Ladder Capital Corp (LADR) Q1 2014 Earnings Report, Transcript and Summary

Good afternoon. I'll be your conference operator today. At this time, I'd like to welcome everyone to the Ladder Capital Corp. First Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Ladder's General Counsel, Ms. Pamela McCormack. You may begin.

Thank you, and good afternoon, everyone. I'd like to welcome you to Ladder Capital Corp's. earnings call for the first quarter of 2014. With me this afternoon are Brian Harris, the company's Chief Executive Officer; and Marc Fox, the company's Chief Financial Officer. This afternoon, we released our financial results for the quarter ended March 31, 2014. The earnings release is available in the Investor Relations section of the company's website and our quarterly report will be filed with the SEC shortly. Before the call begins, I'd like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. I'll refer you to Ladder Capital Corp.'s Form 10-K for the year ended December 31, 2013, for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are contained in our earnings release. With that I'll turn the call over to our Chief Executive Officer, Brian Harris.

Thank you, Pamela, and thanks to all of you for joining us as we report our first quarter earnings for 2014. Ladder produced core earnings of $57.2 million in the first quarter. This translates into a core earnings per weighted average share outstanding for the quarter and after-tax calculation of $0.37 per share. During the quarter, as we began deploying the proceeds from our IPO in early February, our annualized return on average equity was approximately 17.6%. We view the first quarter as confirmation of the success of our flexible business model. Now I'll briefly describe each of the 3 business -- major business lines that we operate in. During the quarter, we originated a total of $611.1 million worth of loans, made up of $463.6 million of loans targeted for securitization and $147.6 million of loans to be held on our balance sheet. The balance sheet loans are mostly first mortgage loans with just $18 million of the new loans originated as mezzanine loans. We contributed a total of $772.4 million of loans into 2 securitizations in the quarter for a net gain of $36.7 million. This volume was in line with our internal models and the profit margins were moderately above where we modeled them. While I would not usually expect to provide too much information on next quarter figures, given that we received the proceeds from our IPO in early February, I would like to mention a few items regarding how we are deploying new capital rates. While the first quarter saw a new loan originations of $611 million, I can report that during the month of April, as we entered the second quarter, we originated over $950 million in loans in 1 month, more than the entire first quarter of 2014. In addition, we have been focusing on the origination of larger loans as we indicated we would in our road show meetings. In April alone, we closed on 4 loans that had combined funded balances at closing of over $760 million. Two of the 4 loans mentioned were in New York City, the largest being a $350 million loan on an office building with a 7-year maturity. The other 2 large loans were in Los Angeles and Chicago. In another of our business lines, securities, we purchased just over $200 million and sold about $58.3 million during the quarter, with about $47 million in payoffs from our inventory. At the end of the quarter, we held $1.75 billion of these securities, which are mostly AAA rated and had an average duration of 53 months. These positions are primarily financed through the Federal Home Loan Bank. We generated a profit of $1.8 million from the sale of the securities mentioned during the quarter. Our real estate business was relatively quiet during the quarter, with no new purchases and the sale of 48 condominiums for a gain of $6.7 million, a gain of more than 50% over where the assets were carried on our books. 44 of the sales were from our Las Vegas inventory while the other 4 were sold during our initial efforts in Miami, Florida. At the end of the first quarter, we had 289 units remaining in Las Vegas and 320 units remaining in our Miami inventory. We also ended the quarter with a debt-to-equity ratio of 1.37x. During the quarter, we observed the gradual tightening of credit spreads. However, unrest in Ukraine, as Russia annexed Crimea, certainly caused some anxiety. Overall interest rates fell in the quarter as investors bought U.S. Treasuries in response and some credit spreads widened, if only temporarily. While the northeastern part of the United States suffered a brutal winter, it became difficult to read how well or how poorly the economy was performing. When interest rates fell, it was unclear if it was because of the flight to safety or slowdown in the U.S. economy or because demand for yield was possibly driving a bubble in the bond market. We think all of the above contributed to cause rates to fall. We think the economy is growing, but modestly and will continue at that pace until people have more discretionary spending at their disposal. Generally, this environment has been constructive for our business and we expect more of the same in the near term. With that, I'll turn you over to our CFO, Marc Fox, who will run you through the financial results in more detail.

