Ladder Capital Corp (NYSE:LADR) Q4 2023 Earnings Call Transcript
Ladder Capital Corp (NYSE:LADR) Q4 2023 Earnings Call Transcript February 8, 2024
Ladder Capital Corp beats earnings expectations. Reported EPS is $0.32, expectations were $0.29. Ladder Capital Corp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Ladder Capital Corp.'s Earnings Call for the Fourth Quarter of 2023. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter and year ended December 31, 2023. Before the call begins, I'd like to call your attention to the customary Safe Harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law.
In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.
Pamela McCormack: Good morning. We are pleased to provide an overview of Ladder's financial performance for the fourth quarter and full year 2023. In the fourth quarter, Ladder generated distributable earnings of $40 million, or $0.32 per share, resulting in a 10.5% return on equity. For the full year 2023, Ladder reported distributable earnings of $167.7 million, or $1.34 per share, generating a 10.9% return on equity. Ladder demonstrated notable financial strengthening across key metrics over the course of the year. With a smaller asset base and lower leverage, we achieved higher returns. Our adjusted leverage ratio stands at 0.7 times, excluding investment grade securities and unrestricted cash and cash equivalents. Distributable earnings increased 13% year-over-year, and undepreciated book value increased to $13.79.
Our financial performance benefited from a positive correlation to rising interest rates, with net interest income growing 58%. Our commitment to an unsecured capital structure contributed to this growth. And we benefited from $1.6 billion of unsecured bonds at a low fixed rate weighted average coupon of 4.7%. We increased our liquidity position to over $1.3 billion by yearend with cash and cash equivalents up 67% year-over-year. In 2023, we received approximately $1 billion in cash from paydowns of loans and securities, which was accompanied by a $462 million or 11% reduction in total leverage. Future funding commitments also declined by over $100 million or 36% and our unencumbered assets increased to 55% of total assets. In addition, dividends coverage also rose to 146% in 2023, reinforcing the safety and durability of our dividends.
Furthermore, our credit ratings were reaffirmed by all three rating agencies during the year, with two agencies continuing to rate Ladder just one notch below investment grade. In the face of significant market disruptions, the company's actions have notably strengthened our financial position, as evidenced by these positive trends. As we enter 2024 our efforts have left us well-positioned to quickly pivot to offence. Our originators continue to explore the markets in new investments in an environment we anticipate will offer compelling opportunities for well capitalized lenders like Ladder, particularly given the pullback by the middle market banks. Regarding our loan portfolio, we received $727 million in repayments, reducing the portfolio balance by 19% from the start of the year.
This amount includes the full payoff of 35 loans, and approximately $100 million in proceeds from the repayment of office loans. Subsequent to yearend, we received an additional $70 million in proceeds from the payoff of four unencumbered loans, including one office loan. We attribute our robust payoffs to our strategy of originating smaller loans in the middle market. This approach has afforded access to a broader range of capital sources for repayment, whether through refinancing or asset sale. Our balance sheet loan portfolio stands at $3.1 billion as of December 31, with a weighted average yield of 9.65% and an average loan size of $27 million. We have limited future funding commitments totaling only $204 million, with approximately two-thirds of that amount contingent upon a favorable leasing activity or other positive developments of the underlying properties.
In the fourth quarter, we successfully concluded foreclosure proceedings, resolving two loans on non-accrual. This includes a $23 million loan on a retail property on the Upper West Side of Manhattan, which had been on non-accrual since the second quarter of 2018, and a $35 million loan on a newly constructed multifamily in Pittsburgh, Pennsylvania, discussed on our third quarter earnings call. Lastly, in the fourth quarter, we placed one $15 million loan on nonaccrual status. The loan is collateralized by a newly renovated multifamily portfolio in Los Angeles, California, and we anticipate taking title to the asset during the first half of 2024. As Paul will discuss, we did not identify any specific impairments during the quarter and increased our general CCEL reserve to align with our assessment of current market conditions.
Heading into 2024, we expect to pivot to office while continuing to actively monitor our loan portfolio. Despite the liquidity pullback from regional banks impacting our market, we believe that the long term advantages for non-bank CRE lenders like Ladder, stemming from reduced competition for lending in our space, outweigh any short term obstacles. In the meantime, we're continuing to work with our well-capitalized sponsors who in most cases, we've seen investing new capital into their assets, expecting more palatable interest rate environment later this year. That said, as we have consistently demonstrated, even during the challenges posed by COVID, we make a clear distinction between a default and a loss. As a well capitalized and experienced real estate owner we possess the capacity to proficiently own and manage the underlying real estate.
