Ladder Capital Corp

NYSE:LADR

Earnings Call Analysis

Ladder Capital's Strong Performance and Strategic Moves in Q2 2024

Ladder Capital reported strong results for Q2 2024, with distributable earnings of $40.4 million or $0.31 per share, yielding a return on equity of 10.2%. The company successfully issued $500 million in 7-year unsecured bonds priced at 7.0%, enhancing its liquidity to $1.9 billion. They focused on high-yield investments by acquiring $81 million in AAA-rated securities. Ladder's real estate portfolio contributed $14.7 million in net rental income. Ladder is on the verge of achieving an investment-grade rating, with Moody's and Fitch placing the company on a positive outlook .

Strong Performance and Financial Position

In the second quarter of 2024, Ladder Capital Corp reported impressive financial metrics, generating distributable earnings of $40.4 million or $0.31 per share, resulting in a solid return on equity of 10.2%. This performance was buoyed by stable net interest income and net operating income from its real estate portfolio, in addition to gains from property sales. The company has prudently managed its balance sheet, evidenced by reduced adjusted leverage to 1.4x and increased liquidity to $1.9 billion, consisting of $1.6 billion in cash and cash equivalents.

Emerging Investment-Grade Credit Status

Ladder is on a strategic path to achieving an investment-grade credit rating. Recently, it secured a $500 million unsecured corporate bond at a 7.0% interest rate, which has prompted positive actions from credit rating agencies. Both Moody's and Fitch have placed Ladder on a positive outlook, while S&P has upgraded its corporate credit rating and bonds. Currently, Ladder's debt composition includes 53% unsecured corporate bonds, significantly bolstering its credit profile and accessibility to a broader pool of potential investors.

Strategic Asset Management and Sales Gains

Ladder has actively managed its real estate portfolio, totaling $947 million and yielding a net rental income of $14.7 million in the quarter. The company has showcased its capability to sell assets profitably, selling four properties for a net gain of $3.4 million. The tenants in their net lease properties are primarily investment-grade rated and committed to long-term leases, giving them a reliable income stream and reinforcing the stability of their portfolio.

Proactive Positioning for Future Growth

Ladder’s leadership is keenly focused on positioning the company for future growth, particularly in the context of anticipated market improvements. They are actively exploring new loan originations, eyeing opportunities within the recovering commercial real estate market, particularly as lower interest rates are expected to prevail. The focus is on balancing immediate liquidity needs with the strategic allocation of funds into higher-yielding investments.

Strong Dividend Coverage Amidst Growth Strategy

The company declared a dividend of $0.23 per share for the quarter, signaling robust dividend coverage, primarily due to stable earnings and a healthy liquidity position. Management indicated that future dividend increases will be contingent upon sustained earnings growth and the efficiency of capital deployment strategies. With the capability to potentially leverage its substantial cash holdings further, future growth opportunities may enhance both the dividend and overall return to shareholders.

Market Outlook and Risk Management

While there is cautious optimism regarding the commercial real estate market, particularly within New York City’s Plaza District, risks still remain, primarily in the office sector. Leaders at Ladder noted the thin liquidity and potential for fluctuations in market conditions, which may impact asset pricing and investment strategies. However, they are confident in their CECL reserve, which they have enhanced to $54 million, safeguarding against anticipated loan losses and reflecting prudent risk management practices.

Securing Future Opportunities

Ladder is uniquely positioned to capitalize on future investment opportunities as it transitions to a more offensive strategy. With a strong balance sheet, reduced debt levels, and an unleveraged securities portfolio yielding favorable returns, they are ready to act as favorable conditions arise in the commercial real estate sector. Their proactive approach to both direct lending and securities acquisition will likely underpin continued earnings growth moving forward.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to Ladder Capital Corp's Earnings Call for the Second Quarter of 2024. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended June 30, 2024.

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 projection. 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 earnings supplement presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call.

At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.

[Pamela McCormack, executive]

Good morning. We're pleased to present an overview of Ladder's performance for the second quarter of 2024 and an update on our progress towards becoming an investment-grade company. During the quarter, Ladder generated distributable earnings of $40.4 million or $0.31 per share. This performance yielded a return on equity of 10.2%, supported by modest adjusted leverage of 1.4x. In addition, we successfully priced a $500 million 7-year unsecured corporate bond offering, resulting in positive rating actions from all 3 rating agencies.

We're pleased to note that both Moody's and Fitch placed Ladder on positive outlook and S&P upgraded both our corporate credit rating and our bonds. Moody's and Fitch are one notch away from assigning Ladder an investment-grade rating. We believe this milestone will enhance our distinction among peers in the commercial mortgage REIT space and position us as an attractive option for traditional equity REIT investors.

Pro forma for the $500 million offering, 53% of our debt is comprised of unsecured corporate bonds. As of July 25, Ladder has $1.9 billion in liquidity, with $1.6 billion or approximately 30% of our balance sheet comprised of cash and cash equivalents. With this enhanced liquidity, we can now squarely focus on offense. As we have stated in the past, our core objective is striving for the highest possible return on equity, while prioritizing principal preservation and employing modest leverage. This disciplined and differentiated strategy, supported by our diversified business lines and conservative capital structure has enabled Ladder to generate stable and attractive returns.

Specifically, over the past 12 months and against the challenging backdrop, we reduced assets to $5 billion from $5.6 billion from loan payoffs and asset sales, almost doubled our liquidity to $1.9 billion as of July 25, reduced debt, resulting in a modest adjusted in gross leverage of 1.4x and 2.2x, respectively, increased our component of unsecured debt to 53% from 40% pro forma for the bond offering that closed in July, grew unencumbered assets to $3.1 billion or 62% of assets, with 82% comprised of cash, securities and first mortgage loans, preserved a stable book value. And finally, we achieved all of this while providing a healthy return on equity to shareholders of over 10% while building up a large liquidity position.