Thank you, Brian, and good afternoon. I will now review Ladder Capital's financial results for the quarter ended March 31, 2014. Core earnings for the quarter were $57.2 million compared to a company record $94.4 million earned in the first quarter of 2013. The $57.2 million of core earnings represents the third highest performance by this measure in the company's history. Based on average shareholders' equity balance of approximately $1.3 billion, this result reflects a 17.6% return on average equity. First quarter of 2014 GAAP net income was $18.4 million compared to $88 million for the 3 months ended March 31, 2013. As noted in the press release, the largest GAAP to core earnings adjustment is related to the adjustment of the timing of the recognition of hedge results that coincide with the realization of gains and losses on the disposition of hedged assets and real estate depreciation. As Brian mentioned, in February, we successfully completed initial public offering of shares in Ladder Capital Corp. The IPO generated net proceeds of $238.8 million, which immediately made Ladder a more formidable competitor, able to carry a larger investment portfolio, all from a more durable funding base. The IPO was executed in conjunction with a number of transactions that are referenced in our SEC filings as reorganization transactions. Those transactions included the creation of Ladder Capital Corp., a C corp, that invested the proceeds of the IPO as equity into Ladder Capital Finance Holdings LLP, or LCFH, the operating partnership that had previously been the ultimate parent company within the Ladder Capital organizational structure. Those transactions are described in the supplemental pages included in the press release distributed earlier today. As a result of those transactions, today, approximately 51% of the equity invested in LCFH is owned by Ladder Capital Corp. and its shareholders. The remaining 49% of LCFH equity interests are held by pre-IPO LCFH partners. This change in ownership structure has resulted in changes in presentation to each of the financial statements and the addition of a number of new financial statement footnotes. In addition to information regarding capital structure changes, the supplemental materials provided with the press release also provide insight into Ladder's income tax provision, the computation and presentation of accumulated and other comprehensive income and earnings per share computations. In reviewing this information and our Form 10-Q, it is important to note that many of the related computations performed in accordance with GAAP were based on determinations of income and expenses attributable to the period prior to the February 11 IPO date and attributable to the period from that date forward. One such example is the computation of earnings per share in conformance with GAAP. The EPS amounts presented in our financial statements are based on the net income attributable to Class A common shareholders that was earned from February 11 until quarter end. To aid in the evaluation of our performance, we have included the computation of a non-GAAP measure called core EPS, $0.37 a share for this quarter, which takes into account the full first quarter core earnings of $57.2 million adjusted for income tax and divided by the weighted average number of common shares outstanding on a diluted basis. Turning back to our first quarter results. During the first quarter, Ladder's investment activities focused on loan origination and securitization and a modest expansion of securities portfolio. The lower balance of loans at quarter end was attributable to a 2 securitizations executed during the quarter including $405 million of loans sold in March. Our loan portfolio has since expanded with almost $1 billion of originations in April, including $679.9 million of conduit loans and $302.2 million of balance sheet loans. Real estate activity was limited to continued sales of condominium inventory at solid profit margins. In a review of trends reflected in the first quarter income statement, a number of items stand out. Consistent with past quarters, Ladder maintained a steady stream of net interest income. We have expanded our base of interest-bearing investments to approximately $2.6 billion, 45% higher than the level just 6 months earlier, and net interest income has risen 28.7% over that time frame to almost $22 million in this quarter. The firm also experienced growth in operating lease income as a result of its investments made late in 2013. Operating lease income was $13.2 million for the quarter compared to $10.8 million in the fourth quarter of 2013 and only $6.5 million in the first quarter of that year. Securitization activity in 2014 resulted in income statement gains of $41.3 million from the sale of securitized loans net. After factoring in related hedging results, the sale of servicing and deal expenses and other GAAP-related adjustments, the net economic benefit was $36.7 million or 4.75% of the $772.4 million of loans sold. As Brian noted, we continue to enjoy strong condominium unit sales volumes and profit margins at Veer Towers, with the pace of unit sales almost doubled during this quarter versus the average rate in 2013. We also commenced sales of units at Terrazas River Park Village in Miami during the quarter. Expenses increased from $29.4 million in the first quarter of 2013 to $38.6 million during the first quarter of 2004. Most of the year-over-year difference was attributable to a $9 million increase in real estate operating expenses and depreciation and amortization related to our larger real estate portfolio. Our income tax provision for the first quarter was $5.3 million, reflecting an effective combined rate of 40.58%, which was applied to 51.04% of the pretax income earned by Ladder from the February 11 IPO date forward. 