0.41 per share, with CECL general and fair are established. In the third quarter of 2024, we’ve repurchased $1.2 million of our common stock at a weighted average price of $11.91 per share. Year-to-date through September 30, 2024, we have repurchased $2 million of our common stock at a weighted average price of $11.41 per share. Finally, our dividend remains well-covered, and in the third quarter, Ladder declared a $0.23 per share dividend, which was paid on October 15, 2024. For details on our third quarter 2024 operating results, please refer to our earnings supplement, which is available on our website, and Ladder's 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. Ladder delivered another strong quarter with credit holding up nicely, and having issued another $500 million corporate unsecured bond, we now head towards year-end with ample liquidity well-positioned Q4 in 2025. There's been a noticeable air of optimism in the capital market, with stocks recently reaching all-time highs and credit spreads tightening in the bond market after the Fed began its rate-cutting cycle. This environment bodes well for our diversified product mix in commercial real estate. Few sectors were hit harder by the one-two punch of a global pandemic and rapidly rising interest rates as the Fed fought to tame inflation. However, the world seems to be behind us with significant reserves for potential losses already established and destabilizing real estate values, albeit mostly at lower prices. There were certainly winners and losers as the Fed raised rates and operating costs swelled, but the future is looking brighter now. Ladder plans to press its advantage of being well-capitalized by capturing market share held by regional banks and highly leveraged non-ban competitors, many of whom are still addressing credit issues and the need to shore up their balance sheets before proactively returning to their lending activities. As previously indicated, we are beginning to deploy our liquidity by first investing in attractively priced securities, then shifting our focus to loan origination as securities spread tighten. In the third quarter, we executed this plan by acquiring approximately $431 million of securities. As we enter the fourth quarter, we are seeing an uptick in loan applications while maintaining only a slightly reduced appetite for acquiring additional securities. We expect the pace of new loan originations to increase as we approach year end. By reallocating cash out of T-bills and into securities and loans, we believe we can add to our distributable earnings in 2025. We believe the diminished lending capacity of regulated banks coupled with sidelined competitors in the mortgage REIT space positions us well to deliver attractive returns as the real estate market recovers. While new private capital may enter the lending space, simply having capital does not guarantee success. Staffing up with anything less than the A-team is likely to lead to disappointment. Loan origination may be relatively straightforward, but financing those loans safely and accretively and getting paid back at par is what will define who the winners are in the end. I'll reiterate again that in the third quarter, Ladder received the second highest amount of loan payoffs in its history at $492 million, despite challenging overall market conditions. We believe our strong credit culture and disciplined lending approach will continue to help differentiate Ladder. Furthermore, the time and investments we have made over the past decade in the unsecured corporate bond market have created a uniquely strong capital structure, one that takes years, if not decades, to develop in gaining the confidence of discerning investors. Overall, we believe our fortress like balance sheet combined with a favorable competitive landscape positions Ladder well for the future. Thanks for tuning in today, and we can now take some questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Stephen Laws with Raymond James. Please proceed with your question.

Hi. Good morning. I want to start maybe with the origination. Pamela, you gave us a little bit of color as you're looking at things. And I think to Brian’s point about some competitors dealing with portfolio issues and banks constrained. Can you talk about where you see the best opportunities in the market, given your target kind of smaller bonds, market loans? Are you looking at anything maybe on the construction side where banks [indiscernible] transitional type loans that are going into the pipeline currently?

Thank you, and good morning. Yes, so we are looking at more opportunities. We are still focused on our core products, which does not include construction loans. We are primarily right now in our pipeline. We're primarily looking at multifamily, some industrial. We just signed up a retail deal. We're looking mostly at new acquisitions, as I mentioned in the call, with basis resets, attractive dollars per foot. We've always been a dollars per foot basis lender. And we're seeing a lot of opportunities for recapitalization. We'll do refinances on newer vintage stuff where there's a good story and properties are in lease up. So, I think the lesson learned for us is we like our strategy of middle market lending, and we are looking to do more of the same.

