Ladder Capital Corp

NYSE:LADR

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon, and welcome to the Ladder Capital Corporation Earnings Call for the Third Quarter of 2019. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I would like to turn the conference over to Ladder’s Chief Compliance Officer and Senior Regulatory Counsel, Ms. Michelle Wallach. Please go ahead.

[Michelle Wallach]

Thank you, and good afternoon, everyone. I’d like to welcome you to Ladder Capital Corp’s earnings call for the third quarter of 2019. With me this afternoon are Brian Harris, our company’s Chief Executive Officer; Pamela McCormack, our President; and Marc Fox, our Chief Financial Officer. Brian, Pamela and Marc will share their comments about the third quarter, and then we will open up the call to questions.

This afternoon, we released our financial results for the quarter ended September 30, 2019. The earnings release is available in the Investor Relations section of the company’s website, and on our quarterly report on Form 10-Q, which will be filed with the SEC this week.

Before the call begins, I’d like to remind everyone that this call may include forward-looking statements. Actual results may differ materially from those expressed or implied on this call, and we do not undertake any duty to update these statements. I refer you to our most recent Form 10-K for a description of some of the risks that may affect our results. We’ll also refer to certain non-GAAP measures on this call. Reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are contained in our earnings release.

With that, I’ll turn the call over to our President, Pamela McCormack.

[Pamela McCormack, President]

Thank you, Michelle, and good afternoon, everyone. During the third quarter Ladder produced core earnings of $44.1 million or $0.38 per share, reflecting an after-tax core return of 10.9%, constantly covering our quarterly cash dividend payment of $0.34 per share. We made $1.1 billion of investments in the quarter, including $732 million of total loan originations, 70% of which were balance sheet loans, in addition to $346.4 million of securities and $8.8 million of real estate. At the end of September, our underappreciated book value per share was $15.16 and our debt-to-equity ratio was 2.89 times.

As I’ll discuss our products in more detail, I’ll begin with our conduit business, which contributed $6.6 million in Q3 core earnings, reflecting the sale of $140.7 million of loans that settled in the quarter. I will also note however that we priced a second securitization in the third quarter, but the result of that transaction a core gain of $4.8 million will be reported in the fourth quarter when the deal settles.

Conduit loan securitization margins for that business continue to be acceptable and we are pleased with the performance of that segment. We originated $230.7 million of new loan to help the securitization in the third quarter and the fourth quarter is off to a good start. We closed $78.9 million of conduit loans in October and have several hundred million dollars of loans presently under application that we expect to close by year end subject to customary closing conditions.

Our balance sheet loan origination business is also doing well. In October, we originated $90.4 million of balance sheet loans and we have a robust forward pipeline for this business going into year-end as well. We originated $501.3 million of balance sheet loans during the quarter, including $454.9 million of floating rate loans with an average loan size of $20.6 million, a weighted average spread over LIBOR of 385 basis points and a weighted average LTV of 70%.

During the quarter, we receive payoffs of $429.9 million resulting in net balance sheet originations of $71.4 million as origination slightly outpaced repayments. We continue to see strong liquidity in the market that is enhancing borrowers’ ability to refinance our sell assets. Our recent focus on new loan originations has been on more lightly transitional asset, including our newly completed, but not yet fully leased asset. The property type mix of Ladder’s balance sheet loan portfolio has shifted towards heavier weightings of housing-related and industrial properties during 2019. Those two categories comprise 56% of Ladder’s balance sheet, originations over the first nine months of 2019, up from 24% during 2018. Conversely, office and hotel properties comprise only 16% of our originations compared to 49% in 2018.

During the third quarter, our real estate equity portfolio continued to provide consistent net rental income from long dated cash flows that contribute to our recurring earnings. We acquired seven new net leased properties to our portfolio with a weighted average remaining lease term of 14.7 years. One sale of property contributed $300,000 to core earnings. At quarter end, we had $1.2 billion of real estate investments on an undepreciated basis.

In the third quarter, we acquired $346.4 million highly rated securities with an additional $209.8 million acquired through the end of October. Since the end of last year, we invested total of $1.4 billion in senior CMBS securities, ending the quarter with $1.9 billion, up from $1 billion at the end of the third quarter of 2018. As Brian will elaborate on shortly, we continue to look to our securities business to provide reliable returns of 8% to 10%, while maintaining the flexibility to sell the securities to reallocate this capital into higher yielding opportunities as market conditions warrant.

We also enjoy the liquidity of our short dated highly rated securities portfolio, but this business line is not a new business for us nor is it just a cash management tool. Our season trading desk is led by Brian together with his six-member investment platform that includes our head trader, Ed Peterson, who has worked with Brian for almost three decades since the creation of the CMBS business in the United States.

The third quarter was characterized by solid earnings, steady loan originations, and investment activity. We have not reached to make more aggressive loans or stretched our historical debt to equity targets as we remain committed to maintaining a strong balance sheet with conservative credit metrics. Our multi-cylinder approach continues to result in sustainable double-digit returns on equity that support a durable well covered dividend. We designed our platform from inception to give us the flexibility to selectively originate loans with experience sponsors and strong credit fundamentals, instead of having to push volume. As always, our primary emphasis is on originating loans with a standalone basis relative to the value of the underlying real estate that collateralizes our loans.

Our focus on middle – repeat middle market borrowers enables us to steadily maintain a granular and diversified book of balance sheet loans that total $3.2 billion with the close of the third quarter. We had an average loan size of less than $20 million and a weighted average duration of just 17 months to initial maturity. With a balanced approach to AUM and an unwavering focus on capital preservation and optimizing ROE, we prefer to make shorter term loans that allow us to routinely reevaluate the credit risk and return profile of each investment. And if warranted, we require our sponsors to commit additional capital if their business plans are not being met.

