Ladder Capital Corp (LADR) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, greetings, and welcome to Ladder Capital Corporation First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michelle Wallach. Thank you. You may begin.

Thank you and good afternoon everyone. Welcome you to Ladder Capital earnings call for the first quarter of 2018. 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, 2018. The earnings release is available in the Investor Relations section of the Company’s website and our quarter report on Form 10-Q will be filed with the SEC this week. 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 refer you to Ladder Capital Corp’s 2017 Form 10-K 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’re 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. Reconciliation of the 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.

Thanks, Michelle. On our last call, I mentioned that I would walk you through the year ahead and how we plan to profit from our more efficient capital structure and how we expected to deliver strong returns for the benefit of our shareholders especially in arising interest rate environment. Today, I am pleased to report our first quarter core earnings, a non-GAAP measure of $63.8 million or $0.55 per share, our best quarter since going public in 2014. The foundation of this very strong earnings report is rooted in our emphasis on investments in balance sheet loans which have grown from $2 billion at the start of 2017 to $3.6 billion today with a weighted average coupon of 7.3% at the end of April. Since most of these loans are floating rate, Ladder’s positive net asset exposure to LIBOR has also expanded. As we have built up this position and as the Federal Reserve Bank has gradually but consistently raised short-term interest rates, Ladder has benefited to an increasing degree each quarter. If the fed continues on their current trajectory of raising the fed funds rate, three more times this year and three to four times in 2019, we expect Ladder’s annual earnings power should be enhanced by about $0.15 per share for every 100 basis point increase in LIBOR, so long as the existing positive exposure to LIBOR is maintained. While our first quarter earnings certainly reflect the benefit of rising short-term interest rates on our hefty balance sheet loan inventory, this was also a quarter where the true earnings power of our multi-cylinder approach to investing in commercial real estate was on full display. We generally guided investors and analysts to look at our net interest margin and our income from leased properties that we own, as we aim to cover our quarterly dividend from these recurring income streams. We’ve always said that we tried to earn a 9% to 10% ROE from these basic and highly predictable cash flows. We also say that our capital light business of making loans targeted for securitization, our conduit business would allow us to supplement that 9% to 10% yield above the stated objective. In the first quarter, we contributed $436.5 million of loans to two conduit securitizations earnings $11.9 million for a profit margin of 2.72%. Since going public in early 2014, we have contributed $9.3 billion of loans into 35 transactions, all of which were profitable. We earned an average profit margin of 3.2% with cumulative profits of $299 million. On our last earnings call, I also mentioned that we had a second product our $1 billion real estate portfolio that we were going to begin to sell portions of and that those sales were also likely to further supplement the baseline earnings goal of 9% to 10% ROE. In the first quarter, we sold $93.4 million of real estate investments in two separate transactions producing total core gains of $17.2 million during the quarter. With the addition of $17.2 million in gains from the sale of real estate and $11.9 million from our conduit to our expanding base of recurring income, we were able to produce $63.8 million in core earnings, $0.55 per share in core EPS resulting in an annualized after-tax ROE of 16.3% in the quarter. Our GAAP book value increased to $13.37 per share and our undepreciated book value also increased in the quarter to $14.82 per share. In reviewing these earnings results, I don’t want to overlook our strong first quarter loan origination activity. We originated a total of $967.5 million in mortgage loans in the quarter comprised of $532.9 million of conduit loans in addition to $434.6 million of balance sheet loans. In the first quarter, we also acquired an industrial property with a partner near Atlanta for $24.5 million. We own about 70% of the equity in this deal and it is financed with non-recourse mortgage debt from a third-party lender. This investment will be held in our taxable REIT subsidiary as we expect to sell this asset within the next two years. Looking forward to the second quarter, we expect to participate in further conduit securitizations and we are also slated to purchase some residential properties on the California coast in a JV for approximately $88 million, which we also expect to finance with third-party debt. We hope our results over the last two quarters in which we reported combined core earnings of $124.2 million over six months is a clear indication that our business strategy is successfully unfolding as planned. With the cash dividend payment in the quarter of $0.315 per share, our $0.55 in core earnings per share continues to position Ladder having among the highest dividend coverage ratios in our peer group. Before I turn you over to Marc, I wanted to briefly address recent developments with Related Fund Management. As previously announced on January 15, 2018, we received an unsolicited non-binding proposal from Related to acquire the Company. Following careful consideration and with the assistance of financial and legal advisors and after numerous discussions with Related, the Ladder Board determined that the proposal significantly undervalued the Company and the parties were unlikely to reach an agreement on value that would be in the best interest of the Company and its shareholders. The Ladder Board takes its fiduciary responsibilities to shareholders very seriously. The Board fully aligned as both Board members and significant shareholders continues to be focused on enhancing long-term shareholder value and will always give due consideration to any credible proposal. While we wanted to address this matter and provide this recap, the purpose of today’s call is to review our strong financial results in the first quarter, and we ask you to keep your questions focused on that topic as we do not intend to comment further with respect to Related. With that, I’ll now hand you off to Marc.