Turning now to our balance sheet loan portfolio, which totaled $2.5 billion as of quarter end, with a weighted average yield of 9.48% and limited future funding commitments totaling $94 million. Our earnings for the second quarter included a $1.6 million or 5.4% gain from the sale of approximately $29 million of fixed rate loans into a recent CMBS securitization. In the second quarter, we originated a $16 million first mortgage balance sheet loan secured by an industrial portfolio in Florida.

Additionally, we made a $13 million passive equity investment in a joint venture with a seasoned operating partner to strategically acquire a Class A office building in the Plaza District of New York City. The asset was acquired from an institutional investor who owned the asset for over 20 years with favorable financing arranged to the existing lender. We're well capitalized and anticipate further expansion of our loan portfolio, for which our originators are actively pursuing new investments.

Regarding our current loan portfolio, we remain proactive in asset management. In the second quarter, we received $255 million in loan paydowns, including the full repayment of 13 loans totaling $242 million. In addition, 4 more loans totaling $56 million were repaid after the quarter ended. Year-to-date, we received $668 million in total loan paydowns, including the full repayment of 32 loans totaling $618 million. We've also been active in opportunistically divesting owned real estate. In total, we sold 3 assets securing loans that defaulted during the first half of the year at a gain above our basis.

2 multifamily assets located in Longview, Texas and Los Angeles, California, with a total carrying value of $20 million were sold in the second quarter, resulting in a net gain of $1 million. Additionally, a third multifamily asset in Texas valued at $11.5 million was sold at a gain above our basis after the quarter ended. We're continuing to demonstrate that defaults do not necessarily lead to losses. We take pride in our capability to own and manage properties, including our readiness to inject capital when necessary or to strategically expedite asset sales as appropriate to maximize their value. There were no specific impairments identified during the quarter, and we modestly increased our general CECL reserve to $54 million, which we believe is sufficient to cover any potential loan losses we may incur.

Turning now to our securities and real estate portfolios. We purchased $81 million of AAA-rated securities with a weighted average yield of 7.1% during the quarter. We ended the second quarter with $481 million securities portfolio, primarily consisting of AAA-rated securities earning an unlevered yield of 6.92%. And we have been actively acquiring new securities to add to the portfolio in the third quarter. Our $947 million real estate portfolio contributed $14.7 million in net rental income in the second quarter and continued to be mainly comprised of net lease properties with long-term leases to investment-grade rated tenants. We sold 4 properties for a net gain of $3.4 million during the quarter, including the 2 REO assets previously mentioned.

In conclusion, we maintain ample liquidity, a strong balance sheet, conservative leverage and a well-supported dividend, positioning us to seize opportunities as 2024 progresses.

With that, I'll turn the call over to Paul.

[Paul Miceli, executive]

Thank you, Pamela.

In the second quarter of 2024, Ladder generated $40.4 million of distributable earnings or $0.31 per share of distributable EPS for a return on average equity of 10.2%. Our earnings in the second quarter continued to be driven by strong net interest income and stable net operating income from our real estate portfolio and was complemented by gains from the sale of real estate properties. As Pamela discussed, the unsecured bond issuance that priced at the end of June and closed in July, further strengthens our balance sheet.

Ladder issued $500 million of unsecured corporate bonds at 7.0% for the 7-year term, which is callable after year 3 in 2027. Unsecured corporate bonds are the foundation of our capital structure with now $2.1 billion outstanding across 4 issuances. Pro forma for the issuance, 91% of our debt is comprised of non-mark-to-market financing with 53% of total debt being unsecured corporate bonds with a weighted average maturity of over 4 years and an attractive weighted average fixed rate coupon of 5.2%. We remain committed to the corporate unsecured bond market as our primary source of financing and are now the closest we have been to an investment-grade credit rating than at any point in Ladder's history.

As Pamela discussed, both Moody's and Fitch placed Ladder on positive outlook, and Moody's upgraded and unnotched the rating on our bonds to Ba1, aligning our bonds with our corporate credit rating. Additionally, S&P also issued an upgrade to our rating on both our bonds and our corporate credit rating. With Moody's and Fitch just one notch away from investment-grade and now with a positive outlook on our corporate rating, Ladder is one set closer to achieving our long-held goal of becoming an investment-grade company, which opens Ladder to the more accessible and broader investment-grade bond market, where we believe Ladder will ultimately achieve a more attractive cost of capital and enhance our return on equity to shareholders over time.

Our balance sheet remains highly liquid. As of July 25, we had $1.6 billion in cash and cash equivalents or $1.9 billion of liquidity with our $324 million unsecured revolver, which remains fully undrawn. Our loan portfolio totaled $2.5 billion as of quarter end across 85 balance sheet loans, representing approximately 50% of our total assets. We did not record any specific impairments in the second quarter. However, we increased our CECL reserve by $5 million, bringing our general reserve to $54 million or an approximate 213 basis point reserve on our loan portfolio. The increase was driven by the continued uncertainty in the state of the U.S. commercial real estate market and overall global market conditions.

Our $947 million real estate segment continues to generate stable net operating income and includes 155 net lease properties, representing approximately 70% of the segment. Our net lease tenants are strong credits, primarily investment-grade rated and committed to long-term leases with an average remaining lease term of 8 years. As we have historically demonstrated, we have a long track record of maximizing the value of real estate assets that we own and operate. This was demonstrated through the sale of 4 properties, including the 2 REOs previously mentioned, that generated a total of $3.4 million of net gains for distributable earnings during the second quarter.

