Ladder Capital Corp (LADR) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Ladder Capital Corp’s Earnings Call for the Fourth Quarter of 2019. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I would like to turn the conference call over to Ladder's, Chief Compliance Officer and Senior Regulatory Counsel, Ms. Michelle Wallach. Please go ahead Ms. Wallach.

Thank you, and good afternoon, everyone. I’d like to welcome you to Ladder Capital Corp’s earnings call for the fourth quarter and year ended 2019. With me this afternoon are Brian Harris, our company’s Chief Executive Officer; Pamela McCormack, our President; and Marc Fox, our Chief Financial Officer. Brian, Pamela and Marc will share their comments about the fourth quarter, and then we will open up the call to questions. This afternoon, we released our financial results for the fourth quarter and year ended December 31, 2019. The earnings release is available in the Investor Relations section of the company’s website, and our Annual Report on Form 10-Q will be filed with the SEC later this week. Before the call begins, I’d like to remind everyone that this call may include forward-looking statements. Actual results may differ materially from those expressed or implied on this call, and we do not undertake any duty to update these statements. I refer you to our most recent Form 10-K for a description of some of the risks that may affect our results. We’ll also refer to certain non-GAAP measures on this call. Reconciliation of these non-GAAP financial measures to the most comparable GAAP measures prepared in accordance with GAAP are contained in our earnings release. With that, I’ll turn the call over to our President, Pamela McCormack.

Thank you, Michelle, and good afternoon, everyone. During the fourth quarter, Ladder produced core earnings of $48.6 million or $0.40 per share, reflecting an after-tax core return on equity of 11.5%. For the full year 2019, Ladder produced core earnings of $190.6 million or $1.60 per share, covering our $1.36 per share annual cash dividend and delivering an 11.6% after tax core return on equity. In 2019, we focused on identifying attractive investment opportunities in a competitive lending environment and further strengthening our liability structure. Our multi-cylinder business model continues to afford us with the flexibility to quickly pivot to take advantage of attractive opportunities as well as the ability to be patient and identify the best risk-adjusted returns in the market. In the fourth quarter, we originated $858 million of loans, 54% of which were balance sheet loans and we acquired $446 million of securities. For the full year 2019, we originated $2.5 billion of loans, 61% of which were balance sheet loans and we acquired $1.6 billion of securities. As Brian and Mark will cover later, we continue to strengthen the right side of our balance sheet by maintaining a diversified liability structure with maturities that are long-dated and well staggered. During 2019, we made meaningful progress on our path to investment grade. As we prepared for our issuance of a $750 million unsecured seven-year corporate bond offering at a coupon of $4.25, a landmark field that closed in January 2020. The issuance was complemented by corporate family rating upgrade from Moody's to Ba1 and Fitch to BB Plus, which also triggered a 25 basis point step down in the interest rate on our unsecured corporate revolving credit facility. Furthermore, since the end of the third quarter, we extended the maturity dates on all of our secured funding facilities and our $266 million corporate revolving credit facility. We now enjoy an average remaining term of over four years on our secured loan purchase facilities. We continue to maintain a strong and long-standing relationship with our bank partners, several leading back to Ladder founding. Through such efforts coupled with our continued commitment to moderate leverage and a disciplined approach to investing, we are making meaningful progress towards our goal of achieving an investment-grade rating. As I discuss our products in more detail, I'll begin with our conduit business, which contributed $15 million to Q4 earnings from the securitization of $421 million of loans and a private sale of $34 million of conduit loans. For the full year 2019, our conduit business contributed $39 million solid core earnings from the sale of $1 billion of loans. For the first quarter of 2020, we sold $186 million of loans, $134 million into securitization and an additional $52 million through our private sales. Both transactions closed in February and generated $6.2 million of core gains. We do not expect to participate in any further securitizations or sale of loans during the quarter. The gain on sale realized from our conduit loan securitization business continues to complement our recurring net interest margin and net rental income. Turning to our balance sheet loan origination business. We originated $466 million of balance sheet loans during the fourth quarter almost all of which were floating rate with an average loan size of $23 million, a weighted average spread of 385 basis points over LIBOR and a weighted average LTV of 68%. During the quarter we received $454 million of payoffs, primarily, comprised of floating rate loans with a weighted average spread of 537 basis points over LIBOR resulting in a $12.3 million of net balance sheet loan originations. For the full year 2019, we originated $1.5 billion of predominantly floating rate balance sheet loans with an average loan size of $21 million, a weighted average spread of 403 basis points over LIBOR and a weighted average LTV of 69%. During 2019, our real estate equity portfolio continued to provide consistent net rental income from long-dated cash flows that contribute to our recurring earnings. At quarter-end, we had $1.3 billion of real estate investments on an undepreciated basis comprised primarily of net lease properties to credit tenants. During the fourth quarter, we completed the sale of our last remaining condominium unit at Veer towers in Las Vegas. Our $119 million investment in Veer Towers resulted and a net profit of $52 million and generated a 23.5% IRR by to-date. As we look ahead in 2020, we will continue to manage our real estate equity investments and contemplate the harvesting of embedded value in the portfolio. In our Securities segment during the fourth quarter we acquired $446 million of highly rated securities and for the full year 2019 our acquisitions totaled $1.6 billion. As of December 31, 2019 our securities portfolio totaled $1.7 billion up from $1.4 billion at the end of the fourth quarter of 2018. In summary, we were pleased to end the year characterized by strong earnings and steady loan origination and investment activity. We are also pleased to start the New Year as a BB+ company with a best-in-class capital structure. With that, I'll now turn the call over to Marc Fox, our Chief Financial Officer.