Thank you, Brian. I will now review Ladder Capital’s financial results for the quarter ended March 31, 2018. As you noted, in the first quarter, Ladder generated core earnings of $63.8 million, and core EPS of $0.55 per share, resulting in an after-tax return on average equity of 16.3%. Each of these performance measures exceeds Q1 2017 results when Ladder earned core earnings of $31.6 million and core EPS of $0.31 per share, while generating a 9% return on average equity during the period when Ladder did not participate in any securitization transactions or sell any non-condominium real estate assets. During the first quarter of 2018 core earnings were primarily derived from net interest income generated by Ladder’s balance sheet loan portfolio, net rental income from our real estate portfolio and gains on the sale of securitized loans and real estate. Overall in terms of net revenues, net interest income and net rental income totaling $52.8 million was supplemented by $29.1 million of gains from loans, securitization, and non-condo real estate sales during the quarter. On a GAAP basis, Ladder generated net income before taxes of $71.7 million for the three months ended 3/31/18 compared to net income before tax of $18.3 million reported in Q1 last year. The largest GAAP to core earnings adjustment in the quarter related to the timing of the recognition of hedge results to coincide with the realization of gains and losses on the disposition of hedged assets. During the quarter Ladder’s portfolio balance sheet loans increased to over $3.53 billion, up from $3.28 billion at the beginning of the year. This growing portfolio has three major components. The largest component is the $2.72 billion of floating rate loans, which had an average mortgage loan interest rate of LIBOR plus 5.57%. In addition, the balance sheet loan portfolio includes $646 million of fixed rate loans with a weighted-average loan interest rate of 5.24% and a weighted-average remaining term to maturity of two years. The final major component of the balance sheet loan portfolio is $158.1 million of mezzanine loans that had a weighted average mortgage loan interest rate of 10.85% at quarter end. Altogether, this portfolio had a weighted average mortgage loan interest rate of 7.1% at March 31, 2018. The interest rates on the $2.72 billion of floating rate loans were adjusted upward by a 0.25 a point in early April, which will increase the annual interest income earning rate on those loans by approximately $6.6 million. This portfolio is financed by a combination of CLO debt, FHLB advances and committed loan repurchase facilities. Ladder’s conduit loan balance stood at $273.6 million at the end of the quarter during which Ladder originated $532.9 million of new conduit loans while contributing $436.5 million, principal balance of loans to two securitization transactions. Much of the capital used to fund the expanding balance sheet loan portfolio has been freed up as our securities portfolio has been reduced over the last 18 months. As a result of the steady and methodical reallocation of capital into balance sheet loans and real estate investments and away from investments in CMBS during recent quarters, approximately 73.4% of net revenues over the past four quarters have been derived from recurring sources of earnings. Finally, during the quarter, we also completed the sales of two properties, an office building and a manufacturing housing community from our portfolio of real estate equity investments generating $17.2 million of core gains. We also acquired one property, an industrial building for $24.5 million during the first quarter. A closer look at these three transactions reveals an investments approach that has worked and that we continue to apply. In the case of the office building sale, Ladder acquired that building as part of a joint venture investment in a portfolio of office buildings in 2013. At the time, this particular building was occupied by bank under the terms of a below market lease. Our underwriting analysis at acquisition and our purchase price reflected a view that this 135,000 square foot space would be vacated in June 2016 when the lease expire. The tenant did vacate the building and six months later a double A rated tenant commenced its occupancy of the building under an 11-year lease priced at a higher per square foot rental rate. As a result of the successful releasing at an appreciably higher rent than was being paid by the prior tenant and the realization of the level of cash flow we projected at the time of the acquisition, the joint venture in which Ladder had a 77.5% controlling interest, was well positioned to sell the property in Q1. Ladder share the sell proceeds resulting in a core gain of $6.2 million and an annualized return on equity of approximately 28%. It is important to note that consistent with Ladder’s to hold this property for a multi-year period and re-lease it at market rates. This building was held by Ladder as a REIT asset because the incremental value that resulted in a $6.2 million core gain was all created while it was a REIT asset there will be little if any tax payable on this gain. Moving on to the manufactured housing community sale, in March 2017 Ladder acquired a 70% interest in a 421 pad community in El Monte California. In underwriting this investment Ladder envisioned a much shorter investment period being required before gain could be realized. In that case, the key value enhancing event, the acquisition of a ground lease affecting a portion of property was achieved in conjunction with the acquisition of the park. The market value of the property increased upon the reconstitution of the full fee simple interest in the property effectively leading the JV with a substantial unrealized gain that we decided to capture as soon as possible. Ladder opted to hold this investment in a taxable REIT subsidiary. In February, less than a year after this acquisition, this property was sold, Ladder shared the proceed resulting in a total core gain of $11 million reflecting a 74% annualized ROE. This gain will be taxed at the recently reduced corporate tax rate. In Q1, Ladder acquired a 6,000 square foot warehouse distribution building that was constructed in 2007 on a 40 acre parcel near Atlanta. Similar to the manufactured housing community investment existed in the first quarter. Ladder proceeds a near-term value enhancement event and is therefore electing to hold this property in a taxable REIT subsidiary as well. The building which is currently vacant was acquired for $40 per square foot by a joint venture in which Ladder owns a 70.6% controlling interest. It was previously occupied by a well-known beverage brand that invested over a $160 per square foot to improve the building to meet food industry standards. It is anticipated that the releasing of the building to one or more food and beverage industry tenants will substantially enhance the property’s value within the next three years. We’ll keep you posted as events develop. We wanted to take the extra time to discuss these real estate investments because they provide some concrete insight regarding the strategies applied and our ability to foresee and execute value enhancing events over time and on a repeated basis. We’ve referenced this in house skill set on previous calls with you, so this is meant to close that loop and provide some perspective regarding future possibilities. Turning to key balance sheet and investment activity metrics, as of March 31, 2018, 96.8% 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. Senior secured assets plus cash comprised 77.9% of our total asset-base. Total assets stood at $6.23 billion, 3.4% higher than at the end of 2017. Quarter end total equity was $1.5 billion resulting in an adjusted debt to equity ratio of 2.62 to 1. Total unencumbered investments including cash were $1.7 billion at quarter end and unsecured debt outstanding stood at $1.2 billion, reflecting an unencumbered assets to unsecured debt ratio of 1.43 times. In terms of originations, Ladder produced a total of $967.5 million of loans in the first quarter. The average mortgage loan interest rate on balance sheet loans, originated during the first quarter was LIBOR plus 5.83%. The average interest rate on conduit loans originated during the quarter was 5.01%, and the weighted-average loan to value ratio of the commercial real estate loans on our balance sheet at March 31, 2018 was 66.2%. During the quarter, Ladder reduced the amount of interest we expect to receive related to our soul defaulted loan by $2.7 million. This was the first quarter that Ladder's TRS or taxable REIT subsidiary earnings, primarily securitization gains and real estate sales gains were impacted by the recently enacted federal tax reform legislation. The reduction of the federal corporate tax rate from 35% to 21% resulted in a $1.7 million increase in after-tax core earnings or about $0.015 per share impact on core EPS. Our shareholders also benefited from a 20% reduction applied to REIT dividend. On the financing side as of March 31st, we had $3.9 billion of core debt outstanding and committed financing availability of over $2.3 billion for additional investments. Over the past four quarters, we’ve continued to enhance the diversity of our funding base through the issuance of $900 million of five and eight year unsecured corporate bonds. Two issuances of non-recourse CLO debt with a total balance of $683.1 million at 3/31, and the net addition of $94.3 million of non-recourse 10 year mortgage debt to finance real estate investments. When combined with $1.5 billion of permanent equity and $103.5 million of other liabilities, $4.13 billion or 66.2% of Ladder’s base is comprised of equity, unsecured debt and non-recourse non-mark-to-market debt. In addition at 3/31, we had the full $241.4 million capacity of our syndicated unsecured revolving credit facility available to us. So far this year, we have exercised our options to extend the maturities of two of our existing bank financing facilities. At 3/31, $550.5 million was outstanding on the leased facilities. Adding to the net interest income tailwind referenced previously over the course of the past four to six months we have seen notable spread reductions in our cost of balance sheet loan funding from banks from approximately LIBOR plus 250 basis points to the LIBOR 200 basis point range. At quarter end we had $1.3 billion of FHLB borrowings with 2.44 year weighted average maturity and an average cost of 1.86%. Finally, we paid a $0.315 per share cash dividend in the first quarter on a rolling fourth quarter basis Ladder has paid $1.23 per share of dividends, while earning core EPS of $1.79 per share resulting in a 69% dividend payout ratio. So summing up, in the 2018 first quarter Ladder generated $63.8 million of core earnings $0.55 per share of core EPS resulting in a core after-tax return on average equity of 16.3%. We originated total of $967.5 million and securitized $436.5 million of loans resulting in $11.9 million of net securitizations reflecting a 2.72% profit margin. We sold two properties in transactions that generated $17.2 million of core gains and added $0.13 per share to core EPS. And we paid a $0.315 per share cash dividend in the quarter and with core EPS was $0.55 per share. And we continue to apply disciplined approach to the use of leverage, the allocation of capital in the face of the risk we encounter and to the selection of longer term investments and loans in real estate. At this point, it’s time to open the line for questions-and-answers.