51.04% is the proportion of ownership attributable to Class A shareholders of Ladder Capital Corp. In addition, the income attributed to holders of LP unit, equity interest and LCFH is subject to the unincorporated business tax in New York City. In terms of key balance sheet metrics as of March 31, 2014, total assets were approximately $3.5 billion, remaining roughly the same as compared to the end of 2013. We had total cash of $148.1 million, including $115.5 million of unrestricted cash. Approximately 94.6% of our debt investment assets were senior secured, including first mortgage loans and commercial mortgage-backed securities secured by first mortgage loans, which is consistent with the senior secured focus of the company. Our senior secured assets plus cash comprised 74.4% of our total asset base. Total unencumbered assets, including cash were $1.05 billion at quarter end, reflecting a 3.2:1 ratio to unsecured debt outstanding. Turning to the right side of the balance sheet, equity capital was $1.42 billion at quarter end. The presentation on the balance sheet and the statement of changes in equity capital reflects the exchange of the Series A and B preferred units and common units issued by LCFH for Class A common stock in Ladder Capital Corp. and LP units. In addition, you will note on the face of the balance sheet, accumulated other comprehensive income is now presented as a separate line item component of equity. In the past, OCI was included in equity in an amount equal to the unrealized gain or loss on Ladder's securities portfolio. The computation of OCI within the newly implemented up C structure is different. It is based on the change in the unrealized gain or loss on the securities portfolio only since the IPO date and that amount is tax affected to the extent that will be allocated to the holders of Class A common stock. The debt-to-equity ratio was 1.37 down from 1.9x at the end of 2013, reflecting the addition of the net equity capital from February's IPO. I'll now move to a discussion of our investment activities during the first quarter. We previously referenced our loan production and securitization volumes. In terms of asset yield, the average coupon on loans held for sale that were originated in the first quarter was approximately 5.2%, and the average coupon on loans held for investment originated during the quarter reflected a weighted average spread of approximately 8.04% over 1 month LIBOR. The weighted average loan-to-value ratio of the commercial real estate loans on our balance sheet was approximately 67% at the end of the first quarter compared to 69% at the end of the prior quarter. Our securities portfolio increased by $92.8 million to $1.75 billion during the quarter and at the end of the quarter, 84% of our securities positions were rated AAA or were backed by agencies of the U.S. government. The weighted average duration of our securities portfolio remained at 4.4 years as of March 31, not materially different from the average duration at the end of the prior quarter. We do not acquire any real estate properties during the quarter. The size of our real estate portfolio decreased by $20.5 million due to the sale of condominium units. As a result, the total size of our real estate portfolio as of March 31 was $603.8 million in 39 properties. Finally, I would like to discuss our financing highlights for the quarter. In addition to the IPO, we have continued to enhance the maturity profile of our debt while maintaining a diverse set of funding sources and access to a significant amount of additional financing availability. As of March 31, we have $1.96 billion of debt outstanding and committed financing availability of over $1.92 billion for additional investments. In the first quarter of 2014, after increasing borrowings above the $1 billion mark early in the quarter, we reduced Federal Home Loan Bank borrowings with proceed from the March securitization to 933 point -- $933 million compared to 998 -- pardon me, $989 million at the end of 2013. As of March 31, 2014, $507 million of the funds borrowed from the Federal Home Loan Bank have remaining terms of over 1 year. Short-term securities repurchased financing was $246.7 million at the end of the quarter, down by $115 million versus the end of 2013. On the other hand, long-term nonrecourse mortgage loan financing increased slightly during the quarter to $331.9 million as we added long-term financing on an office building we acquired in the fourth quarter of last year. At March 31, our average cost of debt was 2.62% compared to 2.43% at the end of 2013. In conclusion, we are very pleased to turn in a profitable quarter in which we continue to build our asset base and position Ladder for success in future quarters. With that, operator, let's please turn to questions and answers.

