Ladder Capital Corp (LADR) Q4 2021 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Ladder Capital Corp's Earnings Call for the Fourth Quarter and Full Year 2021. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter and year ended December 31, 2021. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the Investor Relations section of our website. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.

Thank you and good evening everyone. For the fourth quarter, Ladder generated distributable earnings of $27.7 million, or $0.21 per share. For the full year 2021, Ladder generated distributable earnings of $61.3 million, or $0.49 per share. In addition to having another quarter of strong loan originations, our earnings were supplemented by gains from our conduit securitization and real estate equity businesses. After initially emphasizing raising liquidity and reducing leverage earlier in the year, we began making new loans again in March of 2021. We ended the year by having originated a total of $2.9 billion of loans, including a record 92 balance sheet loans, totaling $2.7 billion resulting in the highest annual production of Ladder's balance sheet loans in Ladder's history. The growth in our portfolio led to strong earnings momentum over the course of the year and we are pleased with the risk-reward profile of the resulting portfolio, which continues to reflect our rigorous credit standards and return expectations. As of December 31, over 65% of our $3.5 billion balance sheet loan portfolio was comprised of post-COVID originated loans with fresh valuations and business plans. The composition of the portfolio remains consistent and continues to be primarily comprised of lightly transitional loans with a weighted average loan-to-value of 67%. In the fourth quarter, Ladder originated $1.3 billion of loans, including 43 balance sheet loans, totaling $1.2 billion with a weighted average loan-to-value of 64% and a weighted average coupon of 4.43%. Approximately one third of our balance sheet loan originations were made to repeat Ladder borrowers. Since the start of the new year, we closed an additional $300 million of new loans and we continue to have a strong pipeline of additional loans under application. In our conduit business, we securitized or sold $131 million of loans during the fourth quarter for total gains of $2.7 million and we are continuing to build our pipeline, which we will target the sale of securitization over the coming quarters. In our equity business, the majority of our $1.1 billion portfolio is comprised of net lease assets leased primarily to investment-grade tenants with necessity-based businesses under long-term leases. The portfolio contributed nicely to earnings again during the quarter with $7.3 million of net gains, further illustrating the embedded value within the portfolio. As of year-end, our securities portfolio totaled $703 million, down from over $1 billion at the beginning of the year as we reallocated capital into our balance sheet loan business, which we continue to believe is currently offering the best risk-adjusted return. Our loan origination business was supported by $1.7 billion of capital raised during the year through two managed CLOs and an unsecured bond issuance, including a second managed CLO we closed during the quarter, the details of which Paul will discuss. As of year-end, we have total liquidity of over $800 million, and our adjusted leverage stood at 1.5 times net of cash. 39% of our total debt was comprised of unsecured bonds and 83% of our total debt was comprised of unsecured bonds and nonrecourse financing. We continue to maintain a differentiated approach to our capital structure within the commercial mortgage REIT space through our exceptional use of unsecured corporate bonds. In our view, this is the best most balanced and safest way to finance a mortgage origination platform for the long term. With the highest corporate credit ratings in the space and ratings only one notch away from investment grade from two of the three agencies, we are making substantial progress on our path towards becoming an investment-grade company. As Brian will elaborate on more later, we are well positioned to benefit from a potential rising interest rate environment, both by way of our large and growing portfolio of floating rate loans as well as our significant base of fixed rate liabilities. In conclusion, we continue to expect our strong originations momentum and our long-term investment in our capital structure to benefit Ladder shareholders in the quarters and years to come. With that, I'll turn the call over to Paul.