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. [Operator Instructions] Our first question comes from the line of Steve Delaney from JMP Securities. Please go ahead.

Marc, you were describing the office building story. Could you tell us what market that was in? It does not sound like it is a larger complex in St. Paul Minnesota that you’ve highlighted in your slide deck, so if you could identify that one, so we can find it in the K, that’d be helpful?

That’s part of the Richmond Virginia portfolio.

Yes, okay and that was like Highwoods Properties or something over there in that Innsbrook Complex I think?

The Innsbrook Complex that’s correct.

And an unusual line in the income statement provision for loan loss, $3 million and it brings the total reserve it appears to seven. You mentioned a single defaulted loan. Is this a specific reserve on that particular loan? And can you give us a little detail on that?

Sure, the $3 million is -- has two components to it. There’s a $2.7 million specific reserve that's on the ground -- this is actually first mortgage loan and a mezzanine loan on the same property originated simultaneously, and that $2.7 million reduction relates to that, that leaves us at this point with a basis that is in excess of the amount we lend, which was $26.9 million in total. The other $300,000 is we’re building up our general reserve. We had been building one for a couple years and got to a point before we started expanding our balance sheet loans to where we felt we were overdoing it and then we stopped adding to that reserve. And then we went -- and expanded the balance sheet loan portfolio, decided to start putting that reserve back on every quarter at a rate of $300,000 a quarter. So, you’ll see that going forward. The building -- the property that is -- the subject of the property that’s in default is, just give you an update on that, got a new tenant in it, it’s a 100% occupied, it’s a 10 year lease and we don’t have expectation and we haven’t incurred any kind of principal loss.