Wonderful. Switching side -- to the other side on the repayments, Pamela, pretty high number, can you talk about what's driving that? Or are they refinancing elsewhere? Are they going into the agency system on some multi? Can you talk about what's causing that pickup and what's enabling these borrowers to refinance these loans?

I'll take that one Stephen. This is Brian. The smaller ones, especially apartment related, tend to be getting refinanced, although very few of them actually refinance on time, meaning they go under application, they're supposed to close 60 days later, and we usually have to give a short extension in order to accommodate. So very there's a lot of laborious detail being put into due diligence at this point for new lenders, but the apartment side of things seems to be doing just fine and the warehouse also. The larger loans are the ones that are some of these have been getting extended a couple of months here and there for the last six months. So if there's no real pattern I can give you here, I wouldn't tell you that the refinances are suddenly booming, nor would I tell you that loans that have been extended a couple of times are suddenly getting done. It's just a lot of effort, and for the most part basis, we took a $60 million loan last quarter that paid off, and it had very little cash flow. It was effectively a slowed business plan, I wouldn't say a failed business plan, but then it was purchased on land value by somebody who wants to build something else on the site. So that'll throw you off a little bit, but we also took the numbers a little overstated because some of the sizes are a little bit bigger. We did take a $119 million payoff on an industrial deal in Puerto Rico. There was nothing wrong at all with that. They did great with that asset, and that just, it was either sold or paid off, I don't remember. So that one probably skewed the payoffs to the higher end, and as the fourth quarter has begun, I believe we've taken another $60 million in payoffs, mostly mixed used stuff.

Great. I appreciate the color on that Brian, and thanks for the comments this morning.

Sure.

Our next question comes from Tom Catherwood with BTIG. Proceed with your question.

Thanks so much, and good morning, everybody. Paul, you mentioned shifting to originations as spreads tighten on the securities investments. I guess what has us worried is that the weighted average extended maturity in your loan book is just over one year, and as you mentioned, payments are already accelerating. So kind of what's giving you confidence that lending can come back fast enough to allow you to backfill your loan book without a material hit to distributable earnings?

This is Brian. I'll take the question, although if you want specifics from Paul, you're welcome to ask him there too. The lending business is definitely picking up. We are just sending out more applications. We're getting more signed up. So what you're going to see in the quarters ahead as loans close is going to look like we threw the lights on, but the reality is it's happening right now. I'm not sure it'll look way different in the fourth quarter, although I suspect it will look materially higher than originations closing than the third quarter. The security side of this, as we've said all along, is really the informing product because if securities are still very widespread, you have to stay wide really on the loan side also if you're planning to securitize those loans. But what we saw were extraordinarily cheap securities, and we bought $430 million of them. I believe we picked up another $20 million or $30 million just this week in securities, and they're still cheap, but they've gotten much less cheap. So that would naturally cue us to slide over to more originations, and that's exactly what we're seeing. There is nothing at all unusual about this. This is exactly what it looks like. As I've said a few times on these calls, it kind of looks like a run-of-the-mill recovery to us. And so while we'll always purchase AAA securities that are rather inexpensive, I believe the $430 million we purchased had an unlevered yield of over 7%. That's pretty unusual over the last 10, 15 years. So we'll keep buying those. They've gotten a lot tighter, but we're now moving squarely into the lending side of the business, and we're happy with it. We're still kissing a lot of frogs. A lot of stuff gets looked at, and ultimately we find out something that we don't like. If you're dealing with a refinance from 2021 or 2022, there's a very good chance that the sponsor is asking you for a loan that's probably too big. And we're a little surprised at how many of them are actually being accommodated with those higher loan requests. They're nearly always accommodated by a lender whose name we're not familiar with. So, I would caution taking too much of a cue from the prior loan amount, because most real estate, let's face it, is worth less than it was worth in 2021 and ‘22. So I think, long story short, very confident that lending picks up here. It will probably be very light on office, and we think hotel cash flows are quite high also right now, but apartments, industrial, and other are doing just fine. So we're very confident we're in the right place now. When you talk about earnings, as payoffs pick up, obviously these are 9% and 10% loans that are paying off. So you might have a dip in earnings, but if that dip in earnings is accompanied by an increase in cash, that's a temporary stop on the train towards higher earnings.