Thank you, Pamela. Looking at our financial results more closely. In the fourth quarter, recurring income in the forms of net interest income and net rental income totaled $46.6 million. This income was complemented by $15.2 million of core gains on the sale of loans $1.1 million of core gains on sales of securities and $0.3 million of gains from real estate sales. From this income, we paid $41 million of dividends and distributions equivalent to $0.34 per share on 119.7 million shares resulting in a payout ratio of 85%. Looking more closely at the balance sheet. It is noteworthy that as of December 31, 2019 97% of our debt investments were senior secured, senior secured assets plus cash comprised 79% of our total asset base reflecting Ladder's continued focus on investments at the top of the capital stack. During the fourth quarter, we experienced two credit events that had a slightly positive net effect on our income statement. We recorded a $2.25 million gain on foreclosure on a $5.7 million mezzanine loan secured by a San Diego Hotel that was offset by a $2 million loss provision on a $23.6 million land loan in Los Angeles both of which defaulted during the quarter. Turning to our capital structure. We continue to strengthen and diversify our funding base. Ladder remains committed to a target leverage ratio in the 2 times to 3 times range and to the pursuit of investment-grade credit ratings. Bond investors recognize the progress we have made as evidenced by the pricing of our recent corporate bond issuance. The 4.25% coupon rate was 100 basis points lower than our previous issuance and the credit spread reflected in that rate was 63 basis points tighter than the tightest of prior Ladder issuances. The proceeds we used to pay down secured debt to cost approximately 80 basis points less than the corporate bond financing. We view the increased cost as a sound investment in the long-term strength, certainty, and flexibility of the right side of our balance sheet that comes with long-term committed unsecured bond funding. We closed the year with a debt-to-equity ratio of 2.97 times. Excluding our portfolio of highly liquid and highly rated securities our debt-to-equity ratio would be 1.92 times. Undepreciated book value per share as of 12/31/2019 was $15.23. Unencumbered assets at year-end stood at $1.9 billion, reflecting a 1.62:1 unencumbered assets to unsecured debt ratio substantially over the 1.2 times requirement included in our corporate bond indentures. Since the majority of our current unencumbered asset base is comprised of first mortgage loans, securities backed by first mortgage loans and real estate, the excess unencumbered assets represent a potential source of future funding. As of February 27th, we had over $2.7 billion of unencumbered assets and over $800 million of liquidity available to fund new investments. On the accounting and reporting front, Ladder has calculated the impact of CECL on our consolidated financial statements. We estimate that the initial current expected credit loss reserve to be recorded in the first quarter of 2020 to be approximately $12 million or 36 basis points of our unimpaired balance sheet loan portfolio. Important factors driving the CECL reserve include the size, composition, and risk profile of our loan portfolio as well as current and projected future macro market conditions. We expect the CECL reserve to vary from quarter-to-quarter reflecting changes in the size and composition of our portfolio. And with that, I'll now turn you over to our Chief Executive Officer, Brian Harris.