So, we should assume that the balance sheet provision or the allowance for loan loss all of that but for the 2.7 specific would be considered general. Is that correct?

That’s correct, that’s the only specific reserve we have.

Thank you. Our next question comes from the line of Stephen Laws from Raymond James. Please go ahead.

Brian, could you comment a little, you talked about the real estate sales and continuing to look at those. Any identified properties or expected pace this year that we should think about with regards to future sales?

Sure, this is Brian. We have a decision to make I think on the St. Paul property that was just referenced 100% of the tenancy has now renewed their leases. And so as a result of that, it’ll pretty much be the same story for the next 10 years we think. So I think we have to make a decision as to whether or not we’d like to sell that property. Now that it’s been fully extended or should we refinance it in a mortgage and hang onto it in the REIT. And I'm not sure what we’re going to do there, but we’re very comfortable with the basis where we own it. And I think the -- we’re going to continue to sell some condominiums. You've seen we’re almost around out of condominiums in Las Vegas. We’ve got some left in Florida still, but we’ve a third condominium project which is on the lower east side of Manhattan and it’s less than 50 units. I think it’s less 40 units. And we would expect those assuming the construction finishes up and the CMO comes online, we may see sales there and closings in the third -- maybe the end of the third or fourth quarter.

Appreciate the update on that and switching to securitization markets, strong volume in Q1 and solid gain on sale margins. Can you maybe just talk of just a general update on what the securitization markets are like today? It can be a little choppy, a little lumpy as we’ve seen historically but maybe an update on what you’re seeing in the securitization markets?

Sure. Volumes are a little bit light I would say and when I talk about the securitization market, I am not really talking about the single assets securitization. For instance, I think the partner said property that owned some bonds on is -- there’s a book out to refinance that at $1.6 billion. So that’s not what I am talking about. The general conduit business, I think the volumes are down a little bit. We have seen the banks as they reported their earnings have indicated that loan demand had slowed a bit. And I think that we may be seeing a little bit of -- I wouldn’t call it a slowdown, I think I would call it a bit of pause mainly because how rates have moved up there on the 10 year. And that frequently will be accompanied by our wait and see moment, we have on borrowers’ part. So I am not overly concerned. I think the amount of competition in the space is down a little bit. I think the result of that is because the other conduit business that’s emerging is the CLO market which is like I’ll call it conduit for floaters, but -- and that is occupying quite a bit of time in a lot of the lending operations in New York. So the securitization business is a little bit down I think with rates rising and spreads actually are out a little bit. I think that should be reasonably healthy. But as I said, I do think that there is this wait and see sensation going on, on the part of buyers as well as sellers of things because the five year and the 10 year rate have been very close to each other in this flat curve. So, I think it’s a pause, I don’t think it’s a slowdown naturally, but we will see. But we are active really in the floating rate and the fixed rate businesses.

And one final question, I kind of want to touch on the stock price and valuation. You pretty cleared the board determine the recent offer was not reflective of the value the Company and I know in the prepared remarks you guys discussed the significant dividend coverage you have. Can you talk a little about thoughts regarding stock repurchase or buyback? How you are thinking about capital allocation between doing something like that, repurchasing shares versus pushing capital into the core business or possibly looking at something like allocating a portion of the gains on that you’re generating sales towards repurchasing stock? It just seems like given the statements around that proposal that the Company certainly feels like the stock is significantly undervalued at these levels.

Yes, I think I would agree with that statement and that sentiment. I think in the fourth quarter we had repurchased some shares although not too many and -- but we are pretty sensitive to what our cost of capital is. I think our earnings -- as when we think about capital and where we allocate it, I think last quarter we had a very good ROE. In the first quarter, we had a 15.3. So obviously we are finding places to allocate capital pretty comfortably well in excess of our dividend. However, I am of the opinion that we are sort of lumped in the REIT space with REITs that are maybe one new phenomenon in this turnaround, the cycle is the EPS. So I think that if REITs don't do well I think we occasionally struggle also, but that doesn't mean we can’t find other ways to reward our shareholders. So we’ve long said that we run a 9 to 10 ROE type business and occasionally supplement it, it’s previously been with securitization profits. We made over 30 million in the fourth quarter, about 11 -- over 11 million this quarter, but now we have the other product coming online, which is the real estate portfolio, which I do think we will be harvesting some gains. It’ll be a -- it is literally sounding if it is a real estate, so it is a binary event and it doesn't work the same way as the conduit does, but well I wouldn’t say that we’ll deliver those returns every quarter. I do think that you will see it more frequently than you have in the past. We have plenty of capital. So I don't see any need to issue shares fares by any start of the imagination, but I do think that our stock does appear cheap to us. We have a 41 plus million dollar stock repurchase allowance at this point that we haven't used, and I would expect there’s a very good chance that we will take a look at that, depending on what happens when our earnings come out and what happens with the rest of the REIT stocks. But also we constantly -- we would prefer to revisit our dividend policy, on a fairly regular basis. That's rather predictable. We certainly don't want to be in a position where we’re having difficulty on any level meeting it and clearly we’re not at this point we -- I think we’ve one of the highest coverage ratios in the peer set. So I think that is a question about when not if, and while I wouldn't normally want to recommend raising the dividend in a mid-year cycle certainly consecutive quarters. I think if the set continues on the path that they’re on, and they continue raising short-term interest rates there is going to be a very reasonable argument for moving a little bit sooner.