Our ongoing objective will be to maximize our value at our conservative loan basis, particularly as we navigate the upcoming quarters with the current higher for now interest rate environment. Turning to our securities and real estate portfolio. Over the course of 2023 we received $196 million in paydowns in our securities portfolio, and acquired over $88 million of new positions, ending the year with a $486 million portfolio comprised primarily of Triple A securities earning an unlevered yield of 6.82%. Our $947 million real estate portfolio, mainly comprised of net lease properties with long term leases to investment grade tenants, contributed $15 million in net rental income in the fourth quarter, and $59 million in 2023. In summary, we entered 2024 with a strong balance sheet, substantial dry powder, modest leverage and a well covered dividend.
As the commercial real estate market continues to reset, we remain focused on optimizing the credit of our existing loan book and we are well positioned to deploy our capital for the right opportunities that we believe will present themselves as transaction activity rebounds. With that, I'll turn the call over to Paul.
Paul Miceli : Thank you, Pamela. As discussed in the fourth quarter of 2023, Ladder generated distributable earnings of $40 million, or $0.32 of distributed distributable earnings per share. And for the full year in 2023, Ladder generated $167.7 million of distributable earnings or $1.34 of distributable earnings per share, a return on equity of 10.9% for 2023. Our strong earnings in 2023 were driven by robust net interest income, and steady net operating income from our real estate portfolio and benefited from our primarily fixed rate liability structure. Our balance sheet loan book continued to receive a healthy rate of paydowns in the fourth quarter, which totaled $167 million. This was partially offset by $11 million of funding on existing commitments.
The portfolio totaled $3.1 billion as of yearend across 116 loans, and represented 56% of our total assets. As previously mentioned, in the fourth quarter of 2023, we completed the foreclosure proceedings on two nonaccrual loans totaling $58 million. Overall, in 2023, we added three REO assets, and sold $144 million hotel assets previously foreclosed on, which produced a $800,000 gain for distributable earnings, demonstrating our ability to maximize value on assets, where we proceed with foreclosure. In the fourth quarter, we increase our CECL reserve by $6 million, bringing our general reserve to $43 million, or an approximate 137 basis points of our loan portfolio. The increase was driven by the current macro view of the state of the U.S. commercial real estate market, and overall global macroeconomic conditions.
We continue to believe the credit quality of our loan portfolio benefits from the diversity and collateral, geography as well as granularity, given our small average loan size, which was demonstrated by the $727 million in proceeds received from paydown in 2023, including the full payoff of 35 loans. Our $947 million real estate segment continues to perform well, providing a stable source of net operating income to earnings. The portfolio includes 156 net leased properties representing approximately 70% of the segment. Our net lease tenants are strong credits, primarily investment-grade rated, and committed to long term leases with an average remaining lease term f nine years. As of December 31, the carrying value of our securities portfolio was $486 million, 99% of the portfolio was investment grade rated, with 86% being triple A rated.
Over 71% of the portfolio was unencumbered as of yearend and readily financeable providing an additional source of potential liquidity, complementing the $1.3 billion of same day liquidity we had as of yearend. Ladder's same-day liquidity simply represents unrestricted cash and cash equivalents of over $1 billion, plus our undrawn unsecured corporate revolver capacity of $324 million. It's worth noting in January of 2024, we extended our corporate revolver with our nine bank syndicate to a new five year term, out to 2029. The facility carries an attractive interest rate of SOFR plus 250 basis points on an unsecured basis, with further reductions upon achievement of investment grade ratings. This enhancement demonstrates the strength of our capital structure as well as well as Ladder's strong relationships with these financial institutions.
As of December 31, 2023, our adjusted leverage ratio was 1.6 times, which was down year-over-year as we delever our balance sheet while producing steady earnings, strong dividend coverage, and an attractive double digit return on equity. Unsecured corporate bonds remain the foundation to our capital structure, with $1.6 billion outstanding or 41% of our debt, with a weighted average maturity of nearly four years, and an attractive fixed rate coupon of 4.7%. I'll also note in 2023 we repurchased $68 million in principle of our unsecured bonds at 83.5% of par, generating $10.7 million of gains. As of December 31, our unencumbered asset pool stood at $3 billion, or 55% of our balance sheet. 81% of this unencumbered asset pool is comprised of first mortgage loans, securities and unrestricted cash and cash equivalents.
We believe our liquidity position and large pool of high quality unencumbered assets provided Ladder with strong financial flexibility in 2023 and continues to do so as we enter 2024. And as Pamela discussed, is reflected in our corporate credit rating that is one notch from investment grade from two of three rating agencies, with all three rating agencies reaffirming our credit rating in 2023. In 2023, we also repurchased $2.5 million of our common stock at a weighted average price of $9.22 per share, and our current share buyback authorization of $50 million has $44 million of remaining capacity as of December 31, 2023. Ladder's undepreciated book value per share was $13.79 at December 31, 2023, with $126.9 million shares outstanding. Finally, as Pamela discussed, our dividend is well covered, and in the fourth quarter Ladder declared a $0.23 per share dividend, which was paid on January 16, 2024.