Thanks Mark. Ladder turned in a strong performance in 2019 and we're especially proud of our after-tax ROE of 11.6% for the year. During 2019, we maintained a healthy activity in both our balance sheet and conduit lending programs keeping our portfolio relatively flat year-over-year, while we also enjoyed a 65% increase in revenue contribution from securities as we continue to build our inventory a floating rate AAA CLO securities which have been offered at relatively wide credit spreads. Over the last few quarters, we have expressed a relative value preference for liquidity in our investment strategies maintaining short-dated investments across all our products and favoring property types like apartments and warehouses. We also expressed the preference for AAA securities over forcing marginal volume on loans in our balance sheet loan business. We expect that same theme to continue as we go further into 2020. Given current volatile market conditions, we expect to continue to focus on our conduit lending program, our acquisition of highly rated securities, and investments in owning high-quality real estate. We will do this while maintaining our balance sheet loan portfolio at or near its current size, albeit, we will continue to be very selective. LIBOR has fallen from 2.52% at the beginning of 2019 to about 1.6% today with a strong likelihood, it will be going even lower. We intend to remain prudent in the face of this environment which is exacerbated by tighter credit spreads and strong competition. While net interest margin is likely to trend lower in 2020, we expect this to be somewhat offset by harvesting gains on mature real estate assets that are now ready for sale and our increased inventory of securities. As rates and credit spreads fell, as the new year began, we successfully accessed the unsecured corporate bond market in January issuing $750 million of seven-year bonds at a rate of 4.25%. While this caused a modest increase in our overall interest expense we feel that the benefits far outweigh the increased cost because as we've told you before Ladder is in this for the long game always trying to increase our use of unsecured longer term debt. This liability construct suits us as it complements our conservative use of leverage and our effort to become an investment-grade company. We expect to continue our use of unsecured debt as we get later into the year. We have previously issued 5.0875% interest rate bond outstanding that is pre-payable at par in August. And we hope to refinance that obligation with new lower-cost debt lowering our overall cost of funds at that time. The timing of our recent bond issuance seems to be fortuitous at this point. With volatility picking up, we have lots of liquidity and expect to take advantage of market volatility to opportunistically invest in assets that are being offered at lower prices than we have seen in quite a while. I'll conclude by saying thank you to all of our shareholders bondholders and our employees at Ladder for their support of our efforts in what was a very successful 2019. I look forward to catching up again with all of you at the end of April. And we can now take some questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tim Hayes, B. Riley FBR. Please proceed with your question.

Hey, good evening guys. Thanks for taking my questions. My first one can you just touch on the $66 million of diversified CRE acquisition this quarter? I don't know if it was one asset or multiple but what type of assets or assets was it? Last quarter you made it sound like you're more likely to be a seller than a buyer of real estate. ,So just wondering what was so attractive about this deal or these deals?

Yes. So, I'll pick that up. So, what you're seeing is you're seeing the increase in the real estate portfolio and the increase in the real estate portfolio we had a few acquisitions of Dollar General stores which has been a place where we've invested money. And then also we mentioned we had foreclosed on two properties during the quarter. The hotel is worth $42.5 million and the student housing was worth $23.7 million.

And just to clarify one thing the hotel was $5.6 million mezzanine loan that there was a first in front of it that we stepped into. So, that's how you get to the higher basis on that.

That's correct.

Okay, got it. Thanks for clarifying that. And obviously we don't know what type of impact or any impact at all that coronavirus might have. But just wondering where you see that potentially there being the biggest impact? I know you have the Omaha hotel you have some retail exposure. Do you think that's most likely to be impacted? Or is it more kind of the capital markets volatility? And do you see that being actually a catalyst or an opportunity for you guys to put capital to work accretively?