In addition, we highly value the ongoing option to quickly reinvest and/or reallocate capital from maturing loans into investments that we view as having the best and current risk adjusted return potential when loans come due. As in previous quarters where we provided updates on certain portfolio assets, I’m pleased to reiterate that we do not have any assets that we expect will result in a write-down or loss to our current investment basis.

As an active lender, we are not exempt from periodically having difficult conversations with borrowers. Our longstanding emphasis on capital preservation and maintaining a standalone basis relative to the underlying value of our collateral has been helpful in keeping our portfolio returns robust. And we are prepared to enforce our collateral rights and remedies against counterparties, whose actions or reforms require us to do so. Two strong hallmarks of Ladder, our unwavering focus on principal preservation and our ability to respond quickly, we understand that they were the clear distinction between a default and a loss and we focus on avoiding the Ladder.

With that, I’ll now turn the call over to Marc Fox, our Chief Financial Officer.

[Marc Fox, Chief Financial Officer]

Thank you, Pamela. In the next few minutes, I will provide some additional detail regarding our financial statements and updates on certain timely topics, including encouraging developments on the FHLB membership front, cost reductions from CLO and mortgage debt refinancing activity and Ladder’s overall funding strategy.

In the third quarter, recurring income in the forms of net interest income and net rental income totaled $49.9 million. This income was complemented by $6.6 million of core gains on the sale of loans, $1.2 million of core gains on the sales of securities and $0.3 million of gains from real estate sales. From this income, we paid $40.9 million of dividends and distributions equivalent to $0.34 per share on 119.7 million shares.

For the third quarter, Ladder’s cash dividend payout ratio was 89%. That would be 82% on a rolling four quarter basis. Looking more closely at the balance sheet, in addition to the key asset related statistics covered by Pamela, it is noteworthy that as of September 30, 97% of our debt investments were senior secured. Senior secured assets plus cash comprised 79% of our total asset base, reflecting Ladder’s continued focus on investments at the top of the capital stack.

On the right side of the balance sheet, we continue to strengthen our funding base, while minimizing funding costs. During the third quarter, Ladder commenced the long plan process of refinancing the series of 10-year nonrecourse mortgage loans that we use to finance our own real estate portfolio. Ladder has reached a point in its corporate history where it is time to start refinancing this debt, property by property over time. As was the case, when we establish the initial property financings, Ladder plants will originate new 10 year mortgage loans and securitize them at a profit. In doing so, Ladder’s goals including achieving funding class reductions, lengthening our corporate debt, maturity profile and freeing up equity capital for other investment opportunities.

In October, Ladder took additional steps to reduce its funding costs, by paying off the remaining $99.3 million of outstanding CLO debt financing held by third parties. The debt was originally issued in 2017 and two separate transactions that generated almost $700 million of proceeds at that time. The assets in both CLO collateral pools performed well, and the attractively priced financing allowed Ladder to earn levered returns in the high-teens over the past two years.

This quarter, we were also encouraged by the treasury departments, public support, the mortgage lender access to the Federal Home Loan Bank, in its housing reform plan released in September. While we cannot be certain with the decision by the FHFA or its timing, we continue to monitor the situation closely, and look forward to a resolution of this matter that benefits both commercial mortgage lenders and the communities in which they invest.

Ladder plans to continue to operate as if our FHLB membership will sunset in 2021, but we’re consciously optimistic about the treasury department’s position on the subject. We closed the third quarter with an adjusted debt to equity ratio of 2.89 times within our historically targeted two times to three times range. Excluding our portfolio of highly liquid and highly rated securities, our adjusted debt to total equity ratio would be reduced to 1.73 times.

At quarter end, Ladder had $1.2 billion of unsecured debt outstanding across three issuances that mature in 2021, 2022 and 2025. Unencumbered assets at quarter end split it over $1.86 billion, reflecting a $1.60 million to $1.61 million unencumbered assets to unsecured debt ratio, substantially over the 1.2 times requirement included in our corporate bond and dentures. Since almost $1.3 billion of the unencumbered asset base is comprised of first mortgage loans, securities backed by first mortgage loans and real estate, the excess unencumbered assets represent a potential source of future funding. At the end of the third quarter, total available liquidity for new investments was over $390 million.

Considering the current environment, I want to briefly touch on how Ladder’s business model has insulated our shareholders against falling interest rates. As of September 30, a 1% decrease in one-month LIBOR would reduce quarterly core earnings by less than $0.1 per share. The impact of lower rates is limited by the floors on our floating rate balance sheet loan portfolio, and the flexibility and strength of our multi-cylinder platform that enables us to invest in other asset classes as market conditions change.

100% of our floating rate balance sheet loans have LIBOR floors. The weighted average of those LIBOR floors continues to raise and stood at 1.70% at quarter end, which translates to a weighted average coupon floor of 6.7%. And on the accounting and reporting front, Ladder is continuing to assess the impact of CECL on our consolidated financial statements. Important factors influencing the CECL reserve will include the size, composition and risk profile of our loan portfolio as well as current and projected future macro market conditions, in our 10-K which we expect to file in February. We plan to provide more details surrounding our CECL methodology, our adjustments to the reserve to be recorded in Q1 against equity and our ongoing process.