[Operator Instructions] Your first question is from Stephen Laws.

Three things to hit on. I guess first gain on sale margins, 475 basis points roughly on a net basis there. As you look at the environment today, I know you made a couple of comments in your prepared remarks, but is that a level you think is sustainable? Do you think it's still maybe trending towards the 400 to 450 basis point target that you referenced from your last conference call? Maybe any color on how you see the gain on sale margin trending from here.

All right. I think that some -- there is some pricing pressure that we're experiencing in the marketplace today, but I think that I would characterize that pricing pressure really is seasonal, more than anything else. I think anytime you have large financial institutions that are in the lending business with the cost of funds at nearly 0, people in the business of making loans and selling them, often times will gravitate towards bulking up their inventories in the first quarter of the year, and that usually gives them 9 months to get out of the position. So while I would say that we are experiencing some pricing pressure, I would also indicate to you that, that is not unusual at all for this period -- for this time period during the year on a calendar basis. Usually, as we go from first to second quarter, that's usually when pricing pressures are most intense and then after -- usually, after June, things tend to get a little bit easier after that because some of the positions that have been put on those balance sheets need to start getting off those balance sheets. So to answer your question, I don't think I would like to comment on the margins that we see going forward, but we are comfortable with the margins that we have modeled in our business during our IPO.

Appreciate the color there. And I guess with my model, 425 basis points, still have some cushion there versus where you guys posted first quarter margins. Moving to leverage, I realized from the conduit business, leverage will move around based on how recently you completed the securitization or what was available-for-sale line item is, but as we think about -- I'm not sure if there's ever a normalized level, but can you maybe talk about where you see the leverage operating? Is this level, I believe, 1.3x, where you see it or is this something will see move higher as you're able to source and other balance sheet real estate investment?

Okay. I would think that given the capital raise in February, we were putting capital to work as I've described in the April commentary. And I would tell you that a 1.3x is low, relative to where I anticipate running this business on a go-forward basis. And but I would see no change to our model again, and I would anticipate 2 to 3 is probably the right range on a stabilized basis. But as you say, it does move up and down quite a bit. The more securities we own, the more leverage there tends to be. The more loans we own, I would say that would take leverage in a different direction

Great. And then one final question. When I think about the real estate portfolio, you mentioned selling a number of units in Las Vegas and a couple in Miami at an average price of about a 50% premium to book value, where they're on the balance sheet. Is it a fair assumption to think about that as roughly having about a $200 million investment and if the prices hold constant, they could -- we could see gains of about $100 million there, almost $1 per share above what is termed in the balance sheet? Is that the right way to look at the opportunity for upside of the remaining assets to be sold?

Well, I think, I can -- let me break the question up into 2 parts. I think what you're doing is you're taking $120 million investment in Las Vegas and you're adding $280 million in investment in Miami for 200. Keep in mind that when we purchased the Las Vegas units, there were 420 of them, and now there's, I think, there's a 289 of them remaining. So some of that inventory has been taken and some gains have been posted. So I would say to you that the Las Vegas portfolio would appear to be holding a margin of approximately 40% to 50% on what we have in it. If you saw the Case-Shiller home-price index, Las Vegas is the leading price appreciation market year-over-year. And I think we're feeling the effects of that. Obviously, it can turn down or it could go higher, but given what we see right now, we think that versus the basis, the Las Vegas portfolio is a lot more well understood than the Miami portfolio. The Miami portfolio, which was an $80 million purchase that we did in December is -- which we only sold 4 units so far, because really, we've only begun getting through our CapEx plan and begun executing our business plan to sell those units. So that story is a little bit more unknown. I can indicate to you that it feels like our basis in those units, which is $225 a foot feels very comfortable, but I can't tell you exactly where the pricing after selling 4 units will probably average out. So I'll probably need another quarter or 2 to figure that out.

Your next question is from Dan Altscher.

One of the large loan originations you referenced in April, the $350 million office portfolio, was that related to, I guess, a single-borrower office that was like I said -- been in the news, that you guys were maybe mandated on?

Yes. I think there was a -- there were a few headlines that went by that said it was a $300 million loan. Those were incorrect. We did do a $350 million 7-year loan on a single asset here in New York City, which was documented in the press.

Got it. Okay. So good, that $350 million is better than $300 million, I suppose. I guess, with that in mind, clearly, you've deployed a lot of capital so far in just April alone. I mean, how are you feeling on your capital needs right now? It seems like, clearly, I guess used all of the proceeds from the IPO, but how do you think about need for additional capital going forward with what appears to be a very good April?