Yes, it's an interesting day certainly, especially at the end today. But yes, I kind of remember when -- I mean it always comes in a different package at the end of the day. But in -- what I see generally from a U.S. perspective which is really the perspective we take is there's a lot of fear. I can hear it on the trading floor, I can hear it in the building, I can hear it on the train. But yes, what this is ultimately causing is energy prices to fall rapidly. And there are certainly companies that don't do well when energy prices fall. But by in large I think it's actually a positive for most businesses. And I sense there's going to be less travel certainly as a result of the virus. So, what I see is lower gas prices, people staying at home in the United States and in all likelihood of drive to market. I think as far what little I know about coronavirus, I would say I think the -- a lot of chatter about like keeping it out of a country as if it's got walls around it, but I don't see that as possible. I think it's very likely we will be dealing with the coronavirus. And I think ultimately, it will turn out to be not nearly as scary as it seems today. But, of course, time will tell. But I do believe any kind of volatility -- we have extreme volatility that we're seeing today. Absolutely presents opportunities and that's – if you've heard us over the last few quarters, we've been signaling caution moving from hotel to apartments, the belief that the world was a little bit complacent and our desire to really see more volatility, because we think that we do very well in those kinds of markets. Having just raised $750 million a few weeks ago, we have plenty of dry powder and we were deploying it today. And so we would never want to wish anything bad on anybody, but if we could see volatility like today for another week or so I think Ladder capital would do very well.

Got it. That's helpful. Appreciate the color there Brian. And then can you give us an update on the 3M headquarter loan? I saw the investor filed for bankruptcy earlier this year and installed the foreclosure process. What do you think the potential timing of resolution is and how confident are you that you can recover your basis and any accrued interest?

Well, I think it's an interesting phenomenon again, a unique case, because the asset is one of the largest assets in Austin, Texas. It is located on 160 acres of land and has another one million square feet of development rights already associated with it. The reason, the loan is in default, I don't think it's because there's anything wrong with the real estate. The sponsor has a legal problem. And he's got several entities in bankruptcy because he owns many properties. And until his legal situation gets clarified, which has not been yet. We are in Texas and Texas does move through things a little bit faster. But I think our exposure on the loan at $60 million is about $70 a square foot. And near as I can tell in that area of Austin, Texas land is traveling at a price higher than that. So we're very confident. However, I'd also say timing matters. The loan is currently accruing at a default rate of almost 14%. And so that can become difficult to pay after a few years, but – and when I say accruing, I don't mean accruing at Ladder Capital's Financials. We've got it on non-accrual status. But when it comes to foreclosure, if he wants to avoid it, and he wants to pay us often recapitalize as we think he should be able to, but that will be a pretty big windfall if we collect all that interest.

Got it. Okay. That's helpful. And just one more for me and then I'll hop back in the queue. Conduit originations and sales are pretty strong. It seems like you're obviously very committed to that business going forward even though this quarter seems to be I guess, the remaining part of the quarter should be pretty absent. But just wondering how you see volumes and gain on sale trending this year? I think gain on sale might have come back a little bit even though it was at very high levels over the past couple of quarters still strong. So just looking for some color around that?

Yeah that business does very well when interest rates are falling and interest rates have certainly been falling. When interest rates are falling like they have been in the last week or so that's kind of the wrong reason, because it's usually accompanied by widening credit spreads. As of tonight, I believe we only have $50 million in loans closed, and for sale in securitization. And so that is very low exposure. And as we close more and more loans, we think most of those will be closing into some attractive floors. So yes, we are very interested in staying in that business. The margins are acceptable. The properties are performing well. And the backdrop in the economy seems okay too. So we would like to do as much conduit as possible and – but I will say despite the fact that interest rates are quite low volume is not very high. The – I think interest rates have been so low for so long that I just – I think it's going to be a similar year to last year.

Okay. That's helpful. All right. Thanks again for taking my questions.

You’re welcome.

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

Thanks very much. Did you give an update of what CMBS securitizations have been thus far this quarter? I didn't really catch that.

Jade, this is Pamela. Hi. Do you mean for 1Q? Or are you going 4Q?

Yeah 1Q.

We did. We completed so we did a – we sold a couple of loans separately and then we were participated in the Wells Fargo deal that settled today, so we can actually talk about it. The total volume we did this for the first quarter, and I do think this will be it for the first quarter is $133.9 million at around 3%.

Okay. Thanks for that. Were there any securities purchases in the quarter? And can you quantify the amount of sales that took place in fourth quarter?

Mark, do you have that? Or you want CMBS securities? Or you want to securitization just to be clear?

CMBS securities.

CMBS securities. During the fourth quarter, we sold $317.7 million worth of securities. And during the course of the quarter, we purchased another $446 million. The balance went down because we had a fair amount of amortization and prepayments. We had over $300 million of amortization.

Okay.