Got it. Appreciate those thoughts, Brian. But follow up to that, how does the origination pipeline, I guess, right now compare to a typical quarterly level that you would have normally seen in a more regular period?

We have Adam here. So Adam runs origination. So if you want to take that, Adam, go right ahead. Make sure you unmute your line.

Yes, it's ramping up. I mean, as Brian and Pamela mentioned, it's going to be a slow build, but I'd tell you the volume of new acquisitions has picked up materially. The volume of term sheets that we are competing on to win those opportunities has picked up materially, and it'll continue to build very comfortably from here, in my opinion. And with the backdrop that we're always focused, again, on the opportunities where we're going to get our principal back. So we're continuing to be discerning, but the pure volume of transactions that fits our credit box has picked up really significantly in the last 60 days.

And I would just add relative to what we call our average run rate, which I guess that's somewhere between $250 million and $400 million a quarter. We're going to be below that in the quarter, but we're going to be moving towards it. And I suspect in the first or second quarter of next year, we'll probably be at that run rate, assuming interest rates don't go in an odd direction.

Really appreciate those answers. And the last one for me just shifts into another side of your business with equity investments. We're obviously seeing more transactions in the market. Values seem to have stabilized, if not somewhat improved. That said, there's still a lot of assets that need recapitalizations. How are you viewing CRE equity investments as a potential use for your capital at this point in the cycle?

We think it's very attractive right now. Having said that, I think when we pencil out a return on an equity investment, it's probably a lot higher return required than what I would call most institutional equity guys. We do think they're attractive here and we'll continue to buy them when we see them, but I don't think given our orientation towards equity and that we're not trying to make 10% or 11% or 12%, we're trying to double our money. That's kind of the guidepost we use. Again, I don't think equity will ever be a giant part of our business, but during any period where banks are cleaning up their balance sheet due to regulators marking things down, that's something you could easily see us in. Our equity position should be going up, not down in 2025.

Got it. That's it for me. Thanks, everyone.

Our next question comes from Steve DeLaney with Citizens JMP. Please proceed with your question.

Thanks. Good morning, everyone. Can you hear me clearly?

I can.

We can.

Can you hear me? Hello?

We can hear you, Steve.

Okay, great. I was getting static on my end and I just want to make sure that I was clear. I'm glad to see the buyback, obviously, in 3Q, a little under $12 a share. Now, the stock is probably about $0.90 lower now. Would it be safe to assume that you continue to be active with your buyback here in the fourth quarter? Could you remind me what the remaining authorization might be? Thank you.

The answer is yes. We will probably continue. I think the remaining authorization, and I don't know the exact number, Paul probably does, but it's over $40 million, so that's probably good enough for my math. It has backed off a little bit here, but we're pretty comfortable with all these payoffs and the amount of cash that we're holding. Keep in mind, we're holding an enormous amount of liquidity, but also our securities book, the AAAs, they're unlevered. We can easily find additional capital there. We've got an embarrassment of riches right now as far as liquidity goes, largely augmented by the $500 million issuance we did in the quarter. I think we take a cautious approach towards liquidity in that a lot of people say, why would you go borrow another $500 million? We'd like to have the cash available before we go shopping. There's always this little lull in deployment, but with $500 million coming in in early July and $430 million going out into securities, we're catching up quickly. I don't think it'll be any gigantic purchases or anything that approaches that authorization, but I do think you can count on us to have a steady eye on the ball there. If we see openings, we will step into them and continue to acquire our stock and our bonds.