Well, the capital deployment was rapid. And I think while we were on the road show, we were thinking about that. Typically, in the lending business when you put a loan under application, it doesn't close for 60 to 90 days. So if you take a look at the calendar there, it all make sense that a lot of that would close in April. I think that of the 900 or so -- $950 million that we closed in April, probably about $500 million of that would be targeted for securitization and that would include the $350 million loan. I'm not sure when we'll do that, but that was really the game plan there. And the other $400-plus million was really targeted for the balance sheet. So as you know from the securitization business, that once those assets are ultimately securitized, that capital recycles back into the company, along with any gains, hopefully, that we'll earn. So we're not feeling any need to return to the capital markets at this time. My guess is, should we return to the capital markets, and we suspect we will one day, the first -- if no conditions change relative to today, would probably be a debt situation as opposed to an equity situation.

You answered my next question, which is going to be the breakout of held-for-investment versus held-for-sale for the April. But maybe just one additional question, more on the maybe strategic front. I think you guys maybe have been working on some maybe strategic focus around maybe enhancing value for shareholders -- that can take many forms. Can you maybe provide an update on where you are in that process or what you might be looking at?

Well, obviously, we are always looking to increase value to our shareholders, and one of the ways to do that is through an increase in after-tax income. We are currently engaging with certain experts in the area of accounting to make sure that anything that we're contemplating doing will be accretive and not have any unintended consequences that would disrupt a lot of the good things that we've done so far since the formation of the company. We want to make sure that our financing lines all stay in place. We want to make sure that our bondholders are all kept apprised of what's going on and are happy. And so I can't give you an exact timeline, I can tell you that we are working on it though. We have quite a few assets that -- we break our business really up into the moving business, which would be the securitization business or anything else that we plan to sell; and the storage business, which tends to be more REIT-like assets that we tend to hold on our balance sheet. So when you take a look at what we did in April with $500 million targeted for securitization and $400 million and change targeted for balance sheet, kind of gives you an idea that we're obviously giving that some thought.

Your next question is from Jade Rahmani.

Can you characterize the investment pipeline that you're evaluating? I mean, any color you can provide in terms of size, average deal size, if that's consistent with what you did in the quarter, and also, where incremental yields are going and whether that's at all shifting toward more on balance sheet-type situations or you'd expect the mix of what you securitized to stay the same.

Sure. Well, in the first quarter, the average loan size of assets that we securitized was around $18 million. We have clearly moved into some larger loans that will pull that average up probably over the next quarter. I'm not sure having done that math, but intuitively, it feels like we're moving in that direction, and that's part of the business plan. I think that the pipeline, I won't comment on other than what I've given you for April at this point, but I would anticipate a business-as-usual quarter, but there is plenty of volatility out there. There is still situations going on over in Ukraine where a lot of these conversations can change very rapidly. But the balance sheet business is a business that we're very comfortable with, and because it really falls on our strengths, which we feel our credit and the fortress-like balance sheet that we've created with our financing vehicles, it is far less competitive than the so-called conduit market. However, the conduit market has the highest percentage of ROE dollars. So we're a constant presence in that market, and I would say that we are relatively constructive at this time on it. I don't see spreads widening dramatically any time soon. There seems to be a pretty comfortable balance from our standpoint in the supply and demand business of the conduits, but I would say, probably, there's a little bit more demand actually than supply, which is what's causing the spreads so far to tighten this year.

In terms of 2Q securitization volume that we should expect. I mean, I don't think I've seen you guys contribute loans to any securitization so far this quarter. I may be missing something though. But I mean, do you expect the timing to be back-half weighted and volume to be similar to what you did in the first quarter or is it possible the 2Q securitized volume could be lighter than the first quarter?

I would caveat that by saying that the $350 million loan that we have closed on our books right now, we can securitize that pretty much whenever we feel like we want to and that could be now or it could be for a long time from now. That's a very high-quality loan that we're very comfortable with on the balance sheet. There are some rather large securitizations taking place in New York -- on New York assets in the very near future. So we're taking a look at whether or not we want to put that asset in the market against those assets or should we wait until after those assets are securitized. We have not made our mind up on that. The fact that you haven't seen our name in any securitizations, we haven't actually closed any securitizations in the second quarter. As you know, we also we work with partners in securitizations, so we often times don't announce ourselves in transactions or we're not picked up in the press until we're sure that we're going. And sometimes, some of these pools are moving around rapidly, so we hold off on actually saying we're in. But I would indicate to you that I think that with the clear data being that you could swing this number pretty hard with the $350 million asset, I do anticipate some activity in the second quarter, but we don't think about back end weighting it at all.