As of June 30, the carrying value of our securities portfolio was $481 million, 99% of the portfolio was investment-grade rated with 86% being AAA rated. As of July 25, our entire securities portfolio was unencumbered and readily financeable, providing an additional source of potential liquidity, complementing the $1.9 billion of same-day liquidity as of that date. As of June 30, 2024, our adjusted leverage ratio was 1.4x and has continued to trend down as we de-levered our balance sheet while producing steady earnings, strong dividend coverage and a double-digit return on equity in the second quarter of 2024.

As of June 30, our unencumbered asset pool stood at $3.1 billion or 62% of our balance sheet. 82% of this unencumbered asset pool is comprised of the first mortgage loans, securities and unrestricted cash and cash equivalents. Our significant liquidity position, large pool of high-quality unencumbered assets and capital structure that has been further strengthened with the new corporate bond deal provides Ladder with strong financial flexibility as we head into the second half of 2024.

As of June 30, Ladder's, undepreciated book value per share was $13.71, which was net of the $0.42 per share of CECL reserve we have established. In the second quarter of 2024, we repurchased $212,000 of our common stock at a weighted average price of $10.75 per share. Year-to-date through June 30, 2024, we have repurchased $860,000 of our common stock at a weighted average price of $10.77 per share.

Finally, our dividend remains well covered. And in the second quarter, we declared a dividend of $0.23 per share, which was paid on July 15, 2024. For details on our second quarter 2024 operating results, please refer to our earnings supplement, which is available on our website and Ladder's quarterly report on Form 10-Q, which we expect to file in the coming days.

With that, I will turn the call over to Brian.

[Brian Harris, executive]

Thanks, Paul. We're pleased with our second quarter results, especially because we were able to issue a $500 million unsecured corporate bond with constructive commentary from all 3 rating agencies. The issuance was another important step in our continued quest to become an investment-grade company. It also sets the table for us to increase our asset base and grow earnings in the years ahead. With the Fed signaling that they are likely to begin an easing cycle before year-end, market optimism has become more prevalent. At Ladder, we share that optimism. And why not?

Our quarterly cash dividend is well covered despite our use of relatively low leverage while having nearly $2 billion of liquidity, providing us with substantial earnings power going forward. Because we are beginning to invest our significant cash position into higher-yielding investments at a time when lending in commercial real estate is increasingly following under the domain of nonbank lenders, we think the future looks bright for our shareholders in the quarters ahead. Our loan portfolio continues to pay off at a comfortable pace. And even when we've had to take back a few properties, we've been able to sell them in short order generally at a gain to our basis.

We still feel like the acquisition of securities offers the best risk/reward proposition for our investment dollars. As Pamela mentioned, earlier in the second quarter, we acquired $81 million of AAA-rated securities at an unlevered yield of 7.1%. We have continued to acquire additional AAA securities into the third quarter. We also purchased a minority interest in a Class A office building in Midtown Manhattan for $13 million. Our purchase price was at a price of just under $350 per square foot.

Our investment was made just a few weeks before news of JPMorgan's agreement to purchase 225 Park Avenue for $575 per square foot with a likely plan to tear it down and build something modern. The 2 assets described are just a 5-minute walk from each other. The Plaza District around Grand Central Terminal in Manhattan is bucking the trend in the office sector with financial services companies like Ares Capital, Blackstone, Citadel and JPMorgan, making major long-term commitments to this vibrant pocket of real estate, and we hope to benefit from this momentum with our recent purchase nearby.

The expectation of lower interest rates has given way to a sense that commercial real estate, in general, may have bottomed in the last 6 months. While office will be the slowest to recover, overall, there is a sense that the worst may be over at this point. There will certainly be more foreclosures than properties changing hands, but green shoots are showing up in many places. We've even seen politicians in Philadelphia and San Francisco calling for workers to return to office in person, creating safer streets. It's become apparent that hollowed out downtown business hubs ultimately cause deficits in municipal budgets and residents in many of the hardest hit places are increasingly calling for new leadership that prioritizes their safety and well-being.

While the mood of the market seems to have improved lately, caution is still warranted because liquidity is thin and to become almost nonexistent very quickly without warning. Despite new supply being on the low side for years now, credit spreads in CMBS and commercial real estate CLOs are still wide by historical standards. That's why we like buying them, but we generally keep to the AAA classes due to this concern around liquidity.

Increasingly, we are seeing the actual rate on a new mortgage, especially on larger dollar amounts being set by the public markets and not by a bank lender. By taking the bank out of the risk position relating to spreads, the larger investors and securities have a lot to say about what rate a borrower should pay if they want these large buyers to buy their bonds. This new way of setting mortgage rates after the securities have been placed on order will probably be around for a while. But this shift in pricing power to the buyer of the securities away from the bank lenders is resulting in spreads staying wide, at least for now, despite a general lack of supply.

I'm sure T-bills with rates in the mid-5s has also caught the attention of a lot of these investment dollars dampening demand for mortgage bonds. But keep in mind, it's possible that the holders of the losses stemming from mortgage investments in the last decade of lower interest rates may now be involved in determining the mortgage interest rate for sponsors seeking to borrow against commercial real estate. Loans secured by unusual property types or relating to a large cash-out refinancing or loans to sponsors that have walked away from other properties have been seeing wide pricing after the deal is first introduced to the market. That's a new development.

So now that the first half of 2024 is in the history books, we can probably look forward to some much-needed relief in the second half with rates expected to fall in the quarters ahead. With a large cash position, low leverage and a strong credit culture, we feel that our differentiated funding model has us in an enviable position to take advantage of the investment opportunities ahead.

We can now take some questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Stephen Laws with Raymond James.