Finally, as we look out over the next several months, we remain focused on improving our funding profile on achieving positive ratings action. We reported to you in July, the Fitch had revised Ladder’s rating outlook to positive from stable. And shortly thereafter, Moody’s affirmed its positive outlook on our credit ratings. We expect to continue our progress on reducing secure debt, and in that regard have been closely monitoring the unsecured debt markets. With supportive market conditions we look forward to continuing to make meaningful progress on that front end, in the process we expect to not only strengthen our balance sheet, but also position Ladder to continue to deliver strong and sustainable core earnings for our shareholders and prudently take advantage of growth opportunities over time.

I’ll now turn you over to our Chief Executive Officer, Brian Harris.

[Brian Harris, Chief Executive Officer]

Thanks, Marc. I’m pleased to our third quarter results, and I’ll add a few thoughts about the quarter and explain why we’ve made some slight adjustments to how we are investing these days given a very different kind of economic backdrop, and how we see these choices benefiting our shareholders now and in the years to come.

I’ll first spend a few minutes on how we are investing giving the macro concerns we have, while navigating the realities of today’s market conditions. While the drop in one-month LIBOR over the last year has had some negative effect on our net interest income, our funding costs also fell. The bigger cause for the decline in net interest income we saw over the last year has been from spread compression on new loan originations. While that spread compression has been well documented by others. What is less well known is that the credit spreads on the securities that these loans support have been widening since last November. In this environment, we prefer to acquire securities at wider spreads and invest in more stable, higher quality assets, meaning newer or recently renovated properties in more densely populated cities with a focus on multifamily and industrial property types.

In the third quarter, our balance sheet lending efforts produced total of $494.6 million in new loans, 68% of which were secured by apartments, mobile home parks and warehouses. The weighted average spread to LIBOR on these loans was 380 basis points, which we believe produces inappropriate risk adjusted return, particularly given the stability of the assets securing these loans. As Pamela briefly mentioned on a year-to-date basis, 56% of our newly originated balance sheet loans were backed by these same property types, so our migration to stability and quality when lending rates come down is visible.

In addition, we have acquired about $1 billion in mostly CLO, AAA and AA securities over the last year, and our securities produced the levered return of about 8% to 10%, while we wait for clarity around some of the more uncertain macro world events. This is what we call purposeful investing. We are responding cautiously to market conditions and accepting slightly lower returns with a higher degree of safety until we feel more certain about the future.

Fortunately, our investment model allows us to easily cover our dividend by a good margin of safety under current market condition. We’ve employed the same strategy throughout our careers and it has produced extraordinary results. If market spreads improve, we’ll pivot quickly into growing our portfolio of balance sheet loans again. If and until then, we’ll continue to see safer investments with acceptable returns until the market volatility passes.

Turning to macro condition, let me start by saying, we agree with most of the media reports that say the economy is fairing pretty well, largely anchored by a strong U.S. consumer. We note, however, that Corporate America is not spending like the consumer, while credit card debt is very high and defaults in automobile loans and student debt are rising rapidly, so some caution may be warranted. Well, we won’t pretend to know when or how the trade war with China will be resolved. We do know that in less than 12 months, our U.S. election will likely put us on one of two paths that couldn’t be more different.

As of today, we think that we’ll either be faced with massive entitlement programs getting larger and more numerous while taxes in general will be soaring or a continuation of a fiscal experiment whereby the U.S. deficit continues to spiral over the $1 trillion mark, while taxes continued to be lowered. Both scenarios caused us to be cautionary. While we think both political paths really evolves into something more reasonable, we feel it might be a fine time to take a slightly more defensive investment profile until we have more clarity on what to expect a year from now.

Hopefully, I’ve offered some insight into our current thinking and investment model, a model that is designed to allow us to respond and evolve in real time, a model that has produced industry leading returns since inception. We played the long game at Ladder, and we’ll occasionally take up a defensive position, but rest assured we are ready in position to go on offense when the time is right. We feel confident that we will see excellent opportunities to achieve outsize returns on investments over the next 18 months. Uncertainty creates volatility, and volatility creates opportunities for those with capital and flexibility.

Before I wrap up, the last thing I’d like to mention is that 2019 will be a year where we stuck to our core strategies in lending and securities. You might recall that in 2018, our performance had a fairly large component of core earnings that came from strategic sales of real estate assets that we owned. As I look ahead into 2020, I expect next year to include more supplemental gains as we prepare to sell more assets that we own as they’ve matured now and stabilized. And I think we can go now, take some questions.

[Operator]

[Operator Instructions] Our first question comes from Tim Hayes with B. Riley. Please proceed with your question.

[Tim Hayes, B. Riley]

Hey, good evening, everyone. Thanks for taking my questions. My first one, Brian, as you move into more defensive assets, how do you see yields trending irrespective of LIBOR movements? And then what type of ROE do you think the platform is capable of sustaining as you continue to shift your loan mix?

[Brian Harris, Chief Executive Officer]

Hi, Tim. I would say that the yields – you should know that when we – when I say we take up a defensive position, we’re doing more multifamily, mobile home parks and industrial because they’re a little bit more stable and there were some opportunities to step into those markets for various reasons during the last quarter. And it seems to me that the credit spreads that are associated with various property types are very similar right now. And I don’t really think hotels should be pricing the same way as apartment buildings. And so if you’re going to be given a price by the market, I think we need to be – if we’re going to pay a fairly tight price, as we all know, there’s been some compression in credit spreads, but if we’re going to pay a tighter price on all property types, I think if the price is the same, we’d rather get the more stable assets being the apartments and the warehouses.