Okay. And then lastly, I think in the past or last quarter, you said there was a bright line between what was conduit eligible and what wasn't. And I'm wondering if the gap between what's conduit eligible and what isn't has kind of compressed at all, and if you could just remind us of what in your mind that clear line is.

Sure. A conduit eligible loan at least at Ladder Capital will generally be an asset that is a 5-, 7- or 10-year fixed-rate loan. It usually will entail hedging against the interest rate movement and possibly credit spreads, and it will be targeted for securitization. There are other organizations that securitize floating rate loans. We tend to avoid that business. We view it more as a financing than a sale. We -- then that business oftentimes is our balance sheet business, which we just keep here and we finance through different vehicles rather than securitization market. Most floating rate securitizations they only sell these most senior bonds. They hold the first loss positions, the originator does. So the clear line for us is usually term fixed year, cash flowing and rating agency-friendly from against their criteria, whereas, our, what I would call our bridge loans, are loans that are either in some form of transition. They could be empty. They could be full where the tenant is rolling over in the next few months. So it's not a comfortable securitized assets because the cash flows could change rapidly in the near future. So and almost always on our balance sheet, our bridge loans are less than 4 years in maturity.

Just in terms of LTVs. Where are LTVs that you're doing on both sides, and have those increased lately?

Sure. We -- the LTVs in the securitized assets, I'm going to say, are about 67% that is -- I wouldn't hang my head on that, but I think that's in the neighborhood of where it is. On the balance sheet, they can -- if they're really -- when you put an asset on your balance sheet that has less cash flow, I think a lot of times people think that you're putting additional risk on, which I guess you are in a traditional sense, however, what we think is you're really putting liquidity risk on because there's just less competition there. So depending on the level of cash flow and the certainty of it going forward for an empty building, we will have much lower LTVs than a securitized business. We might be in the 50%, maybe less where there's substantial equity in the transaction. For a 50% occupied building, you might see us at 60%, 65%, and for 100% occupied building, you could easily see us at 75% or even 80% if we want to impute the synthetic mezzanine tranche that oftentimes follows in the securitized world. So there's no real rules on the balance sheet other than we are credit-conscious at all times. But rule of thumb will be the more cash flow there is, the higher the LTV will go. The less cash flow, the less liquidity, meaning, the lower LTV, the higher component of equity we'll require from the borrower.

Your next question is from Ken Bruce.

My first question, I guess, looking at the pace of volume in the second quarter, that's obviously a very healthy level. Can you give us a sense as to what is driving that and just to give a little bit context here? I mean, obviously, there has been quite a bit of volume in commercial real estate lending, but you also are hearing about a lot of competition as it relates to the conduit. So can we just maybe get a step-back and give us a sense as to what's the state of play in the market where you're seeing the opportunities? Clearly, that 900 number in a month is a very good level and just juxtapose that with all the discussions around how much competition there is in the market.

Sure. I think you have to take that into -- let me parse that question into a few different parts of the answer. I think that the -- all the securitized businesses, I don't think you can look at it on a quarter-to-quarter basis. I think you have to really look at it on a year-on-year basis, so when you see a lot of activity in the second quarter, which you're referencing and we see also, a lot of that has to do with the lack of activity really in March. And I think it's just smoothing things out. When you want to look at the general conditions in the market, I think you have to break it up into 2 pieces, 1 is the large loan market, which is the single-asset securitizations. There will be several transactions in the second quarter over $1 billion I think. And there were very few of those in the first quarter, yet last year in the first quarter, there were a lot of them. So I wouldn't draw too many conclusions from that other than it's just timing. The actual business of many, many borrowers and transactions, multiple borrowers that are unrelated with different property types is probably a better measure. And I believe that business was up slightly quarter-on-quarter, first quarter last year to first quarter this year. I think our volume has -- our market share on our first quarter '13 to first quarter '14 level has increased. Our profit margins, probably slipped a little bit but still very acceptable as we saw. So I think that we are very selective around the business that we will and won't do, and part of that selection criteria does involve profit margin. It's not just a question of can we say yes to this loan because we think it's a good credit, it also has to entail Ladder Capital making a fair compensation for it. So I think that we get a little picky during pricing pressures and at that -- when that happens, we'll turn to our balance sheet where it's a lot less competitive and we'll add assets there that we think, hopefully, in the most efficient process from our standpoint. We have balance sheet loans that turn into securitized loans later, and I think you're seeing that's what we're doing a lot of lately. As far as competitors in space that you mentioned. Somebody had mentioned to me at one point that there were 37 conduit lenders. I -- there may be. I couldn't -- I don't think I could name 15 of them and oftentimes in these securitized deals, you have lenders that have 1 or 2 loans in them. I don't really look at that as a terribly competitive situation. From our perspective, we kind of look at who do we lose to on a regular basis. And I don't think that, that list of names has grown in the last 12 months.