[Stephen Laws, analyst]

Hey, Pamela, I want to -- hey, Brian. I want to start with the investment pipeline and focus on offense. And I know you guys both touched on the security purchases and Brian, I think you mentioned those provide the -- where you're seeing most attractive returns. But given the leverage, you don't get a lot of capital deployed there. So as you think about moving on offense in the second half of the year, when do you see kind of new loan investments accelerating? Is that a 3Q event? Or is it going to take time to kind of get the pipeline and origination activity restarted and more 4Q growth on the loan portfolio. And when you look at -- what are you looking at there? Are you looking at maybe helping fill the void in construction financing? Are you looking at possibly mezz loans? Kind of how do you think about turning the loan originations back on?

[Pamela McCormack, executive]

So -- hey, Stephen, so a couple of things. I think you asked a lot of questions there. On the securities portfolio, I just want to be clear, right now, our securities portfolio is unlevered, so we actually are deploying cash, and it's really quite competitive with the returns on loans right now. It's over 7% unlevered. And given our cash position, it's a nice complement to that. On the loan portfolio, listen, we are actively looking at loans. We are not waiting to go on offense. We're waiting to see the right opportunities to deploy our capital, given the fact that we are covering our dividend well and we feel comfortable with our credit, we're looking to add accretively. So I do think we're starting to see the pipeline build. We closed a loan this quarter. We have loans in pipeline. But realistically, I think you'll start to see some momentum in the third quarter, and we're hoping it will really rev up in the fourth quarter.

[Stephen Laws, analyst]

Great.

[Pamela McCormack, executive]

I think that answers the questions.

[Brian Harris, executive]

That's fine. And Stephen, I just -- I'll add, we don't plan on getting into construction lending. It's not a forte of ours. And -- but we do -- there's just not a lot of demand right now. And the interesting part, as I mentioned, is that volume has been quite low in production, not just at Ladder, but also in the CMBS world or the CLO world. The Wall Street Journal published, I don't know, it's about a decade chart of CMBS and single-asset deals. And single assets are up because they're usually big sponsors that have to borrow. But the volumes have been well way down since 2017, '18.

And you would think normally that would create a supply problem. I mean a lack of supply would create a pricing difficulty because it would be very tight. But in fact, the opposite is true. They're quite wide. In fact, mortgage spreads are nearly as wide as I've ever seen them. And that doesn't make a whole lot of sense, but I do believe it gets pushed wider by T-bills, as I said, in the mid-5s. And also, the fact that the public -- you've actually very quietly shifted how mortgage interest rates are made, what -- like who sets the rate.

And we used to avoid large loans in big cities because there, frankly, were too many lenders. And I felt like we didn't really stand a chance at least hitting the hurdle rates we wanted to hit because a lot of lenders were making loans to accommodate clients. That's not happening anymore. It's very -- no one announced it and nobody sent anybody an e-mail, but the markets are now setting the rates on mortgage deals at the closing. So what they'll do is they'll go out and suggest to the market a structure with a rating agency input, and then the market sets the level. And right now, the market just thinks that commercial real estate should be pricing wider.

So we have been picking up as -- I think we said over $80 million in the first quarter. We're well over $100 million already this quarter in just the first half of July. And these yields, unlevered, are in the low 7s at 175 to 210 over, which is hefty spreads. If you lever those, they lever into the 20s. And -- but the way I think envision this is given the fact that we just raised a lot of capital and we already had a lot of cash, we'll travel in an unlevered state for a while. And then as we run out of -- or run those balances down, we'll start levering not all of them, we'll lever half of the securities, and that should get us into a pretty comfortable, well above dividend rate.

And the -- when you think about the liquidity and the financeability of those bonds relative to a whole loan at 250 or 300, to me, it's a superior investment, I think, and then I think we're going to stay in that area. And the other part is we're not missing anything. There's no volume anyway. There's just not a lot of demand. You'll hear this from banks, competitors, everybody. And rates are just quite wide. And there's plenty of people looking to refinance assets, but you wind up in the equity by accident on a lot of those. And on an acquisition, there's a lot of people chasing those, so they're quite tight. But I am very happy to be buying AAAs at 200 over rather than selling them to people at 200 over.

[Stephen Laws, analyst]

Appreciate the color there. As a follow-up around the dividend, incredibly strong coverage now. It seems like the outlook as you move to offense both out of cash into higher-yielding securities and loans and then eventually leverage probably sometime next year, that coverage likely only continue increasing. So when you have your discussion with the Board and you look at the dividend, it's like a 6 handle yield on depreciated book value. What are the considerations that go around when the right time to increase that dividend? Or if increasing, it's the right way to go? How do you think about setting the right level for the dividend moving forward?

[Brian Harris, executive]

Well, it's higher dividends follow higher earnings, especially in a REIT that distributes 90% of its income. So one, the earnings will come first and then the dividend will follow. But if you just take a look at cash holdings on our balance sheet right now, if we simply lever that 50% and you can easily see how our asset base can get a lot bigger. It can go up to $3 billion, and that will create tremendous earnings power. So if we're out-earning our dividend, while holding almost $2 billion in cash, it shouldn't be a big step to start thinking about raising it as we get through the tail end of the downturn and also the beginning of, what I would call, the expansion.

[Operator]

And the next question comes from the line of Steve Delaney with JMP Securities.