Thanks, Brian. Let me switch over to the dividend for a moment. 23%, you covered it. 130% was distributable EPS in the third quarter. It was last raised in the first quarter of ‘23. And I realize you've been playing defense, if you will, focusing on liquidity. You're obviously shifting now that the market is sort of healing a lower rate environment. It definitely sounds like you're shifting to offense, certainly with the loan portfolio. Would the next logical timeframe for the Board to revisit the dividend be in the first quarter of 2025? That's part of the question. And in your mind, I know this may sound like nonsensical, but could you see a scenario where you are repurchasing your shares, but also the Board makes a modest increase to the cash dividend? Could both of those things kind of coexist? Just in your mind as far as your capital allocation. Thank you.

Okay. I unfortunately didn't write all that down, but I'll try to take that in the two parts it was sent in. I think the first question was dividend timing, if we're to raise it. I won't get in front of my Board or convey our dividend policy on an earnings call, but I can speak for the CEO, and I suspect out towards first or second quarter that could happen, or at least I would be more open to it than I've been recently. But I would also point out that we have to see the loan portfolio start picking up that we believe is going to be consistent. This Fed and this economy has thrown us off the rocks a couple of times with a head fake, but this one looks a little bit more sincere, and we'll see what happens at the end of the election period. We no longer say election day, we say election period. So I think that it will take a little while until we're convinced of that. Keep in mind, we do still have some loans that we're discussing with sponsors as to are they having difficulty or can they refinance. The probabilities of them being able to get out of the difficulty they've been in have gone up. So for the most part, I think the damage is understood on anything that could be potentially coming our way. But that can all change too. And especially if something is not terribly high in cash flow, carry costs are huge. So some people just tap out at some point. So we may still see a little bit more noise in the portfolio, but nothing that we don't see right now. So we're not overly concerned with it. What we're not concerned with, we'll probably start to look to allocate capital into either additional areas. But if we're able to keep buying securities where we're buying them, the way leverage works, right now they're 13%, 14% ROEs. And to the extent that our lending portfolio does in fact continue as opposed to just have a nascent recovery at this point, I suspect we're shareholders, as you know. The management team here owns a lot of stock and our dividend is in the mid 8s. That's attractive. We like it. But there's a couple of ways to return cash to shareholders. One is through the dividend and the other is through stock purchases. So the second part of your question, could we do both at the same time? Absolutely.

Okay, great. Thanks so much for the comments, everyone. Appreciate it.

Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Thank you very much. Just wanted to hone in on the quarters dynamics that played out. CBRE, the largest commercial real estate broker, reported this morning and their brokerage debt volume surged to 53% year-on-year. KKR, an alternative asset manager active in commercial real estate debt, also noted a surge in their pipeline. And CMBS volumes are really strong so far this year, up over 150%. So when you look at being active in the space, what do you think were the factors that weighed on Ladder's origination volumes? Just looking to get some color as to how you think about the market.