For more details on our fourth quarter and full year 2023 operating results, please refer to our earnings supplement which is available on our website as well as our annual report on Form 10-K, which we expect to file in the coming days. With that I will turn the call over to Brian.
Brian Harris: Thanks, Paul. We were happy when 2023 came to an end, and also very pleased with our financial results from start to finish. I credit our success to having gotten our company ready for turbulent markets in the years leading up to 2023. I intend to highlight our differentiated liability structure with a large component of fixed rate debt when explaining why things went well at Ladder during the year. But in truth, it's more complicated than that. Over 10 years ago, we decided to finance our business with a greater concentration of corporate unsecured fixed rate debt, forgoing the typical mortgage REIT model of using repo lines to lever returns, even though floating rate repo finance was cheaper at the time when we issued the bonds.
We realized after what happened to the U.S. banking system in 2007 and 2008 that there would be fewer banks, larger banks and more highly regulated banks. So we felt the usual bank financing models in use might need some shoring up as they were becoming more and more problematic in an increasingly more volatile world with less cushion against market shocks. While we never saw a pandemic coming, or the enormous global central bank intervention that took place in response to it, these items only serve to cement our case to manage our company with safer debt, even if it came at a higher cost, using less leverage, just as we had indicated we wouldn't do when we founded Ladder in the fall of 2008. We stay true to that model and while it was helpful that we got the timing and direction of the Fed's hiking cycle correct, our constant vigilance around avoiding credit mistakes has really been the linchpin to our success.
While not perfect by any means we believe we were better than most in our approach towards lending over the last three years. Although we're not without some headaches in these difficult times, our disciplined approach and keeping our exposure and assets at a reasonable basis has served us well once again, as it has for the better part of our lengthy careers. In March of last year, after a few banks failed largely due to a basic lack of understanding about duration, on the part of bank CEOs and regulators, the funding model for regional banks in the U.S. changed. These changes may very well be permanent. If banks don't compensate savers with appropriate interest rates on deposits, we now see how easily savers can and will move their savings to where their capital is treated better.
At Ladder, we own over $1 billion of T Bills that are approximately 5.4% and mature in less than 90 days. This is not as a result of any plan we have, but rather a luxury we enjoy, because we issued about $1.3 billion of fixed rate unsecured bonds, with an average rate of just 4.5% with a remaining average maturity of about four years. We now have a rather barbelled asset base of T-Bills at 5.4% and a loan portfolio that earns an unlevered return of approximately 9.7%. This combination allows us to cover our quarterly cash dividend using only modest leverage during these precarious times in commercial real estate, while the deficit at the US Treasury is spiraling out of control. Our fortress-like balance sheet allows us to turn our attention to getting through the current downturn in commercial real estate values in the aftermath of soaring interest rates, and with a banking system with little appetite to finance new commercial real estate loans.
We've navigated this environment with considerable success so far. In 2023, as mentioned earlier, we received $727 million in proceeds from paydowns on balance sheet loans, which did include the full payoff of 35 loans. We also received $196.1 million of principal paydowns and pay-off in our CMBS and CLO securities portfolio, further increasing our liquidity as a result of our low leverage business model. Because of our high level of liquidity, we are able to work with our sponsors on loans that are having difficulty refinancing. However, if we share this benefit with those borrowers, the borrowers too must pitch in with additional capital to keep the asset in their control. We've been fortunate so far, having modified some large loans after substantial new equity was posted to create more time to resolve stress from higher rates.
In 2023, we received $119 million in additional equity from our borrowers on 56 loans. We have also received additional credit enhancement in the form of well-heeled sponsors providing full recourse on some of our larger loans outstanding. In our equity portfolio, our largest office property is triple net leased for another eight years with decades worth of extensions available to the tenant who happens to be one of the largest banks in the United States. In this case, the tenant is currently putting the finishing touches on buildings that we own that they rent, at a tenant costs between $250 and $300 million, including construction of a new 1,400 space parking deck, so they can concentrate even more employees into these buildings. We're just not worried about that one.
I'll wrap things up here by thanking our employees who worked so hard last year in a daily environment of falling asset prices. We recorded distributable earnings of $168 million in a year where asset base got smaller every quarter, yet we continued to produce double digit ROEs while holding substantial levels of cash. We feel the Fed is at least done raising rates for the time being. If they do begin to lower rates this will come as welcome relief to property owners. With less competition for lending assignments from regional banks private credit is indeed moving in to take part in this vast addressable opportunity, and we have every intention of taking advantage of our already strong position in mortgage lending, and plan to deploy our large cash holdings into something more interesting than T-Bills.
Thanks for listening. Operator, we can open the line for some questions now.
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