Thank you, Pamela. As Pamela discussed in the fourth quarter, Ladder generated distributable earnings of $27.7 million or $0.21 per share. Originations and pipelines remain very strong, and were accompanied by a CLO that generated $566 million of gross proceeds during the quarter. The CLO financing is a managed deal with a 78% advance rate on $729 million of collateral contributed. The CLO has a weighted average interest cost of LIBOR plus 165 basis points and provides for a two-year reinvestment period and has an expected average duration of approximately four years. This type of match-funded, nonrecourse, non-mark-to-market financing complements our strategy of utilizing long-term unsecured corporate bonds to finance our business. Overall, 2021 saw significant and successful capital markets offerings in both the corporate unsecured bond market and the managed CLO market, which are further solidified and lengthen our liability structure while simultaneously reducing our use of mark-to-market financing as we continue to move towards our investment-grade rated goal. End of December 31, we had total liquidity of over $800 million and approximately 88% of our capital structure, was comprised of equity, unsecured bonds and nonrecourse nonmark-to-market debt. Our nearest bond maturity is in October of 2025. Our three segments continued to perform well during the fourth quarter, and Ladder is well positioned as we head into 2022. Our $3.5 billion balance sheet loan portfolio is 91% floating rate diverse in terms of collateral and geography with less than a two-year weighted average remaining maturity. During the fourth quarter, loan origination activity outpaced payoffs as we added $751 million in balance sheet loans. Our balance sheet loan portfolio continues to perform well and the general portion of our CECL reserve decreased to 34 basis points as two thirds of our balance sheet loan portfolio as of December 31 was comprised of 2021 originations with new valuations and sponsored business plans. In summary, we feel good about the underlying credit of our loan portfolio. As Paul mentioned, our conduit business contributed $2.7 million of gains to distributable earnings in the fourth quarter with the sale of $131 million of loans in two separate transactions. Our $1.1 billion real estate portfolio includes 160 net lease properties, which represents two-thirds of the segment. 70% of our net lease portfolio is leased to investment-grade tenants with long-term leases and the portfolio continues to perform well. During the fourth quarter, we sold four properties contributing net gains of $7.3 million to distributable earnings, including three net lease properties sold significantly above our appreciated basis. In total, during 2021, we received $219 million in net proceeds from the sale of real estate properties, which contributed $23.6 million in net gains to distributable earnings. As we continue to demonstrate the embedded value in our real estate portfolio and to be consistent with our peers on real estate equity assets, in addition to mortgage assets as we do. In the fourth quarter, we updated our definition of adjusted leverage to add back the impact of GAAP accumulated depreciation and amortization to equity. As of December 31, 2021, our adjusted leverage ratio stood at 1.8x. Turning to our securities portfolio. As of December 31, our $703 million portfolio is 87% AAA rated, 99% investment grade rated with a weighted average duration of approximately two years. Portfolio continues to benefit from strong natural amortization and therefore, liquidity as the majority of these positions are front pay bonds. Further, as of December 31, our unencumbered asset pool stood at $2.8 billion, and is comprised of 76% cash and first mortgage loans, thereby continuing to provide us excellent financial flexibility. During the fourth quarter, we repurchased 8,500 [ph] shares of common stock, bringing our share repurchases for 2021 to 823,000 at a weighted average price of $10.95. We have $44.1 million remaining under our $50 million board authorized stock repurchase plan. Our underappreciated book value per share was $13.79 at quarter end, while GAAP book value per share was $12.01 based on $125.5 million shares outstanding as of December 31. We declared a 27% dividend in the fourth quarter, which was paid on January 18. And for more details on the fourth quarter and 2021 full operating results, please refer to our earnings supplement, which is available on our website as well as our 10-K, which we expect to file tomorrow. With that, I'll turn the call over to Brian.