We are still writing hotel loans and office properties, but our rates are much higher than that. And to the extent that the rates on hotels and office buildings are the same as what we see in apartments and industrial properties, we will avoid the hotels and the office products. That’s not to indicate to you that we’re afraid of hotel or office or the economy right now. It’s simply that we express our preferences for our investment based on what we think the long-term stability is on all these assets.

The other thing that we’re doing defensively right now, and again, the word defensively, I don’t like it necessarily, but what’s been happening is credit spreads have been falling on the loans as they’re originated. However, the credit spreads on the bonds that are sold in the CLOs that finance these things, there have been going wider. So from a risk return and liquidity and safety standpoint, to me it’s a hands-down analysis that the securities is a better investment. And so we’re able to attain about a 9%, 9.5% return, and we’ve been acquiring AAA and AA CLO securities at around 120 over LIBOR type number. When you apply market leverage to that, you get to around 9% or 10%.

As far as where do I think yields will go, I actually think they’re widening right now as that tends to happen across the Board in the fourth quarter almost every year because there’s a lot of tax activity that takes place that happen before year end. And in general, for some reason, a lot of financial companies like to go through year end with a smaller balance sheet. So they’re not apt to try to expand their balance sheet going into year end. We’re very comfortable expanding our balance sheet into year end.

And so right now we’ve got, in my opinion, an extraordinarily large pipeline of loans under application with deposits up. And we’re very pleased with that activity. And I think that margins are very acceptable and yields have been rising on the floating rate product. And with interest rates rising over the last 10 days or so on the conduit side, you will naturally see spreads tighten there because as interest rates rise, supply just falls off, if that answered you?

[Tim Hayes, B. Riley]

That does. Yes, that does. Thanks Brian for that. I guess, it sounds like your – and I know you’ve always been committed to the bridge business, but it seems like you’re still favoring the – the return – the risk adjusted returns in CMBS versus the transitional lending space right now. But it sounds like the pipeline is still pretty strong there. So I guess, how do you think about capital allocation in the different parts of your business growing, I guess, in the near-term or over the course of 2020?

[Brian Harris, Chief Executive Officer]

I think the fourth quarter may be a little bit of a tease because as I said, the fourth quarter things get a little unusual because of year-end and tax driven deadlines. But I would say, presently for instance, I’ll give you some quick numbers here in the fourth quarter. So far we’ve actually purchased as of today, I got this number when I walked in here, we purchased about $240 million worth of CLO paper and we’re earning about a 9.5% levered return on that. However, the pipeline of loans under application in the bridge portfolio has higher rates associated with it right now. So we’re actually allocating a lot of capital into that space also.

So it’s one of those rare times, and I would largely attribute this to the fourth quarter, where every product type is working very nicely right now. And profit margins appear to be getting bigger, not smaller as we head into 2020. I think in the middle of 2019, when there was a flat yield curve, that’s a very difficult lending environment for most spread lenders and for various reasons. And that has started to correct itself, so even that fundamental change is adding to the net interest margin. So I’m very encouraged by that. I don’t think interest rates are going to rise dramatically, but at least maybe there’ll be less than flat or worse inverted.

So I think the lenders, I think you’ve seen a lot of the stock crisis, the banks and finance companies move up here recently. That’s in response really to the finance as the curve is steepening. So we will benefit from that also. So I would tell you right now, if it appears that we were avoiding bridge loans in the third quarter that was not the case. We actually had one of our more active quarters. We were simply preferring to be buying securities, but we bought both. I would tell you as we go into the fourth quarter, those numbers are evening out even more. So I think we may very well be doing more bridge lending right now than we’re doing in the securities acquisitions.

[Tim Hayes, B. Riley]

Got it. That’s really helpful. Thanks for the color there. And then just on rate, I guess, the amount of floating rate loans has kind of declined a little bit over the past few quarters. Is that a conscious effort to go more fixed rate in light of your view of rates? And are you putting floors on all new floating rate originations?

[Brian Harris, Chief Executive Officer]

Yes. In 2019, in the middle of the year, I think we stated that our preference would be to invest primarily in the conduit business as well as securities. And we did follow that. And that was as a result of our view that rates would be falling. We had – if you take a look at the profit margins in the conduit business in the third quarter, they were excellent. And I believe as of today, we’ve actually made more money in the fourth quarter already than we made in the third quarter in the conduit business. So those margins are very strong right now. But I don’t want to mislead you in that many of those margins are there. The high margin that you’re seeing is because rates were falling while there were floors in place. So we had some somewhat outsized returns. I think that’ll normalize a little bit as rates rise. But as rates rise, I think we’ll get higher credit spreads in our bridge lending business.

So that’s the way the model works. Whenever something – I know that there’s been a lot of talk about rates falling and what does that do to your net interest margin. That’s fine, we can all figure out net interest margin. And if you don’t have floors in place – the answer to one of your questions is, do we have floors in place on everything in the end? Yes, we do. And our floors are actually rising, something that not many people realize because loans written three years ago actually had lower floors than loans written today. However, as we head into 2020, I will tell you that I think our net interest margin will pick up, our volume will pick up and rates will be higher. However, I don’t think we’ll enjoy the same margins in the conduit business because those floors that added outsize profits, they’re not there anymore.

[Tim Hayes, B. Riley]

Okay. Yes, that makes sense. Thanks again for the color there. And then just a quick housekeeping question. I got the $78.9 million of conduit loans in October, but just missed that number of how much you expect to close before year-end. Can I get that number?

[Brian Harris, Chief Executive Officer]

Pamela, do you…

[Pamela McCormack, President]

We just had several hundred million.