Well, again, it's a lagging business origination. So loans go under application and then 60 days later, sometimes 90 days later, they close. So anything that you're going to see in what I view as our origination volume is probably going to show up in the first or second quarter. So I feel pretty good about that. But what's weighing on that decision to make a loan really has to do with valuations. If anyone who comes in with an asset that appears to be properly evaluated in today's terms instead of when they bought it in 2022, there's no holdback at all. There's nothing stopping us. We're looking at loans, by the way, of up to $100 million, $150 million. There's a few of those. We don't really see individual loans like that unless there's six assets in there cross-collateralized. But for the most part, there's a sobriety taking over the ownership space. People have a general understanding of what's going on and what they can expect to get from a lender versus where they were six months ago. I'll just point to one example. There was a securitization from Blackstone on some, I think it was industrial properties that they ultimately widened out a month and a half ago to 190 over and now it's 100 tighter than that. So the move in on credit spreads has been rather dramatic and rather quick. That can't really happen again. It's just realistically, you hit a point of diminishing returns. So I would say there's nothing weighing on it other than appropriate leverage levels being requested. Even when we think sometimes we're getting loans signed up, all of a sudden somebody will step in with an extra $2 million. We tend to not do that, but we're dealing with cap rates that are reasonably wide, and we may be just a bit too wide there. So we'll take our cues from the securitization market and see what's getting securitized comfortably. But as much as we can point to a few names that you just mentioned there as to how they're doing well and things are picking up, there's also foreclosures taking place at phenomenally low prices. So I don't think it's all good news, but it's not all bad. It was never all bad news. We've said this over and over, that it's not as bad as you think. And I would dare say it probably won't be as good as you think either when it does straighten itself out. But from a lender standpoint in a niche business like ours, with what's going on in the regional banking sector with regulators, and just in New York with New York Community Bank and Signature Bank, that can't help but expand the canvas that we paint on. And so we're very optimistic about that, but we don't have any rules about how much volume we have to do. Almost every investment we make is easily clearing the dividend levels that we pay out along with our expenses.

I would just add, I don't think it should be surprising at all that our loan activity is picking up with the uptick in new acquisitions. We have avoided a lot of the bridge to bridge unless there was really a lot of fresh equity coming in. So I think that is a large driver for our volume increasing today.

That seems like it. On other opportunities, are you seeing loan portfolio sales from banks? It sounded like in your comments you alluded to and are you interested in actively pursuing that business?

Going backwards on the question, we are interested in actively pursuing that business. Got a few phone calls in the last month from people I haven't heard from in five, six years that are working with some banks. So perhaps, but I would tell you prior to those calls over the last month or so, nobody was contacting us to purchase portfolios of loans. And I think that there is a general optimism out there right now. So that may slow some of those portfolios from going out the door, because I think some of them are going to be able to get refinanced. And there's probably less of an urgency around some of those duration books in the banks that are not marked to market, but they're underwater. So yeah, we're interested, but I'm not going to forecast that next time we talk, we're going to have purchased one. We just don't see too many.

Thanks a lot.

Sure.

[Operator Instructions] Our next question comes from Matthew Howlett with B. Riley. Please proceed with your question.

Good morning. Hi, everybody. My question is on pricing. You did the -- can you tell me sort of where the loan you did this quarter went off? I think just in general, I mean, we're hearing multi-families come in inside 300 over. I'd love to hear where you're quoting other property types? And then, I mean, I know you don't do CLOs, but does that work? I mean, those sound very tight for it to work with CLO. I'd just love to hear your thoughts on pricing and where you're quoting things at.

Adam, if you take the first part of that, I'll take the second one. Adam know where the loan we closed.

Yes. In general, including the loan we closed, we're quoting fresh acquisition on really high quality real estate in the high 200s to low 300s range on spread.

When you say, does it work? Yeah, it does work, but there's a point where, as you know, we've been buying a lot of securities because we think the lenders are taking more risk than they should by selling us AAAs that lever to 14 and 15. And so, I will tell you that around 275 on multi-families, run-of-the-mill stuff in the CLO market, the leverage point to the AAA buyer is around a 13, 14. And the leverage to the equity holder, the issuer, is probably about 15. So, they're almost around a break-even push here. And so, the liquidity still is way more attractive in the security side of it. However, the franchise building effort, as people oftentimes tell us, you're not going to get paid a lot of money to buy AAA securities. And yes, okay, I get that. But we're not dependent upon anyone selling those securities to us. We just happen to think on a relative value basis. Sometimes we'd rather own AAAs than write the loans at 275, especially if the credit is a little dicey. But when you say inside 300, we're inside 300. Yes. And it does work for us. So, we're probably about 275 on multi now.