Thanks, Paul. We're pretty happy with the results of the fourth quarter and the earnings momentum that's been established quarter-over-quarter in 2021. As we restarted our lending activities in March of 2021, we knew that all we had to do was invest our large cash position into earning assets using modest leverage our earnings per share would increase and rising dividend coverage would follow. We originated $2.9 billion in loans in 2021, and that pace of originations continued into January of 2022 when we originated over $300 million of new loans. I'd also like to mention that so far in 2022, we received $76 million in payoffs on two hotel loans that we modified in 2020 and deferring some interest until maturity and all deferred interest and exit fees were collected. Our pace of origination should moderate somewhat as markets have reacted to Central Banks pivoting into a decidedly more hawkish tone in recent weeks, along with higher interest rates. At Ladder, we have been waiting for this turn towards higher rates as inflation has taken on a more structural than transitory field in the last few months. By balancing our differentiated liability structure between a larger component of unsecured fixed rate corporate borrowings and a combination of floating rate CLO and a minor component of short-term repo debt, we have positioned Ladder to let the Fed do some of the work for us in the coming year. We expect that our floating-rate balance sheet loans will produce more income as short-term rates rise while our average interest costs stay relatively fixed. If short-term rates move up by 100 basis points, we project our net interest income to increase annually by approximately $0.16 per share. If they rise by 200 basis points, we project net interest income to increase annually by approximately $0.36 per share. That may sound like a lot of rate movement. But in the last 12 months, the yield on the two-year U.S. treasury has climbed by a factor of 15 from 9 basis points in February of 2021 to about 135 basis points last night, while LIBOR has only moved from 9 basis points to 13 basis points. The Fed seems to be significantly behind where the market seems to indicate they should be and recent forecasts from several economists are predicting at least four hikes in 2022 with some estimating as many as seven hikes this year. Also remember that in 2019, one-month LIBOR was at 2.50% in a market that seemed to have only benign levels of inflation. Inflation forecasts look quite different today, and we believe Ladder’s earnings will feel a nice tailwind in the quarters ahead. As I look back over 2021, the lending business was rather difficult with astonishingly low prevailing interest rates and fierce competition. All lenders experienced high loan volumes and lower rates. However, those absolute rates allowed for credit spreads to be quite attractive relative to historical spreads. When we went into the pandemic, we had a floor of approximately 6.50% on our balance sheet loans, and we are now originating loans at a faster overall pace but at rates with floors just under 4.5%. This comes as no surprise to us and due to our decades of experience in the mortgage lending business, we made a decision about 10 years ago to accumulate a highly-curated real estate portfolio that delivered double-digit returns year-after-year expecting it to appreciate in value if rates move decidedly lower and they did just that. In 2021, we selectively sold real estate assets generating gains of $23.6 million. The gains on sales supplemented our lower top line interest income as higher rate loans with floors paid off. And as we run the company with a higher liquidity profile appropriate for the times we were in. We have successfully deployed the liquidity we amassed prior to March of 2021, and we now expect our top line interest income to increase as short-term interest rates rise throughout the year. Because of our growing loan portfolio, we saw our top line interest income jump from $37.6 million in the second quarter to $46.2 million in the third quarter with a further increase in the fourth quarter to $53.0 million. And the first quarter of 2022 is off to a great start. So we expect this growth in income to continue even if the Fed does nothing. As we built up our loan portfolio, we took advantage of lower rates and sold some of our real estate assets at substantial gains. We expect to see some additional sales in the first quarter, but it’s likely this activity will be somewhat curtailed toward the end of the year. We continue to believe that our real estate portfolio is not properly reflected in our stock price, even after we sold a small portion of our holdings at attractive gains. We believe the bigger gains in this book of business are not yet realized. To wrap it up today, I’ll end by saying that we’re back to fighting off the front foot, and we expect the quarters ahead to be very rewarding for our shareholders as the positive operating leverage we’ve designed will start to deliver the results we expect. We can now take some questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tim Hayes of BTIG. Please proceed with your question.

Hey, good evening guys. First question, since you ended with kind of the comments around the pace of real estate sales, Brian, and the embedded value there, I would love to just kind of harp on that a little bit. Are you seeing a softening in bids for your net lease assets, now that there’s obviously a much more – much higher expectations for rates over the course of the year? Or when you say that you expect that to curtail in the back half of the year, is that just kind of your estimate? Or are you seeing that already? And then if you could just talk about the types of assets that you did sell this past quarter if that’s part of a bigger pool, a bigger portfolio of more that you think you can harvest in the near-term? And just any comments around the embedded value that you think is there.