[Brian Harris, Chief Executive Officer]

We’re not giving that number. We’re…

[Tim Hayes, B. Riley]

Several hundred.

[Brian Harris, Chief Executive Officer]

We’re guessing it at several hundred million dollars.

[Tim Hayes, B. Riley]

Perfect. All right. Thanks guys. Appreciate it.

[Operator]

Our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

[Rick Shane, JPMorgan]

Hey, guys. Thanks for taking my question. Brian, when we hear your approach in the near- to intermediate-term, I think that there are perhaps two things that are going on here. One is in terms of driving the strategy, one is a relative value play that you don’t de-risk or riskier assets priced appropriately versus less risky assets. And then there is a more absolute value play based on some of your economic and political concerns. I’m curious if that’s the right way to think about it. And more importantly, how bad are the signals that you feel that you’re seeing?

[Brian Harris, Chief Executive Officer]

Okay. Couple of parts to that question. One is, I’ll go back and hear this recording again because I’d like to say it the way you said it as far as relative value in risky assets versus less risky assets. There is a price for what I’ll call riskier assets, meaning shorter-term assets, meaning more elastic, more levered to the economy, so a hotel, right? It’s probably the ultimate and short-term leasing. So when – we may very well accept a lower ROE on an apartment building than we would accept on a hotel, and one that differential is miniscule, we’re leaned towards the apartments because they’re just more stable. They’re not going to get – Amazon hasn’t lived in an apartment yet for them and so it’s just safer.

So when you see us possibly accepting slightly lower ROEs, you’re correct, it is a relative value investment basis. It’s not because we’re uncomfortable with hotels, we just think that the price of hotels relative to the pricing of apartments is out of whack. So we don’t typically write a lot of apartment loans, if you remember, I think we were 40% hotels at one point a few years ago, we’re much lower than that now. And there was a period in time where the agencies, the GSCs really kind of closed down or took a little bit of a holiday in 2019. And because of the rent regulation laws that went into effect, a lot of savings in loans froze also. And that really opened up 120-day period, where apartment loans were able to be acquired at much wider pricing. So we just stepped in there again opportunistically.

I don’t want you to think that we are migrating towards apartments because we’re afraid of hotels. You’re correct, on a relative value basis in the third quarter that was what we expressed in our investment preferences.

[Rick Shane, JPMorgan]

Got it. And the second part of the question, and I would actually like to rephrase what I said because it sounded probably perhaps a bit more dire than you suggested. But when you look at the economic signals that are of concern, where would you rate the magnitude of that concern?

[Brian Harris, Chief Executive Officer]

My concern primarily lies with medium- to longer- term likelihoods as opposed to what’s happening right now. I mean, the brander’s playing, the champagne is out. Unemployment is low, wages are rising and there’s seemingly no problem at all. And that’s kind of true. I think that the economy is bouncing along pretty nicely here. I don’t think it’s booming, but I think it’s doing okay. Where my concern comes in is after 10 years of extraordinarily low interest rates or you’ve got a 2% GDP, which is okay, nothing wrong with it, but you might’ve thought higher. There was a bit of a worldwide problem going on, a slow down – Corporate America is signaling a hesitancy to spend, which may be motivated by the economy and what they’re seeing or it may be motivated by their concern about which way the next election is going to go.

Frankly, I’m a little concerned about either way the election goes. As far as in the long term with a Republican victory, we’re going to continue to spiral the deficit. I mean, the deficit used to be something people worried about. It’s not anymore. Apparently there’s been a new theory that as long as there’s a small part of the GDP, it doesn’t really matter. I’m not sure I believe that one. But that is the – that’s the narrative that’s playing out in the country today. And the democratic alternative looks like a massive expansion of many, many government programs and entitlements. And it would be – the only way to pay for it, raising corporate taxes and individual taxes, and I have no doubt that’ll turn into property taxes and other.

So we’ve kind of had a quick view of what can happen when taxes start becoming irrelevant as far as how high they go. And you’re seeing it in the high-end Manhattan condominium market where they obviously limited state and local taxes. They got rid of a lot of foreign buyers. And then there was a mansion tax and now they’re talking about putting on a second home tax for out-of-towners. And that market has been hammered in New York City. So obviously, we’re a national lender, but – so is it dire? No, it’s not. Could it be? I think it’s very bad in high-end residential condominiums. I think that’s dire. But to me, it’s just a lowering of price because you’ve really just made it very hard to own over the long-term.

But when I look at the properties and how they’re performing, I think hotels are doing fine. I don’t think there’ll be doing better next year. I think they peaked. I think they’re doing as well as they could be. I don’t see them in trouble. So they could go along here for a while just like this. Industrial properties are doing very well. Obviously, as retail gets hurt, industrial does better. And the apartment market because a lot of housing is out of price range and a lot of people have jobs, apartments are doing pretty well. So it’s not dire at all. But there could be some clouds building that could be a quick catalyst, could step into them in the next 15 months and I don’t think it’ll be positive.

[Rick Shane, JPMorgan]

I appreciate all the thoughts, Brian. Thank you.

[Brian Harris, Chief Executive Officer]

Sure.

[Operator]

Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.

[Steve Delaney, JMP Securities]

Good evening, everyone. To start, for starters, we were pleasantly surprised by the $500 million of new balance sheet loans in the quarter. And thank you for explaining the both, the focus there with housing and industrial. Is there – can you comment on the number of loans and whether there’s anything chunky in there, trying to just figure out if that looks like as you go into next year, that might be a sustainable, near sustainable quarterly level for that type of financing? Thank you.