And keep in mind, we're also targeting shorter term, shorter duration with points, typically at 1% origination fee and something on the exit.

So, when you say 15%, what type of advance, are you talking over 80% advance rate in the CLO?

Yes, about 85%.

Okay. So, that works. It's just, I didn't realize you're getting the type of leverage in the CLO. Are you quoting like -- go ahead?

Yes. I've said a few times that sometimes people say, well, when you lever AAA, you're using 90% leverage. And my response to them is always, and when I'm writing loans and issuing a CLO, my leverage is 85%. So, it's not a discussion about leverage. And I think the liquidity on the AAA side is much more attractive than on the loan side. However, we're kind of in, I think as my words in the opening remarks, we're kind of in both businesses now. And this is really the first time I've said, I think we're equally interested in lending as we are in securities. Securities have tightened. Loans have tightened too, but that's not what got us interested in it. What got us interested in it was the sobriety of the principal column that people are not asking for quite as much leverage as they were just six months ago.

If you like securities, would you do AA's or single A's if you felt really comfortable with the deal? I mean, just sort of move down a little bit and get -- I'm sure there's a huge pickup.

It's not huge, but yes, we would. I think when we really like credit, we jump right to the BBB, and we don't apply a lot of leverage to that. But they're attractive also. Securities in general, I think, are relatively good buys. The yield on an AA levered is about the same as on an AAA because you have a lower advance rate.

Okay.

So that's why we tend to stay in the AAA. Now, we don't have any allergies to AA's.

Got you. Okay. And then I'm assuming the other property types like it's retail you're quoting well above 300, right? Is that hotels, retail?

Yes, over 300, well above, that's subjective 325, once you get north of 350, I think you're in the part of the pool where maybe you got to be careful because maybe you shouldn't be looking at that loan balance if that's comfortable. But up to 350, it's okay. And if the Fed continues cutting Fed funds rates and SOFR falls, you'll see those spreads widen. It isn't like it's going to be one-for-one going to the benefit of the borrower. 275, I actually think is relatively tight for 50% lease anything. However, the rate is actually pretty high when you look at it all in with SOFR at around 475. But if SOFR drops to 4%, those spreads will widen out. It'll probably get north of 300.

Well, that would be very beneficial to your balance sheet for a push…

Yes. It works.

That's a great point. Okay then, I appreciate the color. And the other question is, I'd love to hear your thoughts, Brian, as always, and you've made a lot of comments in the macro, but the Financial Times had an article this morning about the commercial property moment of truth. And they're sort of saying that things are down probably 20%, but no one really knows if people have really marked things down on their books like the banks yet or if things obviously have further to go. What's your sense of the banks and the rates that they've revalued stuff to where clearing levels are? I'd love to hear your thoughts. So do we have more to go here?