Sure, Tim. Thanks. First of all, no softening in bid levels or interest in the net lease arena that we own today. However, I do expect it to soften a little bit only because of naturally with rates going higher in order to finance these things, you’ll be borrowing at higher rates. Interestingly enough, though, in almost all – when we first started selling some of our real estate assets, they were generally sold to people who had 1031 exchanges, where a guy was the first and the last name, and he wanted to get to avoid a tax payment. Whereas the publicly traded REITs would not usually buy these assets. And the reason why it wasn’t because they were not good assets, they just don’t like to assume CMBS debt and many of our assets have CMBS net, all assumable. And they also don’t – the prepayment penalties were pretty high. Interestingly enough, they – the public companies, I think they’ve rallied quite a bit. So their dividends are quite a bit lower than they used to be. And as a result of that, they are now absorbing and literally paying the prepayment penalties for us to retire some of our CMBS debt. So what you’re seeing in these gains on sale with our triple net properties are the net gains after expenses are taken out for prepayment penalties and things like that. The other thing I did was we wanted to see really what was our real estate portfolio worth, because it’s a little bit of a niche business, and it does very well at certain times. And then at other times, it’s not always so interesting, but it usually does very well in a low inflationary environment. And with our long-term leases, we’ve been able to sell both assumed mortgage properties as well as paid off more properties. But what’s interesting is we tend to go a little deep into the names when we own things. So I think we owned about seven or eight BJ’s wholesale clubs towards the – I don’t know, call it a year ago, I could be off by a quarter there. And I think we sell three of them, and we still have four or five of them. So we’ve got a very good idea that in that scenario, assuming there’s nothing wrong with the BJs we’re still holding, we’re probably up about 30% of those. And I think we could sell them. In fact, we sold three to three different parties. The second thing we’ve witnessed is we also own a private grocer, about – we bought about seven properties out in Iowa with a company called Hy-Vee. And Hy-Vee, we purchased them with about a 6.3% cap rate and they just sold a portfolio of similar properties with longer leases than we have because we’ve owned ours for seven years, but they sold them at a 4.2% cap. And so we think that we’re up substantially there. And in order to prove that to ourselves, we actually sold one of them. And in fact, that is exactly – we did feel a big gain there. So keep in mind, we still own about five or six of those. I think that basis is about $55 million, but we can easily extrapolate and say we’re probably up 20% to 30% on those. I don’t usually go too deep into the individual statistics here, but I will say we own Dollar General’s. We’ve been accumulating those. We actually haven’t bought one in a while now, but we have about $140 million of those. And those we own at a 7-plus cap, and those are routinely trading in the market at about a 5%, 4.5% cap in pretty good locations. So I think we’ve got a substantial gain there also, and we do own over 100 of them. So that’s just a smattering, I’m giving you an example, not all of them. So we do expect higher rates certainly to impact the pool of borrowers. However, what is not showing any signs of deterioration is the public companies that are bidding on these things. So it’s kind of funny and the reason we point out in our call today is that we really don’t feel like our real estate is appreciated in our stock price because we’re basically a public company and we’re selling into other public companies. And they’re buying them from us at a gain and yet their dividends are substantially lower than ours. So the price appreciation is a different. And we have more to talk about. I think we’re going to start talking a lot more about our real estate portfolio. Just one further example, we own a student housing portfolio out in Santa Barbara and if you have any interest at all staying up reading too much, Charlie Munger is trying to build a dorm out there called – and there’s a lot of publications in the press on it. They’re calling it Dorm’s Villa. Because they are so pressed for housing in this college that they are looking to build a dormitory with about 2,000 rooms and most of them have no windows. So we own a substantial portion of assets there in the Isla Vista neighbourhood in Southern California. And so as we look through our portfolio, some of them have stories behind them and some of them don’t. But most importantly I think on the Triple Net side we’ve been selling a couple of things that we own a bunch off. So we’ve got a pretty good idea now on, on what we think that work. So hopefully that helps.

Yes. That’s really granular helpful information Brian, I appreciate it. So it sounds like clearly a lot of embedded value in this portfolio and you are proving it out. It seems like your appetite to continue doing that is still pretty high. I guess, I’m just curious like obviously for the rating agencies like to see you guys have that sticky income and how that portfolios finance is nice too. Are you okay with continuing the harvest you’ve gained and let that portfolio kind of runoff to be a smaller percentage of the overall business? Like where do we see that going over time assuming that the bids are there?

We don’t try to figure out where interest rates are going over a 10 year period of time. We go into each of these investments with a view as to what we think they should yield over time. And when we begin to exceed those gains that we were planning for, we’ll start to win on back a little bit and sell some of them. There’s no wholesale sale. I will tell you though, the sale that iStar conducted of their net lease portfolio, certainly caught my eye and a few of our shareholders have even indicated to us perhaps, if we thought we could replace it in, we do think we can replace it by the way. Perhaps we should sell our entire portfolio or else put it off balance sheet in a net lease REIT that we manage externally. So these are all scenarios that we occasionally look through. But we haven’t made any decisions in that regard just yet. But for the most part net lease properties are best – in our opinion, our best purchase when you have a fairly steep yield curve and that’s been a long time since we’ve seen that I do expect to see more of that going forward. And I think that a lot of their net lease REITs don’t use a lot of mortgage financing, so they don’t really – they’re not impacted by the yield curve, but we are, because as you know, we’ll write a CMBS loan into a trust. And then we’ll take – we target double-digit returns for the next 10 years. And then when the loan comes due we usually have another 10 years behind it. And at that point, we’ll make a decision to sell, blend and extend if we want to talk to the operator. But this all breaks down if you have bad credits in those pools. So, we are very, very meticulous about who we will purchase 10-year assets from. And we focus on, as Pamela said, the necessity-based retailers. And listen, there’s always a time for a necessity-based retailer, but rarely has been a time where the wholesale clubs and the grocery stores have done better than in the last couple of years.