[Marc Fox, Chief Financial Officer]

Wonderful. Steve, we originated 24 balance sheet first mortgage loans during the quarter.

[Steve Delaney, JMP Securities]

Got it.

[Brian Harris, Chief Executive Officer]

What was the average?

[Marc Fox, Chief Financial Officer]

And the average size of those balance sheet loans that we originated during the quarter, it originated $500 million worth, a little bit more than $20 million.

[Brian Harris, Chief Executive Officer]

$20 million.

[Steve Delaney, JMP Securities]

Yes. Got it.

[Brian Harris, Chief Executive Officer]

I did see I think $90 million loan in one of them, but I don’t think we have things over $100 million that I can recall. We would love to write slightly larger loans because frankly at this point I talked to Pamela the other day about how busy we are going into year-end. And she said, we might need to hire some more people. We just have too many things closing in. My first answer to her was we’ll raise prices because that means we’ve got too much volume coming in here. So we do stick to that middle market model and I think our average loan size been between $18 million and $25 million for a long time.

[Steve Delaney, JMP Securities]

Great. Thank you for that. And we see two closed conduit deals so far in the fourth quarter. Obviously, a lot of rate volatility and I don’t know how that’s going to effect the second half of 4Q, but can you comment on the probability that you will be able to participate in a third transaction before the end of the year?

[Brian Harris, Chief Executive Officer]

Sure. We have participated in two.

[Steve Delaney, JMP Securities]

Yes.

[Brian Harris, Chief Executive Officer]

And I believe we’ve made $7.5 million so far this quarter and in the fourth quarter. And there’s a very good probability, high probability we’ll participate in a third one, which I think will probably be bigger than the other two. However, we are somewhat dependent on other people and partners on those deals.

[Steve Delaney, JMP Securities]

Understood.

[Brian Harris, Chief Executive Officer]

But Wall Street partners are typically very motivated to get things done before the end of December. So I would say the probability is higher. I think going into this quarter end than most. And as I said, I think it’ll be bigger. I also think we’ll track over year-end with a much bigger balance of conduit loans to be securitized going into 2020. We are trying to acquire a lot of assets right now.

[Steve Delaney, JMP Securities]

Interesting. Great. Well, thank you very much for the comments.

[Operator]

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

[Jade Rahmani, KBW]

Thanks very much. You made some conscious comments around office. Wanted to ask you about coworking and WeWork, my understanding is WeWork absorbed a significant amount of vacancy in New York for example, which could have artificially propped up the office market for a couple of reasons; one, by resetting rents to higher levels, taking that vacant space offline. But also in the transitional space, sponsors could underwrite that last mile of vacancy assuming that WeWork, would take it as, I saw a stat today that even in the third quarter WeWork was 69% of the market, although they’ve pulled back. So just curious about your thoughts around that trend in the office space.

[Brian Harris, Chief Executive Officer]

Sure. I actually asked a few of the larger landlords around the country and we do have some loans out to them. First of all, our exposure to, WeWork is de minimis. We’ve got an exposure to them in a building in the Midwest, which is not very high in that building and that’s it. I think you’ve asked us a few times of questions around coworking space. And I think, I may have indicated that unless it was the parent on the lease, I would not have even considered using WeWork as a tenant that we would bank. And in fact, the lease that we do have them in our building, the parent is on that lease. So with the recent rescue I guess of by SoftBank that is the company that is backing that lease.

And also it seems to me that obviously they’re very large acquire of space in a very short period of time. And just market dynamics, tell me that when you acquire a lot of things in a very short period of time, you’ve probably paid a little too much for it, because you were out competing a lot of other people. So I think against the backdrop of WeWork, which I’ll call, I don’t know, 10% maybe of the space it’s going to come. I think a lot of it will come back on the market. I don’t know, it may not, but I think the market is already softening a little bit, not in just generally.

So I think it’s – if it had a – I think it had a muting effect on the way up because I think that they were paying high prices in a market that was softening. And now I think there’s going to be mark – space coming back on the market, in a market that’s falling. So that may have a bit of an outsized feel to it. And but so if I had to guess, what do I think you’re going to happen in New York city rents in the next 24 months as a result of coworking space being less dependable. Maybe a 10% drop. I don’t think it’s fatal by any means. And especially in a lot of markets that they’re in

[Jade Rahmani, KBW]

10% drop in rents?

[Brian Harris, Chief Executive Officer]

Yes, I think so.

[Jade Rahmani, KBW]

Okay. So just to follow-up, you would also see cap rates widen in that scenario, and then you have a lower NOI. So you’re saying that you expect the office values to decline more than that over the next 12 months?

[Marc Fox, Chief Financial Officer]

About that? Yes, I would go along with that probably.

[Jade Rahmani, KBW]

Okay. That’s interesting. So how does that play into a Ladder’s office exposure specifically? Any issues of concern right now?

[Brian Harris, Chief Executive Officer]

No, I think, the concerns that are out there as far as what we’re seeing. I mean the economy is still at doing fine. Corporate America earnings are okay. And as I’ve said many times I think if and when a recession does come, I don’t think it’ll be nearly as difficult as some people fear. Mainly because of the expansion, and the recovery has not been nearly as euphoric as many people had thought. So you did hear me say that we’re preferring, again at a similar price we’re preferring apartments, mobile home parks and industrial properties as opposed to office and hotel. I don’t put office in the same category as hotel, but I put it closer to hotels and I put it to apartments. So it, how is it affecting us?