I think the banks are paying the price with their regulators for the indiscretions of Silicon Valley Bank and a couple of others. I don't think the banks really have a big problem in commercial real estate except to the extent that they're deep in the office column. But if they've been in the multifamily sector, I don't think they're really in trouble. You just have regulators who've decided to wake up after falling asleep on Silicon Valley and a couple of other names. But there was really no need for additional regulation in the banks. There was a need for normal regulation inside of a couple of banks that just wasn't done. So there's a little bit of an over swing the other way now towards conservatism, but I don't think the banks are in a lot of trouble. The sectors are all a little different. I would say in 2021, when the CLO investor group decided they wanted nothing but multifamily I think I even said that's a recipe for disaster. And so everybody was seeking multifamily properties to put into their CLOs and people were buying three caps and they thought they were going to double their rents, which a lot of them did, but their expenses doubled also. So they didn't really catch up. So I would argue that when we talk about current levels of valuation in real estate, the real question is, were they ever worth what people paid for them in 2021 and ‘22? And I would argue that answer is no, they were never worth that. So they're now coming back to a more normalized kind of analysis rate. They should follow rates, but as I said, when SOFR falls, spreads will widen because you're just getting too tight on the absolute rate. The multifamily sector didn't do that when LIBOR went to 20 basis points. They just kept chasing it lower and lower and as a result, they built themselves a difficult situation. So I don't think the banks are in a lot of trouble. Probably a couple are but a couple are always in trouble. And so are we near the end? I think the REITs have taken a couple of approaches towards kicking the cans in one case. And in that, I don't mean one case as a name, I mean just one avenue. And those are going to take a while. And I suspect ultimately they'll bleed out over time at smaller and smaller losses on a regular basis. The other path is the kitchen sink path where let's just dump everything that doesn't look good right now, we'll start over at a lower capital base. And I think when you foreclose on a property, for instance, we took back a property in Oakland and the prior owner had a $22 million cost associated with it. We now own it at $7.5 million at $130 a foot. I think Oakland is a difficult place right now as are a few other cities. And I really don't think it's always a great idea unless you need capital. I don't think it's a great idea to dump that into the market at whatever the market will pay you knowing it's bank owned and you're getting drilled by it. So, I think it's a different, I think the experience of Ladder, first of all, being well capitalized. So we never really need money and that's why we would do a kitchen sink transaction. It's not, I don't love the fact that we own an empty building in Oakland, but I'm not terribly bothered by it either because I do believe we own it relatively cheap. There are not a lot of the new refurbished buildings at $130 a foot in big cities in California. And if they would just get their crime situation straightened out, there's not even a lot of crime in Oakland. It's something that politicians there are talking about. Crime has gone down because everyone left. There's no people there. So that's going to take a little while, but I don't think I want to just stop talking about it, because we made a mistake there. I think we'll take our time. It's real estate. I think we own it at a good basis. It's an attractive asset and I don't think the city of Oakland is going to stay in the condition it's in for long. How long will we wait? Easily a year, that's no problem. So yes, I think that that's the difference. Some of the highly levered REITs are just throwing things in-and-out with the kitchen sink and I just don't know why you would want to sell an office building today unless you had to.

Right. Well, I mean, that just sort of brings my last point, commercial -- property REITs and mortgage REITs and they seem their book value is decimated. I know not for the Ladder, but for others and the expenses are still very elevated, yet they're working on much lower book values and maybe there's more room to go. But do you expect a massive consolidation when this is all over mortgage REITs, property REITs and would you get involved?

I would love to get involved in something that we don't think will happen.

Okay.

But the reason we don't think it will happen is a lot of externally managed REITs really do lack transparency. You don't quite know what's in there and they're also under no obligation in their mind to sell their company to a better steward of capital. So you don't traditionally see a lot of consolidation in the REITs. In fact, some of the famous ones that you've seen have been taken by force in difficult situations. The opportunity set is attractive right now. So I don't want to get caught up in all kinds of litigation and arguing in newspapers with people. So I would -- somebody calls us up and says, I'm a certain age and I'd like to get out. Sure. Would love to do that. One of the afflictions, I think our company is a little too small. I wish it was a little bigger and that's one way to make it bigger. But in our desire to be slightly bigger, so we're more investable for some of the bigger money managers, I don't think we should start buying other people's headaches. I do believe there are some companies that have gotten to the bottom of their problems, but I think most of them have not.

Right. Well, look forward to seeing it all shakes out. Thanks for the answers.

Sure.

There are no further questions at this time. I would now like to turn the floor back over to Brian Harris for closing comments.

Just last comment from me today, thanks for staying with us. Things are going well here and we won't be talking again for a few months because of the year end audit and announcement in fourth quarter. So we look forward to the quarters ahead. We think 2025 is going to be a very bright year and we're happy with our performance in 2024 so far. But for the most part, as we said, a little bit of defense, a lot of capital acquisition that we wanted to have. And we're getting ready here. We're on offense. We're not talking about it anymore. And I think you'll start seeing those results in the quarters ahead. And thanks again.