Right. Right. Well if I could just rephrase my last question in different way, because not saying you’re going to sell your net lease portfolio, but it sounds like you are potentially open to the idea and you’re obviously also rotating capital out of the CMBS portfolio in due loans, like are you later than historically than with diversified commercial real estate investment company, but are you okay with going more towards kind of like a pure-play lending platform with maybe conduit on the side. Is that something – not saying it’s going to happen, but like would you be okay transitioning more to that model than where you’re at today?

Yes. I think so. I don’t think there’s anything wrong with our model today. And oftentimes, we talk to people who are, for whatever reason, inquisitive enough to bring it up. But I think there is a possibility that our multifaceted approach has been a little too complicated. Whereas I see some of the monolines, even though you got to be very careful in those monoline businesses when you’re – because when it’s not time to buy them, you have to keep buying them, and that’s never a great idea. But I’m not against, I don’t think anybody on the team is against it, moving more towards a balance sheet, recurring earnings, sustainable cash flow model. The conduit will always be something that we are parachuting to here and then because of the inherently high ROE and little use of capital, frankly. But everything is for sale. We own a fairly hefty real estate portfolio still. Would we sell the whole thing, sure we would. On the other hand, I tend to think we are moving towards an environment where if the curve doesn’t steep-in we’re going into a recession, if the 10-year doesn’t get moving. And in that environment, we’d probably – in a flat environment, we would hang on to those net lease assets in a rising rate environment. I think we would just soon sell them and replace them with other loans other assets we can buy. Because we think we can find them. The fact that we have and acquired a lot in the recent past is not a statement as to we can’t. It’s a statement as to the conditions don’t seem right.

Got it. Got it. Well I appreciate the comment, it was very interesting and in depths and I’ll back in the queue for now.

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

Thanks very much. Just while we’re on subject on the overall commercial real estate owned portfolio is the debt transferrable and how easy it is – is it to refinance, because another option would be to just increase the leverage since you have these unrealized gains in those portfolios rather than selling the asset at that right?

That's a good question because we have actually rolled some of them over and refinanced them. And in nearly all instances, they turn into a cash out refi and many instances would because of the cap compression that's taken place over the last 10 years with a rather stagnant low real estate environment. We almost have no basis in some of the assets. So when we do that, so sure, we tend to target a double-digit rate of return over the long term, and we think we can manage that. And if we think we can find new ones that do that, so sometimes it's helpful to take gains and harvest 25%, 30% increases in valuation and then go do it again. However, if we were to stop selling them because we won't sell them at a price we don't like. But if we were to stop selling them, then we could easily – yes, just look in all likelihood, put them into a lower rate refinance where there's cash out because the valuations have increased. The valuations are what they are. We don't control that, but by virtue of the fact that we've been selling them at hefty gains, we would expect the appraisals to do the same thing. But it's always hard to say goodbye to a double-digit rate of return. But yes, sometimes it's time to let them go and do it again where you think you might have a better ROE situation. It's important in those environment, have to remember the leases are getting shorter, not longer. And the companies are doing quite well, in fact specific market cap rate on Dollar General and BJs, and the several of the companies we own has tripled in many cases. So they're much stronger credit. So we're not really in a credit conversation anymore, at least not now. But with rates expected to rise and lease term is getting shorter, I would expect there to be some view towards perhaps we'll sell them. But if we were to refinance them, it's gotten a lot cheaper to refinance them now because rates have gone up. I know that seems weird, but because the prepayment penalties have come down so much because of the 10-year movement in the defeasance calculations.

Okay. Thank you for that. It seems like most of the nonbank lenders in particular, but the overall lending market was pretty gang, but there's the last two quarters. Some of that momentum seems to have continued this quarter, maybe it will slow with all the volatility. But CMBS has significantly lagged. So I guess, the two questions would be, one, what are your thoughts around the [indiscernible] in the originations? But then why do you think that took place? But then why also do you think CMBS was such a laggard? And thanks so much.