Thank you. Our next question comes from the line of Tim Hayes from FBR. Please go ahead.

Looking at a year from now just kind of assuming the same macro conditions persist. And we see a couple of more rate hikes. How do you see capital allocation mix looking like at that point? Should we expect you to be net seller real estate, as you continue to harvest gains, and just kind of opportunistically sell some securities and just redeploy all that into the lending business? Or any color around that would be helpful?

Please understand the next few comments are going to be with not a lot of conviction because we have to deal with the market conditions that are in front of us. Frankly, it’s been a little bit quiet lately. We had a little bit of an interruption there during that Vicks spike that took place. But realistically I think the markets have been a little bit quiet, and I’d tell you it feels to me like things are a little too quiet, and I just got a sense about me that there’s going to be a little bit more turbulence in the future here. So our securities portfolio is down quite a bit, I think it’s down about a $1 billion now. We have not been any aggressively to that, but we stand ready to should there be any kind of turbulence or spread widening for unforeseen purposes. The last bout of spread widening took place when oil prices fell at a very precipitous drop, around $20 a barrel. Interest rates seem to be rising that’s making some people nervous, I know you’ve seeing some of the high yield bonds that have been issued recently. They have taken a diet pretty quickly after being priced. So these are all things that factor in to what we were allocating capital. I think as rates rise, we’ve got a very healthy book of floaters that will benefit from that. We would like to keep adding but at some point I do think you have to assume there might be some demand disruption there as rates rise. At this point, I think one of the slowdowns that I mentioned earlier in the conduit business is really the fact that there’s two types of loans you are doing the securitization business, you securitize loans where somebody purchases a property in acquisition or else you do a refinance. The refinance channel is a voluntary channel unless you have a maturity date and now I think the refinance channel has been reduced quite a bit because of the recent move in interest rates. So if I look out over a year, I think we’re going to get a chance to buy some securities if there’s any volatility. I think the conduit business is going to be reasonably healthy mainly because I think rates rising and volume falling creates a supply and demand imbalance. And the bridge loan business has a lot of players in it but I think everybody is shooting at a little bit of a different target and I think the target we go after is really a middle market lending business and it’s frankly as competitive as some of the larger loan businesses. So we would expect to stay in them but we will emphasize them differently in different ways. The real estate product is an interesting one though because we have purchased, as Marc mentioned, we bought a $24 million warehouse in Atlanta. Yesterday or today, we settled on an $88 million purchase of some housing in Santa Barbara. So we are finding plenty of opportunities in the equity side so while we happen to have $1 billion portfolio of equity I do see us adding to that and sometimes people will sell real estate because they think rates are rising. So there’s just always opportunities in real estate, we just happen to be seeing more of them recently.

And on the real estate portfolio, I guess it sounds more like you are going to be adding there even as you’re harvesting gains. But would you mind just kind of identifying or sizing just how many of your properties are stabilized in a position to be sold right now?

Well, I would bifurcate our portfolio into what I would call the net lease business and I think that’s about $600 million of our portfolio, that’s leased 100% for I think on average about 13 to 14 years. If those are all financed with 10 year non-recourse financing and those loans assumable, we're throwing off double-digit returns. There’s no active effort on our part presently to sell those, but occasionally somebody does want to buy one and calls us. But I think we will continue building there, but with the flat yield curve that’s a difficult prospect. The rest of the portfolio is what I will call value-add. We get together with a JV, it’s maybe not occupied, it could vacantly -- Atlanta warehouse that we purchased is vacant. We think that’s a great opportunity and we don’t think -- we put that in our TRS because we think we are going to lease it and sell it back quickly, that we wouldn’t even put into REIT. But there are -- the value where we have a JV partner, an operating partner on the ground, we usually try to get involved with seminal events that take place quickly that require capital, for instance the El Monte mobile home park we needed to acquire a ground lease to make that value proposition take hold and we did very quickly. We actually have all of it before we close. So that was a quick turn. So, there’s -- I would call our real estate portfolio, a conveyer belt, there’s going to be some coming on, there’s going to be some coming off. And -- but we don't have any opinion about holding onto things forever or never selling things, nor do we have an opinion about selling things immediately either. It generates a lot of good REIT income that -- and our loan and lease business really generates a lot recurring income and that’s been an effort that we’ve been undertaking. 2017, we spent a lot of the year getting our balance sheet in optimum format where we could properly leverage assets safely and we’re in that position today. So 2018 will be a year where we spent most of our time on investments, reaping profits and trying to move the stock price up with shareholder value.

Thank you. Our next question comes from the line of Jade Rahmani from KBW. Please go ahead.