[Steven Delaney, analyst]

Look, congrats on the new bond issue and all that, that implies and also just a very solid quarter all around. So look, I think we -- Brian, we've got more clarity now on the Fed, the outlook for the next couple of years. And if we get 50 basis points this year, 100 next something in that magnitude, how impactful really is this to the overall CRE market? Obviously, that short rate, but you got to figure the longer intermediate rates will be impacted by the Fed's actions. Will that rate environment over the next 15, 24 months, is that going to bring fresh equity, institutional equity off of the sidelines into CRE? And isn't that what you need to be able to -- you need equity to come in the market so that creates new transitional bridge loan opportunities? It seems like the problem is there not enough borrowers, even with the banks falling back and stepping away. Just curious how that plays out for Ladder competitively in a lower rate environment.

[Brian Harris, executive]

Sure. Well, I think the first step there is transaction volume will increase because more dollars will go to the equity holder than the lender relative to today. So that would be chemistry Class A, just the first year, you would want to see transaction volume pick up. If transaction volume picks up in there, there's plenty of equity around. I mean, as we mentioned, we sold, I think, 4 properties in the quarter. Typically, we think about selling it and then the phone rings. And before you know, we have an auction going on. And it's oftentimes people who have been looking at the asset, but not talking to us, they've been talking to the prior owner. And we may be a little bit guilty of basis trading because I do think some of these are pretty cheap.

But I think the first step is lower rates and just the jawboning of lower rates has already created a bit of an optimistic feeling in the market that you might remember from January when we were at CREFC down in Miami, everybody is thinking 6 to 8 cuts and they were ordering the expense of Cabernets again. That all fell apart pretty quickly. But this time, it kind of looks like we're at the end of the Fed cycle, and it looks like they're going to embark on a lower rate cycle going forward because they seem to have -- I've never thought they were going to get to 2% inflation. I think they're at 3%, and I think they're going to live with that.

And -- but then on the other hand, they now have a dual mandate. So they've got to watch -- I mean, they've always had a dual mandate, but they tend to only focus on one at a time. But as the economy is undoubtedly slowing a little bit. And I think you'll see that as they get a little bit more concerned about participation in the job market and juxtaposed against the 3% inflation rate, I think they'll start -- instead of fighting with inflation, they're going to make sure that they don't create the jobs market. So yes, we do need it to happen. And it's always easier.

I've been doing this for a very long time. And when stock markets are plumbing new highs, invariably somebody sells some stock that have a big gain and they move over to buy an apartment building. So real estate travels with a lag factor behind stock market. And the stock market continues to levitate, most of the stock market valuation took place because of compression of multiples as opposed to actual earnings gains. So we'll see how they sort it out here. We're a little concerned about volatility. You saw the VIX yesterday go above 18 very quickly. So not out of the woods here and that's almost like my reference to liquidity and how quick it can vanish. I mean when the VIX goes from 12 to 18 on nothing, that's a little concerning.

So I think we're going to continue to be conservative in our approach. And as long as AAAs at 175 to 200 are out there, we'll let other people do the lending for a while and will buy the finished products. But once things stabilize, and I think the Fed will steepen the curve, you saw our bull steepener go on recently. But I suspect the 2-year will fall more than the 10-year will rise. And once that happens, that's when the real estate market really does start catching on.

[Steven Delaney, analyst]

And a real quick follow-up. You did this JV interest in a partnership. Could we see a transaction where you saw a building, you and other investors created a partnership, bought the building, it needed to be rehab to whatever. Could you put equity into a project and also make the bridge loan to the partnership? Would you get 2 bites at the same apple?

[Brian Harris, executive]

Sure. I'll even offer a third bite. There is a scenario where you stretch a senior and you basically make your equities a debt instrument, sometimes we call it dequity internally. And instead of just owning the real estate with the partner because all of your investment dollars are senior to his, then you just put a rate on it, so you combine a senior with a mezz and you take a participation in the building. So there's 3 versions of it. One is, yes, we could be a lender to the partnership. Two, we could be an equity borrower in a debt outfit with a higher stretch on the size of the loan. Or else, we could just be equity in the deal and borrow from somebody else like we just did.

[Operator]

And the next question comes from the line of Jade Rahmani with KBW.

[Jade Rahmani, analyst]

You all have been sitting on ample amount of cash for quite some time and are in an enviable position versus competitors, yet originations were pretty subdued in the quarter. So I'm wondering if you feel that the market is actually, in fact, too competitive with debt funds chasing a very limited pool of deals. For example, CBRE showed commercial mortgage originations up 38%, and they said debt fund volumes were up 70%. Is the market's too competitive actually?

[Brian Harris, executive]

The market, that's a big word and it covers a lot of ground. But the addressable market, in our opinion, not exclusively, but largely lands and borrowers seeking debt on acquisitions. So you just got rid of 75% of the addressable audience. And if it's a multifamily, then it's too competitive, yes. I think it is. But it isn't too competitive because of too many competitors. It's because there's really no volume. But you're seeing the market react and it is the purchase that we made during the quarter of an office building, that was -- that's a reset on price. And as you see more and more of that happen, you'll see more and more acquisitions.

So I don't think it's too competitive. I think there is just a lack of demand. When there is a high-quality investment possibility on the lending assignment, it is very competitive. But it's not like they're losing money. I don't -- it's not that bad. But what is happening, I think, is that a lot of a lot of volume is being driven by the sake of transacting as opposed to margins or making a lot of money because I don't really understand how you make money lending at [ 2.50% to 2.75% ] over SOFR and then selling AAAs at 190 to 200. And you would think with a lack of supply, like you just mentioned, there is this tremendous widening going on in the securities market because I just believe the pricing mechanism is inefficient. And for the first time in my career, we're seeing the price -- the interest rate on a mortgage is being set by the public markets, not by a banker who's taking a risk.

[Jade Rahmani, analyst]

On the origination side, could you say as to the volume of term sheets you put out and the success rate you're hitting. Just trying to gauge competition if you're really actually losing out on a lot of the deals.