Okay. Yes, a number that was thrown out to me was in the 40s, so I guess, in the 30s is actually a good number.

No. I would think if you just take the top 10 or 12 producers, and I think, you can find that in some of the industry rags, I think that if you take the top 10 or 12, you probably have 90% to 95% of the volume.

Got it. And I guess if we just look back at some of the characteristics of Ladder loans that commanded the premium in the securitization market, a lot of that was the diversification that the smaller loans provided, and now that you're making a move up in loan size, do you believe that that's going to have any meaningful impact in terms of the margins that we should be modeling going forward? Is there an ample enough pricing power, given kind of the large loan size that you can make up for that or just so we don't have any surprises on the gain side of the equation?

Yes. I think you have to kind of look at that question as 2 different questions. And when you are making a large loan at a low LTV to an institutional owner of a -- in a portfolio of millions of square feet of real estate, those margins are not -- it's effectively the wholesale market versus the retail market when you're making $10 million loans. So when you have a borrower who is in the markets borrowing money every quarter, quarter-after-quarter, that's a lot different than the conversation you're having with the borrower who has 1 or 2 loans that he's going to do in his lifetime. So it really is a bifurcated situation there. And there are fixed costs involved in originating the loan, so we don't want to write loans that are too small, where there's too many costs involved in originating the loan. We want to keep the process uniform, so that all the loans are originated the same way under the same criteria, but I think that in all likelihood, you will probably see the more large loans we do, unless they're coming right off of our balance sheet into a refinance -- out of a refinance program, then I would imagine that the average margin is acceptable that we've modeled, however, you will see some large loans that will not meet that average.

Okay. And maybe lastly for me, you've seen a lot of the competition in the mortgage REITs kind of pivot towards Europe. I don't believe you've got plans to do that. Do you see this -- the domestic market whether that be on balance sheet or through your conduit activities, you think it's going to turn out to be maybe better than you were thinking just 3 months ago or is there any change in your general view of market conditions today in terms of both maybe just from the volume standpoint, you've already kind of discussed the margin side?

Yes. I think the securitized business is what it is, and I don't really see many changes to that going on presently, other than the credit curve is flattening as yield is chased. But on the REITs that you mentioned that are filling the space really of the banks that used to hold loans in their balance sheet that no longer do, I think that we're probably the insurance into that market that may be annoying to them at this point, because we have extraordinary financing abilities, and also, we have the abilities to do lower-cost businesses also with those very same borrowers. So we cannot only provide bridge loans on large transitional assets, but we can also provide the take-out. Most of those conduit businesses do not involve themselves in the securitization activities, so I think we're well positioned because we do both of those things. And in addition to that, I think that most of those REITs have a dividend payment that we understand what it is, so we also understand how they finance activities and so when we know that a competitor -- if we know who the competitor is, we probably have a general idea of where we can tap them out if we want to on the competitive process, because we know when it becomes non-accretive to them. So that extra information, which we do not normally have when a bank is writing a loan, is actually, I think, an advantage to us.

[Operator Instructions] The next question is from Charles Nabhan.

My question is regarding financing. Looking at the $1.9 billion in available financing, can you give us a sense of how much relates the FHLB membership?

Sure. We have $1.405 billion in capacity, and we're borrowing $933 million at the end of the quarter.

Okay. And you had discussed in the past the possibility of potentially upsizing that membership. Could you give us an update on that, if that's been done already or if that's something that's in the works right now?

We're in the process of applying for that at this point in time.