In terms of the overall share REIT market, how many rate hikes do you think that the market can absorb before we start seeing diminishing credit performance?

I would -- I think realistically it could -- if the rates are going up because the economy is doing well then I think that number is higher and I would say four easily because that’s still going to be a very high interest rate. But if the rates are going up because the government is borrowing too much money and there’s too much demand and -- there’s too much demand from them and there’s a crowding out phenomenon that takes place then I think it gets into trouble quickly. But I am also of the opinion that fed I think is signaling as they are going to raise rates three more times this year and possibly four times next year. I do not believe that. I am of the opinion they may go once more in June, I’d suspect they probably will and I wouldn’t be at all surprised if that’s the end of it to the year. And so, I don’t think anything is going to cause a problem here in real estate as far as loan origination or purchases of equity or making bridge loans. I think we’ve done a reasonably healthy economy that's doing okay. I think any potential downturn in the economy was forestalled by the tax cuts, as well as the repatriation.

To sum on the REIT side we’re seeing a continued trend of rent growth slowing, NOI growth slowing, so the worry that could be emerging in the market is that additional fed rate hikes could start to spur cap rates widening. Are you starting to see any upward pressure on cap rates?

Yes, I would say so, there’s been some, I wouldn’t call it any kind of dramatic pressure, but I also believe interest rates were artificially low for very long time, and a lot of things were built especially in the residential side of the business, multifamily, but you also had technology causing a lot of retail square footage to become obsolete. So and some office converted -- and the hotel business seems to be doing well. So I do feel some push especially in the retail side, and I do think you’ll see some upward pressure on the apartments' side also, but I think the industrial side of the market is very tight.

And in terms of lending spreads, with all the debt funds seeming to take market share from CMBS. Do you feel that at this point that fund -- the spread compression has kind of reached its bottom because most of the debt funds are shooting for dividend yields after pretty similar to the mortgage REITs in the 8% to 9% range? And so with further tightening, we would start to have returns -- leverage returns below that. So do you feel like most of the spread compression we have seen over the last six months has kind of run its course?

No, I don’t think so. I think a couple of phenomenon taking place at the same time, which may be growing a little bit of a headshake into the equation. Spreads have actually been widening for the last I would say 90 days or so and certainly rates went up for a period of time, but then they went back down. So when you look at some spread compression that took place earlier from the outstanding of January, February part of it, it really didn’t have absolute borrowings rates much different than they were in the fourth quarter. So I mean we are at today, it looks like we are in the 5% to 5.25% for the conduit. And our bridge loan portfolio really runs a gamut between LIBOR plus 375 all the way up to LIBOR plus 800. I think that where we have a little bit more bandwidth than many, but what I am seeing which is a little surprising. It's not a little bit early in the cycle I think is that many of the fund. There’s been frankly too much capital raise in the bridge loan market and that’s largely as a result of the reemergence of the CLO business. And we’re seeing some of the large loan originators really putting a lot of pressure on the banks to lower their borrowing rates and their repo. And the CLO business afforded REIT that employed the CLO model to actually borrow money at rates that were lower than repo rates in the banks. So, the banks are responding with lower rates there. So I think it will keep going for a while. I think you can lower rates and spreads a bit more as long as the banks continue to lower their repo rates. But we opted to go with the corporate bond model where we borrowed a lot of long-term money at higher than repo rates. And we are hoping over the long-term that will be the right decision. So it’s not impacting us but we do see what I look at dividends at 8%, 9% and 10% and loans are being made at LIBOR 300 to 350 that becomes a bit of a hard sell to pull that off without a lot of leverage. So we are avoiding that.

Thank you. Our next question comes from the line of Rick Shane from JP Morgan. Please go ahead.

Very quickly, I would -- looking at the gain on sale say that it's sort of towards the lower end what we’ve seen from you guys historically. Brian, given the flexibility of the business model, at what point do you just put those loans on balance sheet as opposed in weak P&L?

There’s a lot of products that we take a look at every day as to where we want to allocate capital. And you are right the conduit market is a little bit difficult on the distribution side right now. You are seeing a lot of banks getting together and what you are seeing smaller deals and the rating agencies are even moving some of their models around a little bit. So the conduit business is a little bit tricky right now. Spreads in the conduit business profit margins tend to hit their low in the year, it’s a seasonal thing usually in the second quarter and that’s we’re experiencing that. But that’s not a surprise at all but anything fundamental is going on there. I think is just the second quarter. Once the New Year came in all reallocations to fixed income were there. Stock market had done well last year, so everybody was buying things. And typically, the lenders will overdo it on the inventory side and overwhelm the buyers. And that’s kind of what’s going on I think. But that doesn't last. I think this is temporary. I think its technical issue. I don’t think it’s a credit issue by any means. But when we look at allocable investments where we would put our capital, we look at our stock certainly and with a 9% dividend that weighs in on where we’ll lend money and put them on the balance sheet. The conduit loan market is as I said around 5%, 5.25%, so that’s sort of a tossup there, and I do believe that rates continue to go even higher, we have to be very respectful of our bondholders also, and we want to keep our debt to equity ratios healthy. And if we need to acquire some of those bonds that are outstanding in a high rate environmental, they would be sold at a discount. So we would also go in that direction, but right now we still think the best business for our capital is the real estate business as well as the bridge loan business. And so far there's been a couple of pressing points on it, but nothing to change direction.