[Brian Harris, executive]

We're not losing out on -- when we bid on something that we like, we are losing some, of course, you always do. But not at a -- in fact, probably at a lower clip. Where we're seeing fallout take place is you've got a lot of new buyers coming into the market who have been pretty good stewards of capital through the last decade and didn't really lever up on low interest rates. So they are now acquiring assets at lower prices because of the reset. And many of them have never seen documents from CMBS shops or CLOs. And so they're bank lenders primarily. And when they see our documents, so they go, this is scary. And so sometimes they just step away or sometimes the rate is so high that they just fund it all cash even after we send the term sheet out. So there's a myriad of reasons why even the small volume that we are sending out isn't really coming back with productive situations. But it has little to do with competitors at lower rates. It's more nuanced than that.

[Jade Rahmani, analyst]

Okay. Just in terms of property-type mix on the loan portfolio, office increased to 34% from 31%. And I think that you probably are seeing repayments proportionately outside of office, there's probably some office, but maybe more in the other asset types. Are you at all concerned about the increased concentration in office? And do you maybe provide a comment on how you feel about the office portfolio.

[Brian Harris, executive]

Sure. Well, multifamily is the easiest thing to pay off. So we are seeing that. And obviously, office is the hardest thing to pay off. So you're naturally selecting to higher -- as you take $1 billion in payoffs over a year, the office sector is not punching above its weight in the portfolio. What we do particularly like about it, though, is that our office buildings loans, we look at every loan, never mind office or multifamily, as if we're getting it back. And if we're going to get it back, we want to know what we're going to do with it.

I think you will start to see -- first of all, in the CMBS world, a lot of office is going into those deals. They're going in a very non-courageous debt levels, but makes sense. But it used to be you couldn't put an office loan in, now it's probably the highest concentration of property type. And I do believe it's because of these resets that are taking place. But the way we approach our office portfolio, we've been triaging some of these for a couple of years. And our sponsors are hanging in for the most part, and they're paying it down, and we're deleveraging these situations.

So every time a borrower writes a check for $5 million in principle and buys a cap for $1 million and posts reserves for TIs and leasing commissions, you just sort of think, Barry, that's probably not going to default. And we are seeing quite a bit of that, the vast preponderance of facts in our portfolio that's happening. We're --probably the most dangerous part of the portfolio would be in large cities where there is still difficulty with many things as -- never mind just real estate, but return to work is slow. Washington, D.C. is a horror.

But we did have a couple of loans, but they're quite small in cities that they were very not well occupied buildings, and they're still not well occupied. And so we may very well get those back, but they're quite small. And the loan amount that we committed to never got to as big as we had committed to because, for the most part, it was a poorly occupied building that is still poorly occupied. It's just in much better shape now. So there's -- yes, we'll get a few of them back. I'm not signaling that we're going to run through this without a problem, but we haven't taken losses yet. And that is a little surprising to me.

I think we're well covered by our CECL reserve. I don't really see anything on the horizon. And we're kind of at a point now, too, because we didn't write a lot of loans for a while there. We're getting to the point where we understand every loan in the portfolio and where the problems may come from, there are borrowers who tell us they're going to give us the keys, and then they don't. So it's a little hard to predict that. But for the most part, we worry about basis and as evidenced by the fact that we went out and bought an office building and rather, it wasn't a foreclosure. It wasn't -- we had no relationship to it prior to that. We just thought it was cheap.

And so we're happy to step out of our typical suit and do something a little different. And we're not overly concerned about our office portfolio. And when I say not overly concerned, I don't see us getting through a $50 million CECL reserve unlikely.

[Operator]

The next question comes from the line of Tom Catherwood with BTIG.

[William Catherwood, analyst]

Maybe Pamela or Paul, I appreciate the commentary in your prepared remarks on Moody's and Fitch's outlook for Ladder. What are the next steps or hurdles that the rating agencies are looking for as you progress toward investment-grade rating?

[Pamela McCormack, executive]

I can start, and Paul, feel free to jump in. The short story is we have met the objective -- they have objective tests, and we met them already with the last issuance, which is why I think you saw some positive action on us. I think we made it really difficult for them to do nothing. We would have liked to have achieved the investment-grade rating when we hit the hurdle. But given the market backdrop in commercial real estate, all the agencies were reluctant to do anything too aggressive in terms of an investment-grade rating in this environment.

So if you ask me with a lot of knowledge, I can tell you, I think if we continue to perform, we demonstrate what Brian said earlier. We have real confidence in our CECL reserve, which is currently $54 million. We think that should be more than ample to cover any potential losses we may incur. As we turn the balance sheet, the market moves out of the state of distress and we start to see rates come down. I think with the next issuance, we are very hopeful to see an investment-grade rating.

Paul, is there anything you'd want to add to that?

[Paul Miceli, executive]

As we mentioned in the remarks, Tom, 53% of our liabilities are now unsecured corporate bonds and we're well over 50%, in other words, in utilizing unsecured corporate bonds in our liability structure. So as Pamela said, quantitatively, within the hurdle, it's really a matter of the [ series ] backdrop that we think is the biggest hurdle.

[William Catherwood, analyst]

Understood. Appreciate those thoughts. And then last for me, maybe, Brian, given your comment earlier that you're happier to be acquiring securities at 175 to 210 over rather than originating them. Is it likely that activity on the conduit side of the business could remain more muted in the near term?