And as you can imagine with the volatility that we've seen in the last couple of weeks here, we've been adding to our inventory.

Okay. Can you talk to the company's overall hotel exposure and how you're feeling about that? Also, is there any New York hotel exposure? And might that be one area where you anticipate a notable pickup in foreclosures this year? I've been hearing some pretty scary stories about the New York hotel market?

So we have in total, we have about $450 million of hotels broken down by $385 million of loans and then the $60 million owned. As Brian alluded to earlier, first of all, we have an average LTV of 70%. So we have a good equity quotation on them, but most of our hotels are 85% of them are drive to market, so we don't have anything that stands out to us. We have no New York hotels and we don't have anything that stands out to us is problematic at all.

And I would say, TJ, well, we have always -- we've been a little concerned about the New York Hotel market before what happened with coronavirus. We were a little concerned about Airbnb, a little more than that. So -- but then I have heard some stories about a couple of assets here and there, but to tell you the truth, I think we're getting a little more interested in that market. And as Pamela said, we don't have any right now, which I'm going to shock by that. But -- and so we're pretty comfortable with our exposure. We have taken it down quite a bit. In our loan portfolio, it's only 11%. And I know it was much, much higher than that a few years ago.

Okay. In this current volatile fixed income environment widening credit spreads, I'm assuming what's going on in the equity markets and spillover effects. Do you anticipate any mark-to-market or potential hedge losses that might transpire either on the conduit business, you only mentioned $50 million in the pipeline, but just through your overall CMBS strategies?

No, really. I mean, yes, we do have a little bit of that in the $50 million of conduit loans. But as you know, we've been big fans of the CLO space in the AAA category. Those are floating rate assets. We feel that's the right place to be with LIBOR at 160, while the 10-year is at 120. That's an odd optical there too. But -- so we're not expecting any margin calls or -- and we don't own anything at very high premiums. The only thing I wish that if I could turn it down a little bit would be the $50 million in conduit that we have. But again, we've just done so many conduit deals. We haven't owned them long enough to be hedged into too high of a premium.

Yeah.

On the core loan portfolio repayments for the last three quarters have been in the $400 million to $450 million range. I'm wondering if you expect any slowdown in repayment activity perhaps based on the volatility? Or that's a number that we should assume for -- on a quarterly basis?

I think safely you can assume at or about that candidly it looks a little lighter at this moment. But in that range I think over the long-term look right.

Yeah. You're right. The last three quarters is between $400 million and $450 million.

A lot of that depends on what other lenders are doing also. So I'd imagine the business itself might take a few weeks off here. So things could be delayed. I’d say, it certainly won't accelerate any prepayments.

Okay. Thanks for taking the questions.

Okay.

Our next question is from Joel Dryer, LTC Partners. Please proceed with your question.

Good afternoon everybody. Thank you. I just wonder if you could give a little more color on the loan loss provision on the Los Angeles land.

Okay. Well, let me -- I'll get Marc is going to give you the provision, but I'll just tell you too that this was a land loan to a developer, it's actually located in one of the best areas of Los Angeles, it's located between West Hollywood and Sunset strip. So it's funny when we call that a land loan, it's like a land loan in the middle of New York City. But in any event, the developer who came to us for a loan probably he was going to get up zoning of three times what it had previously been and we did not think you would we thought it would get two times the upselling. And he got two times the upzoning and he did not get three. So that's what ultimately put the loan into trouble. Sponsor had contributed $10 million in equity prior to our taking the asset. But as market as far as the provision goes what is...

$2 million.

$2 million. And so how big was the loan balance.

Along with $23.6 million on about three quarters of land.

Thanks, Pamela. So it goes without saying that you underwrote it to a 2x obviously?

Yes. And we don't build apartments but we will either sell it or bring in a JV partner out there to properly build.

And then Brian you mentioned something at the very end of your comments which was assets – you're seeing assets at lower prices and we've seen in a long time. And just a little more color on that would be helpful because it's such an important part of your book of business?