Thank you. Our next question comes from the line of Ben Zucker from BTIG. Please go ahead.

Just real quickly, if I heard you correctly you said that subsequent to quarter end, you are making $88 million investment in some residential properties in California. Could you just expand on that a little is that like a portfolio of single-family rental homes for rental income? Or how should we think about that investment?

Its coastal properties, it’s I think a little over -- it’s over 40 buildings, its student housing and its Southern California. We are not buying it ourselves for $88 million. We borrowed money from a third party. So, our equity investment in the transaction is only $14 million and we own I think about 75% of the equity in the deal.

And then just lastly, how much capacity do you guys have to fund new investments right now? I know throughout 2017, there was a lot of selling down the higher leverage CMBS kind of free up capital, but I'm curious more about, aside from just reallocating the capital. How much room do you have right now to kind of grow the overall portfolio at this time? And I only ask because of the impressive balance sheet growth that we have seen throughout 2017. I'm just wondering how much longer it can continue?

Well, we certainly have to be mindful of debt to equity ratios and just margin of safety. But we do believe we can continue to grow and we have a lot of liquidity right now. I think we can easily add $500 million worth of assets probably up to a 1 billion. Obviously, these all get impacted, if you start buying stock back or if -- you have to look at it, but keep in mind we have a lot of assets and we still have a $1 billion worth of security and they're all very short in duration, not all of them, but almost all of them and so what you sometimes experience in a falling rate environment. As you hear analysts talking about banks and they’re saying well that high coupon loans are paying off and as the years go by in lower rates the bank earnings will fall, we actually have the opposite going on right now, our low coupon loans are paying off. So we have hundreds of millions of dollars of loans and securities that are match funded. So I don't want you think they were upside down, we put them on match funding fixed against fixed, but they’ll be paying off and those rates are 3% and we’ll be reallocating those funds into lower leverage, perhaps, but also higher rates about 7.5%, 8% type assets. So we’ve got plenty room and I think if we wanted -- if we wanted to redline the debt to equity ratio. We will not do, don’t be mistaken. We could add a $1 billion.

Thank you. Our next question comes from the line of George Bahamondes from Deutsche Bank. Please go ahead.

Just a quick question on credit. What geographies or asset classes that you’re watching most closely or avoiding? And also, if you can -- maybe touch on some of the things you closely monitor to ensure you have a clear view of early signs of credit downturn?

Well, we have a large portfolio of transitional assets, so we see business plans unfolding all over the country on a monthly basis. So, we do keep an eye on that. The hotel sector is a little bit more impacted by the strength of the dollar. When we had a very weak dollar, you saw, in my opinion luxury hotels in New York were having a problem, but I think the weak dollar really brought back the tourists and I can hear them upside. So I think that, that was an accident possibly heading in the wrong direction, but it didn’t happen, at least not yet. Airbnb had done a number on a lot of the major metropolitan cities. Retail is its own animal. You have to look at that versus supply and demand. So I don’t know that I can tell you that I look something that makes retail do worse. I think you look at consumers and consumers are getting pretty tapped out I think. And so there was an initial spend there. But -- and so that will take retail. But the office market is a densification business but a lot of office product is turning into apartments. So what I worry about more is macro trends like for instance the recent loss of the state and local tax deduction in places like New York and New Jersey. I think that is a big problem and we are very hesitant to undertake loans that require a lot of cash flow increases because we do think that there is going to be pressure on asset values and housing prices for that matter, things are already taking place. We do believe a lot of those pains that are absorbed in the northeast will benefit Texas and Florida because of their no state tax policies. So, you have to look at every example as to what’s going on around it. And we are always concerned about that replacement cost. So when we see things dollar square foot that makes sense that we can’t build them for less that’s a much safer environment than when you are just blending very high dollars per foot on something that somebody can build another one across the street. But we are not seeing that, we are not seeing credit problems. We are seeing hotels plateau. I wouldn’t say there is a credit problem yet and I do think as prices of gasoline continue to rise probably something that hasn’t been talked about a lot yet but will be soon, I think the hotel businesses will flatten out a little bit the drive two markets.

[Operator Instructions] Our next question comes from the line of Ken Bruce from Bank of America Merrill Lynch. Please go ahead.

Just coming at the end, there’s most of detailed questions have been asked and answered. I guess the one that I would like to revisit really is to shareholder value and enhancing that. You’ve discussed the further valuation on the stock. It’s substantial discount to your undepreciated book value to discount to what most of us would consider the peer group and our work would suggest this company can do value considerably above that on an absolute basis and on a relative basis. I am interested in hearing what you think needs to happen for that -- for the market to be into rerate the stock? Do you think it’s consistency of earning? Do you think its dividend growth, buybacks I personally don't feel like that's the solution? But what do you think needs to happen for the rerating to occur?