And we’re pricing higher and we’re not acquiring as many office loans as a result of that. And that’s by design. If we want to add office product, I think we can do that. If we simply lower our spreads to where we’re doing apartment loans, we’ll have plenty of office buildings here. So we curate our portfolio and we try to make sure that we’re responding to what we perceive. Again, I see a lot of the stock traders that say, well, if it looks like a Democrat is going to win the election, you should sell your stocks. When you’re making loans that you’re going to get paid back in three to four years, you’re not going to have that opportunity. So the time to start boarding up and protecting things is well in advance of that.

So I don’t know what’s going to happen and I don’t know which one I fear more, but I do fear that there is a lack of discipline in the financial system right now, and a bit of complacency on the investment side. I understand why stocks are trading at all times high. And I understand why employment – had an all time low, I’m a little bit concerned as to what the cost of those two statements has been. And it’s translating into the deficit. And I sound like an old man when I talk about it, but I’m little concerned about a deficit that went from $400 billion to $1 trillion very shortly, very quickly.

[Jade Rahmani, KBW]

Pamela went through some of the way Ladder approaches, asset management in a proactive manner. I fully appreciate that. I think it’s much better then lending pretending and extending. But on that note, can you just think about or talk about the magnitude of potential upcoming maturities noting that maturity default is one big driver of at least credit defaults. And are there any credit issues that you’re watching closely that you’d expect to arrive in the next quarter or two?

[Brian Harris, Chief Executive Officer]

Jade, I’ll let Pamela talk here in a second, but I think what you’ll hear from Pamela is, a big distinction between default and loss. And you’re correct, you can certainly extend a loan when LIBOR is 175, and probably get somebody to put up a few dollars for interest and kick the can down the road. A Ladder believes if there’s a problem you should get at it. When the capital markets are very liquid, when aggressive lenders exist and when refinance possibilities are plentiful and before that same sponsor might have two or three problems on his hands. So we are probably an early warning system that we’re very aggressive in how we approach maturity deadlines.

As I’ve said in the past, one of the annoying borrower habits is when a borrower has a maturity coming up and the building is not for sale and he has not looked for an extension. And his belief is that he’s going to get an extension with us, and he hasn’t sought a refi rather. If – that’s a poor discipline that that we don’t really like to encourage. And if a borrower does need an extension and he’s willing to write a substantial check to recommit himself to the equity, then we’re happy to extend it, oftentimes charging fees and raising rates, because we prefer things to happen on time unless there’s a reason.

Do we have some things coming near term? We have a $60 million loan that is recently defaulted as far as a maturity default went. I’ll just point out it’s actually been discussed a little bit in the Austin newspapers. It’s the old 3M headquarters in Austin, Texas. And the borrower purchased it just 18 months ago on North of $80 million has $22 million in equity in the building. We swept cash flow for 18 months and the building is now empty. It’s almost $1 million square feet and there is 160 acres of land with another $1 million square feet as of right buildable space in probably one of the most, the healthiest markets in the United States.

If we were to foreclose on this property and take ownership of it, we would own it at about $70 a square foot on the existing building, giving no value at all to the land or the other $1 million square feet. The borrower extended this loan with a seven figure pay down right before it, we gave them 30 more days. And we believe he was looking to refinance it with several hundred million dollars in a loan that would have been a full redevelopment. However, the FBI went into his offices, seized computers and records, and there’s been no charges filed, but the refinance fell down.

So when the borrower suggested potentially extending the loan, we reiterated that it would require a pay down of principal, not just a reloading of interest, and the loan went into default. And it may pay off, the loan at a default rate is presently accruing at 13.8%. And we’re pretty comfortable with it. So if there was a default, not anything that’s concerning us and not anything that we’re expecting to take any write-downs on. And if it pays off great, if it doesn’t, that’s okay too. And we are in Texas. Texas seems to be quick.

And so again, I think I’ve mentioned to you where we’re seeing these problems bubble up is where there’s no cash flow and the borrower needs an extension. And there’s another example of it, right? Right there. And I mean he – when you want to extend a $60 million loan, you have to put up a year of interest at a high rate. That’s a lot of money. And the mistake was made in the first 18 months not finding new tenants, and waiting perhaps too long to refinance it. So as I said, no one has been charged with anything and so we’re hopeful. We hope the borrower can keep the property, but he’ll have a very high interest rate that goes with it at this point.

And you should also know too, that, this is an unusual phenomenon in this part of this recovery, in 39 years I never really saw Law enforcement in real estate owner’s offices. But we had another one last quarter that the FBI was in the offices of Upstate New York property owner. And we had a $39 million loan out to them. And it did pay off. I mean, he had a maturity coming up and he did pay us off. But I’ve rarely seen law enforcement looking in real estate owners buildings as much as this. And when it happens in immediately all refinance activity stops. So if they’re large substantial holders of real estate, they ultimately wind up defaulting quite a bit. But again, that doesn’t cause us concern as a lender because of the basis that we lend at going in. So in this example in Austin, Texas, it’s $22 million in equity 18 months ago.

[Jade Rahmani, KBW]

Okay. And any other upcoming maturities that are on a near term maturities on a box list?

[Pamela McCormack, President]

So we maintain a robust – includes any maturity. But what I would tell you, Jade, is there are a small handful of loans where we’re in – some of the same, I think Brian covered it well. We’re in conversations with borrowers about putting in more capital and we are taking a hard line across the Board. In order to gain an extension, you have to recommit additional capital, submit a business plan that we think is superior to one that we could execute on our own because as Brian mentioned, we really are a basis lender. I look at the underlying value of the real estate and feel very confident. I think one thing that really distinguishes Ladder.