[Brian Harris, executive]

Likely, I think. And you'll really see the first sign of a thawing out in that business will be when you don't have 13 originators each putting in 3 loans. That's a pretty unusual roster of originators. And that just tells you they don't have enough size or demand to go into loan. So they're combining forces with a lot of other lenders. But I think the security -- the CMBS business will pick up when you see a steepening of the yield curve because if you write a 10-year loan off of a rate that's lower -- a base rate that's lower than the 2 year, you have to hedge that. And when you start hedging a 10-year that's below the 2 year, you start -- there is no carry in the business pretty much. And it is a substantial component of profitability when that business is functioning properly. So I think the -- as the Fed cuts rates, the curve will steepen and that business will pick up. It will start in the 5-year category, and it will progress to the 10-year category.

[Operator]

[Operator Instructions] And our next question will come from the line of Matt Howlett with B. Riley Securities.

[Matthew Howlett, analyst]

Just a follow up on the investment-grade rating. What do you think it will save you? I mean, in terms of -- I know there might be -- once you get it, there might be a lag in terms of the yields on the new debt that you issued. But just sort of what do you think you could do debt at? You did, what, 7% on the 7-year debt. Just curious on what do you think it will save you ultimately?

[Brian Harris, executive]

Yes. Pamela, you can take it if you want, but I would just say the first one, probably not that much because you're kind of new to the space. But because we've done 7 issues at this point, never know. But if I were -- and I'll listen to Pamale and Paul, they may know better than I, but I would quickly cuff it at 200 basis points in the beginning and maybe 300 at the end.

[Pamela McCormack, executive]

I think it's a little less than that on the crossover credit. I think we were hoping to build into. But on the first crossover credit when we -- the next issuance, we would hope to save at least 50 basis points. I think for us, Matt, it's a longer-term play. We think that there's a real spot in the world for a mortgage REIT with primarily basically exclusively at this point, senior secured assets, delivering a high single-digit, low double-digit return. And the reality for Ladder is given our high insider ownership and internal management, we have consistently run this company since we opened the doors in 2008 with leverage of 2x to 3x. So it is not -- that is the leverage constraints we'll be living with. The only difference will be that we'll have a higher component of unsecured debt, which in this environment, we think, has proven to be not only safer but accretive at a time like this. I think we have the lowest cost of funds on the Street right now.

So for us, I think the way we think about it is we will have long-term savings, and we're also very -- we're looking forward to trying to convert traditional equity REIT investors because we basically check every one of their boxes in terms of internal management, insider ownership, low mark-to-market debt and the investment-grade box is really the only box we don't check. We'll be a little bit constrained by we're not obviously going to be a huge growth company. But we think that there'll be a big appetite for us. And we don't think we'll just see it on the debt side. We think we'll see a conversion of our institutional and retail ownership on the equity side as well.

[Brian Harris, executive]

What I'd also add, Matt, is you have to watch flow of funds and like where things are going. Right now, the high-yield market is not charging a lot of premium because there's not a lot of defaults. But if you just look at the ETFs like JNK and LQD, it will give you an idea of the differential, although because we are in the commercial real estate business today, we trade on the wide end, and because we're not a single-B, we probably are more towards the middle of the high-yield index. On the other hand, if we -- and that's a 4 year, it's not a 7-year on average. But if we were to go to an investment-grade credit, the LQD is dividending a little over 5%.

So maybe aggressive, it's hard to say. But the first time you go, you'll learn a lot, and you'll probably not get the rate you want because you look at the index and they're going to say you're new, we're penalizing you. So they will. However, in the long term, the high-yield market, the size of the corporate bond market in the investment-grade is massively higher than the junk bond market. So you've got a much bigger group of people, and they tend to own the same names over and over and nobody owns us in the investment-grade space. So it's a lot of factors that go into it, but I still think you price wide the first time and then after that, you do better.

[Matthew Howlett, analyst]

Well, it's clearly going to put you in a stronger position. We already have the best -- probably the best balance sheet in the space right now. And I guess where I'm going with this is, I mean, we see all the news, we see your peers, big and small, having issues, Brian. I mean at what point do you think -- at what point would you get aggressive? Do you see -- are you getting calls from bankers looking at maybe taking something over time? I mean, do you want to make a splash? Just -- I mean, you've got obviously tons of cash, tons of liquidity and there's a lot of peers struggling. And there's obviously could be a lot of flow coming out of the banks over time. We keep hearing that. But what about making a splash? I mean, are you saving the capital for that?

[Brian Harris, executive]

No. Ladder is not a flashy company at all and not at all interested in making a splash, far more interested in just developing attractive return profile safely. We don't like big flashy buildings. We don't like big flashy companies, and we don't like high leverage, which makes us a little unique in the REIT space. So no, we're not saving it. We just think there's a big opportunity coming, but we'll probably stick to our knitting. The only thing I would tell you that I think is developing is if you have a $20 million loan, you can refinance it. Yes, I mean there is a place you can go. You may pay more than you want to, but it's not like it can't be done.

And if you have a $350 million loan, you can go to one of the big banks and have them take it to the rating agency and they'll take you to market and the market will tell you what your rate is. But if you have an $80 million or $90 million loan, you're sort of in this air pocket between too big for a bank and too small for a single asset deal. So I think that $70 million, $80 million, $90 million area is a very, very attractive place for somebody who wants to commit capital without going to -- with the certainty of the capital market spreads.

So to me, that's an inefficiency that has bubbled up here that I think will stay there for a little while. The trick to that, though, is if you want to start writing $80 million loans to securitize them, you can't write 2 or 3 of them. You have to write 10 or 20 of them. And therein is the rub. But I think if the volume picks up and transactions -- buildings start getting, so I think we might very well go into that kind of a space and acquire $1.5 billion, $2 billion worth of loans and do a single sponsor securitization where we hold the B piece because we know all the credit and go sell the bonds to the public. But we would have the rate on the mortgage definitionally because it won't all close on 1 day.