Sure. I would love taking in the reverse order. I think CMBS has been lagging. The answer to both questions is the pandemic, but with different reasons why. The tenure sign off on a 10-year CMBS loan, generally need 12 months – trailing 12-month cash flows from tenants that are in occupancy and paying rent. And there was such an interruption in who's in an office building. And I can remember underwriting loans where we would write a loan on an office building and you go and see the office building out in Indianapolis, and there is no one in it. So that presents a problem to a lender on a 10-year loan, whereas under normal times and circumstances, of course, you show up is bustling and people are downstairs ordering breakfast and then you get the stock-hold from the CEO and you just go on. So I think CMBS was burdened by two things. One, it was tough to get a fix on trailing 12. But as you can imagine, with everybody staying home, the apartment market did very well. So it wasn't hard to find 10-year loans in the apartment market. However, the apartment market is dominated by Fannie and Freddie. So as a result of that, the CMBS business suffered. And the second thing that hurt the CMBS business is the flat yield curve with a 10-year – right now, even, let's say it's 2% and you sell AAA 90 over. If you get a 2.9% and you just saw an inflation print of 7.5%, I think. So that's always a dangerous thing to be holding, a long-term piece of paper that might go upside down on you on funding, not because anything is wrong just because spreads have moved out and rates are moving higher. Not a lot of people in the market are used to dealing with that. But in the old days, in the 1980s and 1990s, but those were things that you had to – if you made a loan like that, you had to sell it almost right away. Otherwise, you risk having a negative tariff situation. On the beginning of your question, you talked about how the leverage – the CLO lenders, I'll call it, have been having a hell of a time with a lot of volume here. Well, I think deep down aside interest rates have been very low. And that's actually one of the things I mentioned while I was talking on the earnings. The initial call there is that while rates were low when LIBOR is at nine basis points, spreads were high. And most experienced lenders in the space, if you were writing apartment building loans at 350 over LIBOR, you're doing pretty well on a historical basis. However, 350 over LIBOR is 3.59% rate, and that's not terribly interesting. I think as things – as rates go higher here, you will see spreads tighten. So just because LIBOR is moving up, don't naturally assume that the prevailing rate that the investors get will naturally go up. It will go up. It has been going up. Spreads have been widening now, but I think the spread widening is taking place because LIBOR hasn't moved. And I think the investors are rightfully building in some version or they should have moved by now and it just hasn't happened. I mean the two-year moved 25 basis points this afternoon. So I said in the original discussion there, I was afraid to say where the two-year was because I didn't know where it would close. But I said last night, it was at 135. [ph] Right now, it's at 155. So it's – I think spreads will tighten the CLO business as LIBOR begins to move. So it won't naturally be just ratcheting higher in absolute interest rates. So I think that's – and the other reason that there's been a lot of availability there. Because I think in the post pandemic era, there were a lot of people who thought about selling their assets and just didn't get around to it before the pandemic hit. And I think those people, especially the older folks that own small apartment buildings in New York, San Francisco and some of the other baker cities. They just sold them at that point. They got tired of carrying them for a year or two. And the investment has probably been very good to them over the last 20 or 30 years. But we did see a lot of all-time families selling assets that they've held for decades.

Thanks very much for taking the questions.

Sure.

[Operator Instructions] Our next question is from Steve Delaney of JMP Securities. Proceed with your questions.

Thanks and congratulations, everyone, on a great close to a comeback year. And Brian, I just checked my screen, the two years at 161 up 26. So...

If you walk away for five minutes today.

You can't – you got to stay glued to the screen then through a bond guy. Wanted to just ask a couple of quick things; Cash $549 million, down about $200 million from $750 million at $930 million. So what would be sort of the minimum level? I know it fluctuates day-to-day and week-to-week, but as far as sort of a target, maybe ask it this way. $550 million, is some of that excess cash? And if so how much. Okay. That's – yes. So may be...

Yes, I think I know where you're going here. So what's the carry rate, what do you want to go home every night with. In general, I think we generally say about $100 million. I personally think that number is probably a little high and it probably comes out often when we say $100 million because we still own about $700 million in securities. However, and I do expect our securities portfolio to become much smaller as time zones, they're paying off very rapidly right now. They're in that part of the – these are the A classes from CLOs from 2019.

Sure.