Is the fact that we do own and operate $7 million or $8 million square feet of real estate. We’re very comfortable taking back property and we know what to do with it. And the Omaha Hotel was really a good example of that. That just opened and was reopened as a Hilton, it’s operating in – you can make reservations under the website. That was a good example of why and how we would step in. So I guess, the best way to say it is we are in a few conversations, but we are not looking at any assets that we have any concerns about or that we expect to take a right down to our last four quarter.

[Jade Rahmani, KBW]

Okay, great. I definitely appreciate the proactive approach. I think that’s the right way to go about it. Thanks very much.

[Brian Harris, Chief Executive Officer]

Sure.

[Operator]

[Operator Instructions] Our next question comes from Joel Dryer with LTC Partners. Please proceed with your question.

[Joel Dryer, LTC Partners]

Good afternoon gentlemen. I have two questions – and Pamela, sorry. Number one is, over the last seven quarters, the LTV on your balance sheet loans, it’s crept up 400 basis points to 70% LTV and I just want to know what might be driving that? And the second question is, you mentioned retail, Brian, how’s the DG portfolio, DG activity and just kind of some viewpoints on what’s happening over there as well? Thank you.

[Brian Harris, Chief Executive Officer]

Sure. The 66% – 66% LTV to a 70% over seven quarters?

[Joel Dryer, LTC Partners]

That’s correct.

[Brian Harris, Chief Executive Officer]

Yes. My guess is that’s probably, that’s almost the same number but obviously it’s higher. My guess is that’s very reflective of our movement over two apartments as well as industrial properties, because we use much lower leverage on hotels. And I think the – is that helpful?

[Joel Dryer, LTC Partners]

Yes. That’s answers the question. I appreciate that. It’s a shift in sectors. And then the other question was color on the GD – DG portfolio and grow with that nature?

[Brian Harris, Chief Executive Officer]

Dollar General is one of my favorite companies as you know – and they have an incredible business model and it’s one of the few retailers in the United States and not only is thriving, but it’s expanding at a rapid pace. There are many technical reasons why DG is a wonderful credit for us to put on our balance sheet. And for the long-term, where we’ve signed brand new properties with 15 year leases, many of the properties that we acquire are – is moving Dollar General that’s been in place, inline shopping center for 25 years, and now it’s moving across the street to a standalone.

So they understand their market intimately at that point when they’re moving across the street with a new store. And they’re such small investments that they tend to trade at wide cap rates, which generate enormous returns. And the reason why is because the expenses that are associated with acquiring such a small asset on a – the Dollar General’s cost $1.4 million generally. And if you are going to buy one of them, you’re going to get a very big legal bill and a whole lot of other bills from various reporting companies. However, if you’re going to buy a 100 of them, you’re going to be getting some economies of scale.

We actually acquire our Dollar General, elsewhere if we do close on the transaction, our expenses are paid for by the seller. So it’s an extremely efficient business for us. As long as you’re comfortable with the credit, and we are on Dollar General continues to expand in their same store sales do grade, their customer is not necessarily Amazon Prime. And there’s not necessarily getting things delivered to the house on a regular basis. So in many ways, Dollar General comes in behind Walmart, when Walmart closes sometimes. And while I wouldn’t call that great real estate I would tell you – they become the general store of the small town that they’re in.

We probably buy three out of every 10 that we look at. I don’t want you to think that we’re just waving in the corporate credit. We would do, we require a certain amount of people nearby. Many of their stores are in rural areas. We also try to acquire Dollar General’s where we don’t expect there to be much slippage in the inventory. And it’s just been a – it’s been a good program for us, what we own presently 91 of them. And the other thing that I think Marc mentioned in his – we’re beginning to refinance some of our triple net properties. I know that we refinanced a few Walgreens recently where we had been making 13%, 14% cash-on-cash returns. We’re taking small position cash out rates going down and the cash-on-cash return is now exceeding 20% going forward for the next 10 years.

So we liked the business. We’re very particular about it. We don’t go in and buy them, widespread with reckless abandon on any corporate credit. We actually look at the real estate. The typical Dollar General real estate box is about $140 a foot. And when you compare that to what a Walgreen’s or CVS costs in some of these smaller towns, it really is a much safer play. And that’s assuming there’s a default. I don’t think it’s going to be, it would be painful. I wouldn’t say it wouldn’t lose money, but I don’t think it would lose nearly as much money as Walgreens that might close.

[Operator]

That concludes our Q&A session. I’ll return the call to Brian Harris, the company’s Chief Executive Officer.

[Brian Harris, Chief Executive Officer]

Okay. Thanks everybody. Who listened to the call tonight, very pleased with the third quarter. It’s always interesting time to talk to you at the end of the third quarter because after the fourth quarter, I don’t get a chance to talk to you again for until around April or May. So I would just say that probably the flat yield curve, if it disappears that’ll be very helpful. Rising rates is going to be a good thing if that does occur. However Ladder is built to perform an up rate or down rate scenarios for everything that goes wrong, when rates go down to something else goes right, we build it that way on purpose.

And I think that we’ve had a very good year, and I think that competition has abated a little bit. I think it was very aggressive in the second quarter. And we are looking forward while we do expect some volatility and I’m not counting on all of that, but as we move into the first quarter, I think that we go into 2020 with a very full deck. And I look forward to also, selling some real estate next year because some of our assets have matured at this point. We didn’t have any real punch, the thing that punches our ROEs up into the low-teens, but I do believe next year we will.

So with that, I’ll say goodbye to you for the year and thanks for your support.

[Operator]

This concludes today’s teleconference. You may disconnect your lines at this time.