Yes, I think whenever – again we've moved a little bit towards higher-quality around here over the last year. And in anticipation of something we just felt it was a little bit too joyous out there and we didn't really see it going quite as well as that. But when I say cheaper assets, for the most part we want to get involved with assets that are short duration, if possible as well as just lower prices. So most of that comment would have been directed towards securities acquisitions. And so just a quick anecdotal. The high-yield index, the HYG that the ETF of people and many people invest in I think they took in about $13 billion last year, which was an extraordinary amount and that's what caused so much pressure on high-yield spreads, which is a surrogate to the corporate bond market. I think they've had $5 billion in redemptions in the last two days. So when I came in this morning I informed the people out on the desk there to start looking at force selling at the end of the day and we did see that. And so we were participating in acquiring. We're not selling anything. And so this does happen once in a while there's a – it's not a credit problem in that market at all. It's a liquidity question. And that problem if oil prices continue to fall that problem will get more exacerbated. On the other hand to the extent that we're able to acquire longer data things like real estate and we're able to finance it at interest rates for 10 years as low as 3% that creates an extraordinary opportunity also. So if you had asked me in 2015 before the Fed started to raise LIBOR short-term interest rates and LIBOR moved with it. I would – I think I had said, we're going to be investing in LIBOR floaters in anticipation of the Fed moving rates higher and that's what they did. And with LIBOR having moved from 2.5% down to 160 in the last 14 months, that's probably not going to be at the top of our priority list going forward. However, given how low overall interest rates are, it's a great time to acquire real estate and we also think it's a great time to acquire short-term securities that other people are being forced to liquidate.

Okay. That's very helpful. So you watch that high-yield bond index. We watched the SJB ourselves. So...

Yes they all kind of mimic each other. But what I – we do is what, we watch flows. Fund flows. And when there's a lot of flows into ETFs that buy bonds you can expect bonds to tighten. When you have a lot of outflows things have to get sold.

Excellent. Thank you. Appreciate the answers.

Sure.

Our next question is from Charlie Arestia, JPMorgan. Please proceed with your question.

Hey, everybody. This is Charlie on for Rick today. I was wondering if you could talk a bit about how you mitigate risk in the broader CMBS portfolio that you purchased directly versus what you originate in the conduit business. And if there's any big differences in the collateral there?

Well, yes I mean, the collateral may be similar that underlies the – when you're originating loans for securitization, you're originating loans and you actually synthetically own the AAA through the unrated and until you sell it. Whereas when we buy securities, we almost always buy AAAs and AAs. So, by definition, the subordination level on the securities, they're much safer than the whole loans and the AAA security can be sold in 60 seconds, whereas a whole loan cannot be sold usually inside of them, three weeks.

Okay.

So we have a preference for more liquid, shorter duration assets and we always do that. That's not unique to us, as a result of coronavirus. Are you asking me about a hedge, by the way, how we mitigate risk there?

Yes. I mean, the color on the capital stack is definitely helpful, but if there's anything kind of specific to the broader portfolio, that would be helpful.

Well, I think, if you're asking us if we do take credit hedges, no, we don't use credit default swaps unless it's a particular name. Sometimes we'll buy put options in our portfolio. So, if we have like Joel, who just to went before you here, he knows that we own a lot of dollar generals, that's a credit that we've exposure to and we happen to like it. But there are ways to mitigate exposure to that. But the real risk we do mitigate is, anything longer than three years in duration, we interest rate hedge. But as I said earlier, that's only a little over $50 million, right now, in a $6 billion portfolio. We have a small an interest rate exposure today than I think I've ever seen in my life and in books that I've handled.

Got it. Okay. And then, switching gears a little bit. I don't think I heard in the prepared remarks, but could you give an update on LIBOR floors in the lending portfolio?

Sure. As of 12/31 our weighted average LIBOR floor was 170 -- pardon me, it was 184. And at that point in time, LIBOR was 176. The LIBOR floors that we had at that point in time, 59% of them were in the money. So it's about $1.5 billion worth of floating rate loans. And they were on a weighted average basis on a -- $1.5 billion worth of loans, about 41 basis points would be the amount that we are earning. So you're talking about a little over $6 million of floor income per year on that basis.

Okay, great. And then last question for me. Some of your peers have been particularly active in Europe over the last two quarters. Are you guys seeing any opportunities there that look compelling? Or are you mostly staying domestic?

We're 100% domestic. You could see us that we have a lot of experience in Europe, most of us worked in Credit Suisse or UBS, where we were the heads of real estate at that time. But I'm not seeing anything compelling. However, I believe, if we were to go into Europe, I don't think it would be on the loan side. I think it would be on the equity side, where we would be a borrower.