So those are kind of taking care of themselves. If we need to sell them for capital, we certainly will that we have no problem with that. The collateral is in excellent shape. But – we also have a $250 million revolver that's not drawn. You don't want to draw the revolver and for any reason other than a short-term reason. But so I'll tell you, I'm pretty – with a lighter securities book, I would be comfortable with $50 million to $75 million, although I believe we generally think $100 million is like the overnight minimum that will go on with.

Yes, that's helpful. Thank you. Rates, I mean, they've obviously broken out, but volatility scares everybody. It scared the stock market, and it looked to me just in the last week or so that the credit markets – that the fixed income credit markets are responding in the last week. We don't see what you see on your screen, but it appeared that new issue AAA – 10-year AAAs widened by about 10 basis points on CMBS. I talked to a couple of people this week that did CLOs in the last two or three weeks, and they said, Thank God, I'm glad I got my deal done because what I'm hearing now is bankers are saying we're not taking anybody out. So I'm just curious, you hear all this chatter all day long. And has this – what impact has this rapid move higher in rates. It was volatility a month ago now; it's just 1 direction, right? So where do you see credit reacting to this rate move? Thank you.

I think the two things that are driving the investor wider on credit spreads in the long-term fixed rate market. So that's the conduit or the VIX. It's been comfortably above 20% now for quite a while, and it was in the 30s for a little while. Those are pretty near panic levels of 30. So that naturally causes people either to not bid at all because there's too much volatility around to widen out their price. So that's one. That's just general volatility. The second, and by the way there's plenty of reasons to be volatile, too. I can go through a litany of them at this point, but it doesn't surprise me at all that people are a tad nervous. When you think about what's going on and the virus is only one of those things on a list of about seven. And the second part is the CLO market. The CLO market is simply oversupplied. And there were too many LIBOR-based loans trying to be sold to a rather large investor base, but large in dollars, not large in name there. So about five or six big accounts that if you're going to try to do a $1.5 billion CLO, you're going to need them in that transaction. And if they're not there, it's going to be a problem. So I think that they were inundated. There were too many deals going on. They couldn't catch up with them fast enough. And so they kind of gravitated towards the apartment loans, the ones that have the highest degree of apartments in them. That is what you would expect – and they've driven levels wider. I think there's a deal in the market today where the A class is at 175 over. We did a CLO in June, where the A Class executes at 120 over couple of years ago, there was a tight done at LIBOR plus 85 on A Class. And what's interesting, the dynamic that's developed here in the last – just the last few months, I would say, is that a lot of people wrote a lot of apartment loans because they're considered very safe, and they probably are. But they were writing them in low 300s on the whole loan side call LIBOR plus 325. And then they go to the CLO market with their pool and they get about 83% or 84% leverage. And then they have fees and they have LIBOR cost based on where the bonds trade. And for the most part, those multifamily deals were levering the equity with 84% leverage and across collateralized pool into about a 13%, 14% rate of return. Today at LIBOR plus 175. And I don't think the apartment deals are 175. So let me put that down to 155, 160 maybe. Those transactions are levering the owner of the seller of those assets into – about 8.5% or 9% rate of return for BP's equity on apartments. That might be okay. However, what I find fascinating in that market is, if you buy the A class in that transaction, which has about 50% subordination on every single loan in the pool, and their all apartments, you can use 90% leverage on that, which is I know that sounds high, but keep in mind, the equity is at 84%. So it's not that much higher. And they actually are levering given the cost of funds of LIBOR plus ASP, they're levering into a double-digit return. So the AAA portion is levering to a return much higher than the BPs at 84% level. And that is a phenomenon probably should not last for very long. And I think with these widening in spreads, we'll see some demand – I mean some originators backing up those spreads in the whole loan market from 325.

Yes, that's great color. I had not realized, but I heard this last week about that the CLO market is a mile deep, but maybe 100 yards wide. And exactly what you were saying about the five or six guys. Thank you so much for the comments and again great a quarter and wrap up on the year. Thank you.

Sure.

We have reached the end of the question-and-answer session. I will now turn the call back over to Brian Harris for closing remarks.

Just thank you, everybody, on a very interesting day in the markets. We are fortunate to be positioned not just to do well with a rising rate environment, but to do exceptionally well. And I think we haven't earned anything on that yet, but I think that we're about to. So I look forward to talking to you all again in April and you to believe the pundits today. There should be another 50 basis points on the Fed funds rate at that time. So we look forward to it, see how we did. Talk to you soon. Thank you.

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