It’s a theoretical question and I appreciate it because -- also I grew up and went to a school and always thought that the efficient market theory you would tell, right if you -- if information was available markets would find their level, but we live in a sector that is very interesting and when I look at our some of our largest shareholders, they are ETF, and I have never met anybody from one of those ETF companies and they’re our largest shareholders and when I open up my screens in the morning and I look at our -- what I consider to be our peers, and if Ladder is up 1% and the peers are up 1%, I can pretty much tell you what the inflows were in the ETFs for REITs and income stocks because that’s just to me is allocated capital just moving into the sector because funds have been received. And you see the opposite also. And as funds are being redeemed, you’ll see certain - all the peers fall the same amount on a percentage basis that day. And that’s usually ETF buying and that’s something I really haven't seen too much off before. We spent a lot of time meeting people and investors that run with first and last names, and we tell our story to them and we give them the value proposition about internally managed company with a lot of internal ownership. We’ve never raised secondary capital. We’ve got ironclad balance sheet, and we go through all the checkmarks that we do to run a safe company, but deep down inside I do believe half of this market is driven by three factors, market cap, dividend and average daily volume. And I don't think that those algorithms that make those purchases know if own subordinate debt, or senior secured, they don't know if you're internally or externally managed and I think that they pay attention to rising -- price-to-book value and I think they pay attention to dividend increases on a regular basis. But I think we've been walking around here at Ladder questioning, how do we make something happen, and finally just have to sit down and realize we’re a REIT and REITs are perceived to be out-of-favor asset class when rates are perceived to be rising. There are plenty of REITs that do very well while interest rates rise and that is a fact that I think everybody on this call knows, but I don't think a lot of those algorithms take that into account. And you'll see sometimes where the bond market is available at 6% but a REIT might raise money at a dividend rate much higher than that. So why would they do that? That’s typically an externally managed REIT, that’s an asset under management model. But I don't think that the algorithms are picking that up. So I think as we -- as I said last year, we went to Great Pains to set up our balance sheet and our asset liability set to make sure that we could really optimize our earnings power. We’ve got the right product mix. I think the analyst and investors do understand that. And I think we’re in the self-help model now because I don't think we can wait anymore to reward our shareholders. I don’t think we could wait for efficient market theory because of the fed says, they’re going to raise rates four times, REITs are going to go down. Now I don't understand why residential mortgage REITs go down, I don’t understand why mortgage servicer would go down nor do I understand why a REIT with a lot of exposure to LIBOR assets goes down. But down they go, and I think that that’s rather than fight City hall and get frustrated by it. I think we have to pick and choose our opportunities that those very same buying patterns create, instead waiting for them to correct themselves. So I think that we will spend a good part of 2018 being a lot more active in the self-help shareholder reward column.

That sounds I guess both good and bad, I am a little concerned about the indiscriminate selling, if that’s what you are leading to is the yield stocks go in favor with rates. Some of that would argue for frankly not having Ladder as a public company. And I know you don’t want to address related, I won’t ask about that. But what is it that you think you need to see to consider essentially kind of going different strategic direction?

Well, I think that we have to open up investor classes that we haven’t really met yet. And we take a lot of email from the retail side of the world who certainly didn’t want us to go private under any circumstances because they felt that it’s very hard to find an investment that they feel safe with at a 9% dividend yield. Now, I would like to tell them that 9% dividend yield shouldn’t be 9% I would like to get that down a lot, but we have to walk before we run. But look, we know about the Company’s worth. We know how it operates and we know what our prospects are. I think if we can walk into a portfolio manager’s office and explain to him the value proposition and probably get a buy ticket as we walk out there. But we cannot convince an algorithm that you should separate Ladder and buy it rather from the residential REITs. I just -- I don’t know how to do it mainly because I don’t -- I haven’t talked to them because I never met them. They are large shareholders and they never called here and they’ve never shown up in a meeting. So I think that rather than -- this is a new phenomenon. I think the ETF acquisition of the stock market in many ways, but I do think there’s certainly a place for us I feel with our high dividend rate and easily covering it. I mean we could make it much higher if we wanted to. But I think that there is plenty of investment opportunities that are not available to the general public. And so the retail side of the business really does need to be spoken to a bit more. And with the all the data available to people at home on their computers I think we can really talk to them that way and we may have to start doing that. We will certainly continue and want to be owned institutionally and I think we will be. But I can feel for institutions who say investments in REITs have been difficult lately now. They get a little popular when the FANG's stocks drop 10% or 15%, but -- and the time will turn, but I don’t think we need to wait for that because we run a company that does very well in a down market and does pretty down well also in a fairly safe market. So, we are an all weather REIT. We think we know how to avoid the problems. We keep the leverage in check and we always focus on credit. And I think as we keep doing that I just don’t know how long a 16% ROE over a couple of quarters. I don’t think we are going to make 60 plus million dollars a quarter every quarter, but I don’t think you’ve seen the last one today. And so I think we continue to spring those along. We'll either have to dividend out some of our institutional shareholders that have been believing in us and buying into our model of a multi-cylinder approach, we actually talked about possibly just setting up the conduit and the real estate portfolios as when we make money we will distribute it. Those feel like special dividends and those have never been very helpful to most companies, but I do think that we will take a more aggressive posture towards shareholder rewards.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

I just want to thank everybody for getting on the call with us today. We had a lot to talk about so it probably ran a little later, but we look forward to catching up with you next time. Thank you.

Thank you ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.