Okay. Thanks for taking the questions.

[Operator Instructions] Our next question is from Chris Muller, JMP Securities. Please proceed with your question.

Hey, guys. Thanks for taking the question. Most of them have been asked already. But, I guess, the last one here is, can you guys estimate the positive impact on book value from the securities portfolio in the fourth quarter? And then, is it fair to assume that there is further appreciation there in the first quarter? Thanks.

Yes. In terms of the impact on the securities portfolio in the fourth quarter, it was not substantial at all. We have a -- one thing to always recall is that we have a very short duration on the portfolio. The weighted average duration is 29 months. And so, we don't see a massive amount of fluctuation there.

And most of it is floating rate.

Yes. And most of it's floating rate, exactly. We can direct you to the other comprehensive income portion of our, what you call it, equity reconciliation statement in the financial statements and you'll be able to see the exact amount.

I also want to point out, if you remember we tend to use our securities portfolio during special time. So volatility is high, then it becomes a profit center. But for the most part we use it to allow us to be very patient in our loan origination process because we -- because of the way we're funded, we're able to buy very short AAA securities and lever them into a 7% or 8% or 9% yield. So we'll just sit there for a while until something better comes along in the loan book. So we don't usually use it for price appreciation, although given what's gone on, certainly, in interest rates, yes, they're probably up a little bit, but a two-year AAA does not have a lot of price volatility.

Got it. That’s helpful. Thank you.

Sure.

Our next question is from Jason Weaver, Compass Point. Please proceed with your question.

Hi, good evening. First, I wonder if you can speak to what you're seeing in new loan spreads in this quarter versus the 385 for originations in 4Q?

I'll let Pamela answer that -- answer that because he handles it, but I will cut her off in the beginning of this and just tell you that as -- up until this week, Pamela will give you some of those answers, but I'll tell you today spreads mean nothing. Because with a 120, 10 year typical spreads a month ago were 160 or 170 over the 10 year 160 over the 10-year today would be were 280. And I think most of the street is not closing loans anyway right now. I think many market max are being exercised. And however, we're somewhat protected because we've been closing loans with floors and if interest rates have fallen that's been a phenomenon we saw throughout 2019, seeing it again in 2020. So with that, I'll let Pamela describe what we have closed, but anything in the pipeline if something is under application at 210 over the 10-year, the real rate today if we were to rate lock it is 250 over.

I think he asked about balance sheet loans. Are you looking for me to give you more...

Yes, balance sheet loans is what I was...

Okay. Right so we are weighted average for 4Q was 3.85 and I would say, that it's trended up a little bit, but don't want to be too optimistic there because we have -- we're early in the quarter. And I would say to think about it similarly for now.

And most of the floaters that I've seen come through for approval. They're in the floor also at this point.

So, I mean it's a floating rate instrument, but LIBOR plus 350 loan that was asked a couple of months ago was probably LIBOR plus 400 now because of the floor.

Got it. And just one clarification on a previous question, where you addressed as of 12/31, the weighted average for was at 184. You mentioned a $1.5 billion figure, $1.5 billion out of your existing portfolio loans are the ones that feature cores, correct?

No. The all the floating rate loans is about $2.5 billion of loans at floating rate in our balance sheet loan portfolio, $1.5 billion were in the money, okay.

They're at the floor now.

Yes, they're in the money 41 basis points. So that's how you get to that.

Got it. And then one on almost the same subject, given the fixed rate senior unsecured. Are you using comparatively more hedging versus the overall floating rate portfolio there?

No. We did not -- I did not.

Got it. Okay. Well, thank you for taking my questions.

We think it functions as a hedge against -- so for instance I mean high-yield is widening right now. And that is a BB bonds. So it is outstanding and we're very fortunate to have gotten it done in early January, but we did not swap out.

All right. Well, thank you for taking my questions.

That concludes our question-and-answer session. I'll now return the call to Brian Harris, the company's Chief Executive Officer.

Well, at the end of a long day for all of us I'm sure. So, thank you for hanging around after work here and listening to us. The audit always takes a little bit longer. So, we were a little bit later announcing here. So, we won't be done for too long. We'll be right back to talk to you again about the first quarter I think at the end of April. All right. So, thanks everybody.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.