[Matthew Howlett, analyst]

Got you. And just to follow-up on that. One of your newer peers came out and sort of said, there's going to be the secondary market supplied, let's just say, I don't think he's talking about securities as much as he's talking about just senior loans [ and subordinate ] saying levered yields are between 12% and 16%, and we've raised the fund and we dedicated just to taking all this stuff down, presumably mostly from the banks over the next few years. Would you -- do you see that, like that secondary market opportunity where banks just capitulate due to new capital rules and you see these leverage yields in the mid-tier?

[Brian Harris, executive]

Yes. I mean the banks are under a lot of regulatory pressure. So that part is true. And -- but I would just say that a bank selling loans probably with some financing generating a 12% to 16%, that's fine. But why would you do that if you can make [ 20% to 25% ] on a AAA with leverage, obviously. And the safety of being able to sell it pretty -- in most markets, pretty quickly. So I don't think I would steer Ladder towards taking a risk at 12%, 13% on a bank sale. I would prefer we move into the safety of AAAs. And as Pamela said, we're not levering them right now at all.

So yes, we have a lot of cash. And yes, we have a lot of liquidity. We also have a few hundred million dollars of unlevered AAAs, too, if we feel like generating some cash. The key for us at this point has been to keep the balance sheet fortress-like. And investors gravitate towards strong balance sheets during difficult times. But as it airs itself out and you get a little long in the tooth in the cycle, these yields will compress. I don't believe we're going to be talking about AAAs at 200 over or 190 over for much longer.

[Pamela McCormack, executive]

We have been hanging around the hoop of -- our originators are actively talking to the banks, and we're watching anything that is or will be coming for sale. We are -- we will be looking at and considering in the context of what Brian just said.

[Matthew Howlett, analyst]

And these AAAs, I mean just living through the financial crisis and not everything was AAA that they said was AAA, these are real AAAs, they have like 20% subordination. I mean are they -- I mean what...

[Brian Harris, executive]

Some of them have 60% subordination.

[Matthew Howlett, analyst]

This is, I mean, just incredible.

[Brian Harris, executive]

Well, interestingly, what goes on in the CLO market is as loans default, which they're picking up the pace there, if the sponsor is in good shape, he pulls them out of the deal, and it looks like a payoff. So that is good unless you own it at a premium. But if you can buy them at 99 and get paid par on a defaulted loan, that's very attractive. So I would say the -- in the CLO space, the subordination level starts at 40%, 45%. And if you get through a few payoffs or defaults, you quickly get to 60% or 70% subordination. And they're still trading very wide.

[Matthew Howlett, analyst]

That's incredible. I mean I hope these yields stay around for a while. But like you said, I don't think they will. I mean it just seems like if we...

[Brian Harris, executive]

I don't either, but we'll -- we're very good at taking what the market gives us rather than forcing our opinions. So we can live a long time. We don't need the market to tighten. We don't need to lever them. But if the market does tighten, we'll sell some and maybe we'll lever some others when we need to. But the best time to borrow money is when you don't need money. And I think in our supplement on our website, if you want to just get the picture that sold, all the bonds, it's on Page 5. It's a snapshot of us last year and this year.

And when we looked at the rating agencies, they were saying it's a very difficult market. And we said, yes, look, what we did in that market. Let's go back a year. We took $1 billion in payoffs, and we de-levered the company. We raised a lot of cash. And so yes, that's experience. We've been out in bad weather before, and we saw it there for what it was. And we're not out of it yet. We still think there's a little bit left in this downturn. But I think we're past the most dangerous part. I don't think we'll be surprised by anything at this point.

[Matthew Howlett, analyst]

Look, you've been right all along, Brian, on this. So I've got to give you credit. We're definitely paying attention with you when you give out guide -- when you call bottom like this and start talking about things like that, we -- I certainly pay attention. So I really appreciate all the color and comments.

[Brian Harris, executive]

Yes. I mean if you think no one is ever going to an office again, probably we might have something wrong here. I don't believe that. I don't think it's ever going back the way it was. I don't think people are going to be charging off the beaches in The Hamptons at 3:00 on Sunday to get to work on Monday. But if you're only in the office 4 days a week or -- you still rent the office. And the main difference in the office space isn't that you can't rent it. You tend to have to pay a lot for a tenant. But in most of our office loans, the buildings are being leased and they're being leased at rents that were higher than we underwrote. The biggest problem is they're not fully leased. There is a lot of cost involved in a tenant acquisition to get them in the building. And the ROE is just poor. And when you ask them to go buy a cap at 1% or 2% when the prevailing SOFR rate is 5.30%, it gets very expensive. So I think what you'll see, and not just with Ladder, but you'll see this with a lot of other people, too, they're going to be taking buildings back that are doing okay. They're not empty. And there's some cash flow. It may not be perfect, but it wouldn't signal a large loss either.

[Matthew Howlett, analyst]

Well, you certainly made a great call on New York City. You were one of the first to call that. So congrats on the...

[Brian Harris, executive]

You can feel it, right? I mean, New York City is doing better. And if you walk around that area of the Plaza District, north of Grand Central on Park Avenue or -- that's doing just fine. And when I say fine, I mean there is massive expansion going on there. And so the idea that I don't think JPMorgan is buying an extra building next to its headquarters because they think the office market is going south.

[Matthew Howlett, analyst]

No, not at all. I really appreciate it.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I'd like to turn the call back to Brian Harris for any closing remarks.

[Brian Harris, executive]

I'll just end by saying thank you for hanging with us, especially thank you to the bondholders that purchased our recent offering. We won't let you down there. And we hope to be revisiting that space down the road in an investment-grade outfit. So thanks again, and yes, see you soon. Bye.

[Operator]

This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.