Okay. And if I could take a step-back and just sort of follow-up with one of Ken's questions regarding the overall CMBS market heading into this year, I think the expectation was for overall issuances maybe 10% or so in excess of the 2013 total. I guess with 4 months into the year, given the expectation of volatility, do you still -- how do you think about that expectation? Has your expectation changed in terms of overall issuance for the whole year?

I don't get overly involved in guessing what I think the issuance will be. It's a growing business that isn't anywhere near where it had been in 2006 and 2007. So directionally, I still feel like it's up, but I think that the large single-asset securitizations can really distort these figures so -- but intuitively, interest rates are low, the banks are still being harassed on one level or in another about writing loans and holding them on their balance sheet. And so I think that it's -- that's why the REITs, I think, are so active in the space and they have filled that gap, and I think companies like ours, have plenty of headway -- headroom here to grow. But I think the big surprise here in the first 4 months of the year is that interest rates are as low as they are with unemployment dropping. I think that probably has caught a lot of people off guard. I think that going into the end of last year, there was a bit of a rush to the door because people thought rates were going up and that's one of the reasons I think the first quarter was a little bit muted in the single asset side of things. So I think it's very -- the profit margins don't depend on where interest rates are generally. It's always easier to lend people money at lower rates because they're happier, but at higher rates, transactions need to be refinanced also, so it's not. And I think we may have made this distinction one other time where the residential mortgage market is very different from the commercial mortgage market and that commercial real estate is locked out. So even though people see rates that are very low, they may not be able to act on them. So what you now have actually is the first class of the 3.0 era of loans coming from 2010 ultimately coming up for refinancing here. So you do see some of that activity coming on board also, but most importantly, I think that there's an enormous class of legacy assets from the precrisis era where the loans are performing well enough to be current, but not well enough to be refinanced. And I think the combination of securitization, senior and a mezzanine is a very -- will be a very common business tactic taken over the next few years. And I think that we're positioned where we can provide both of those transactions to a borrower and meet their needs.

The next question is from Rick Shane.

Ultimately, you guys had a lot of questions about volumes, about loan spreads, about competition and sort of how that impacts your view on potential volume and potential gain on sale. There've been 2 securitizations that have been conduit deals that have been done this quarter. AAA spreads are a little bit tighter, but subordination levels on the AAAs are also up. When you're thinking about your originations for conduit securitization, how do you factor that in? I mean, I think historically, you kind of talked about the diversification you bring for -- to the pools in terms of loan size. But I think one of the other contributors is that you tend to do some higher yield and dues to your loans. In this environment, do you think that, that continues to drive the same value?

The answer is yes. I think it does continue to drive that value. I think the increase in some subordination levels or certain rating agencies, being preferred on certain bond classes is probably as a result of what I would -- what you hear often times referred to as a deterioration in credit underwriting standards. We see most of that so-called deterioration taking place in the form of I/O as opposed to amortization on loans. I don't really see anything that I would call reckless going on anywhere. Certainly not here, but anywhere else either. The only thing that really does surprise me at times is where I see organizations putting risk on their balance sheet at very low returns, and I'm a little surprised by that. That may be an outgrowth of how the banks are paying some of their people these days, maybe an unintended consequence of that. So but I think that as far as the diversification, that's always going to be invoked. I think that it's always helpful to have high-quality credit underwriting. And when we do some of the more structured products at Ladder, I think it's a benefit, because often times we're holding a mezzanine behind those loans that are securitized and that oftentimes gives comfort to investors. What we can't see when we're originating loans is the partner that we're going to securitize with. So we actually have to build the portfolio that stands on its own and then we have to evaluate what the partners inventory looks like and how the mix all works together, so only part of that is visible when we're writing a loan. So what we do is we don't necessarily -- we never abandon our credit standards. We always look to securitization with a partner, but we always have to originate loans as if we're holding them, because if that partner doesn't materialize or the business gets very disruptive because there's a lack of responsibility in lending, we will not securitize in a transaction we don't think is going to hold up, so at that point, we would just hang on to our assets. So I think it's easy to say but hard to do. Credit, I don't think -- ever goes out of style. And I think that we approach every day the same way as far as that goes and that we don't react to how the markets or rating agencies or where AAAs are trading.

[Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenters.

Okay. I think that wraps it up on our end. And thanks for everybody for getting on. Does anybody -- I think that's it. Thanks very much. Goodbye.

This concludes today's conference call. You may now disconnect.