Earnings Call Transcript - LADR Q3 2025

Operator, Operator

Good morning, and welcome to Ladder Capital Corp.'s Earnings Call for the Third Quarter of 2025. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended September 30, 2025. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our 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, President

Good morning. During the third quarter, Ladder generated distributable earnings of $32.1 million or $0.25 per share, delivering a return on equity of 8.3% with modest adjusted leverage of 1.7x. Credit performance remained stable and the quarter was marked by 3 notable developments, a significant acceleration in new loan originations, continued progress in reducing office loan exposure and the successful closing of our inaugural investment-grade bond offering. These results reflect our disciplined business model and conservative balance sheet philosophy, positioning Ladder for continued earnings growth and greater capacity to capitalize on investment opportunities across market cycles. Loan portfolio activity. Origination activity accelerated in the third quarter with $511 million of new loans across 17 transactions at a weighted average spread of 279 basis points, our highest quarterly origination volume in over 3 years. The spread reflects the mix of assets originated, which were predominantly multifamily and industrial, consistent with our focus on stable income-producing collateral. Net of $129 million in paydowns, the loan portfolio grew by approximately $354 million to $1.9 billion, now representing 40% of total assets. Year-to-date, we originated over $1 billion in new loans with an additional $500 million under application and in closing. Notably, the full payoff of our third largest office loan, a $63 million loan secured by an office property in Birmingham, Alabama, reduced office loan exposure to $652 million or 14% of total assets. Approximately 50% of the remaining office loan portfolio consists of 2 well-performing loans secured by the Citigroup Tower in Downtown Miami and the Aventura Corporate Center in Aventura, Florida. Securities portfolio. As of September 30, our securities portfolio totaled $1.9 billion, representing 40% of total assets. During the quarter, we acquired $365 million in AAA-rated securities, received $164 million in paydowns through amortization and sold $257 million of securities, generating a $2 million net gain. Paydowns and sales exceeded purchases, resulting in a modest net reduction in securities holdings this quarter. This reflects our disciplined approach to capital allocation as we did not replace certain securities that ran off, consistent with our view that spreads may widen in the mortgage market given recent volatility and the Federal Reserve's ongoing runoff of mortgage-backed securities. Consistent carry income from our real estate portfolio. Our $960 million real estate portfolio generated $15.1 million in net operating income during the third quarter. The portfolio primarily consists of net lease properties with long-term leases to investment-grade rated tenants and continues to deliver stable, predictable income. Capital structure and liquidity. During the third quarter, we closed our inaugural $500 million 5-year investment-grade unsecured bond offering at a rate of 5.5%, representing a 167 basis point spread over the benchmark treasury, the tightest new issuance spread in Ladder's history. The offering was met with strong demand and the bonds have since traded tighter in the secondary market, reaching spreads as low as 120 basis points. This transaction validates the strength of our conservative balance sheet philosophy and disciplined business model. As one of our premier debt capital markets bankers noted, it also firmly planted Ladder's flag in the investment-grade market. The continued tightening of our bonds positions us for lower borrowing costs, stronger execution and improved shareholder returns. As of quarter end, 75% of Ladder's debt consisted of unsecured corporate bonds and 84% of our balance sheet assets remain unencumbered. We maintained $879 million in liquidity, including $49 million in cash and $830 million of undrawn capacity on our unsecured revolver, which provides same-day liquidity at highly competitive rates. Outlook. Ladder's unique investment-grade balance sheet, disciplined use of unsecured debt and robust origination platform positions us to capitalize on investment opportunities, while maintaining prudent credit risk management. We expect fourth quarter loan originations to exceed third quarter production. Recent credit rating upgrades and our successful inaugural investment-grade bond issuance have lowered our cost of debt and expanded our access to a deeper, more stable capital base that remains consistently available across market cycles. Over time, we expect our strong balance sheet, modest leverage and reliable funding profile to position Ladder alongside a broader set of high-quality peers, including equity REITs rather than solely within the commercial mortgage REIT space. As investors increasingly recognize the strength of our senior secured investment strategy and conservative capital structure, we believe our equity valuation will reflect this alignment. Combined with our disciplined credit risk management and ability to deploy capital with speed and certainty, these attributes reinforce our capacity to deliver strong, stable returns for shareholders across market cycles. With that, I'll turn the call over to Paul.

Paul Miceli, CFO

Thank you, Pamela. In the third quarter of 2025, Ladder generated $32.1 million of distributable earnings or $0.25 per share, achieving a return on average equity of 8.3%. In the third quarter, we closed our inaugural investment-grade bond offering of $500 million 5-year bond at a rate of 5.5%. The proceeds were partially used to call the remaining $285 million of bonds that were maturing in October and fund loan originations. As of quarter end, $2.2 billion or 75% of our debt is comprised of unsecured corporate bonds across 4 issuances with a weighted average remaining term of 4 years and a weighted average coupon of 5.3%. Our next corporate bond maturity is now in 2027. The offering strengthened our balance sheet and affirmed our commitment to the investment-grade bond market as our primary source of capital. We're encouraged by the bond's strong trading performance in the secondary market and believe our bonds offer attractive relative value to fixed income investors with significant upside potential as the market continues to recognize Ladder's distinct long-standing investment strategy, anchored by conservative lending attachment points, AAA-rated securities and high-quality real estate equity investments. As of September 30, 2025, Ladder's liquidity was $879 million, comprised of cash and cash equivalents and our undrawn capacity of $850 million unsecured revolver. Total gross leverage was 2.0x as of quarter end, below our target leverage range. Overall, our balance sheet remains strong and primed for continued growth as our investment pipeline continues to build. As of September 30, 2025, our unencumbered asset pool stood at $3.9 billion or 84% of total assets. 88% of this unencumbered asset pool is comprised of first mortgage loans, investment-grade securities and unrestricted cash and cash equivalents. As of September 30, 2025, Ladder's undepreciated book value per share was $13.71, which is net of a $0.41 per share CECL reserve established. In the third quarter of 2025, we repurchased $1.9 million of common stock or 171,000 shares at a weighted average price of $11.04 per share. Year-to-date in 2025, we've repurchased $9.3 million of common stock or 877,000 shares at a weighted average price of $10.60 per share. As of September 30, 2025, $91.5 million remains outstanding on Ladder's stock repurchase program. In the third quarter, Ladder declared a $0.23 per share dividend, which was paid on October 15, 2025. As of today, our dividend yield is approximately 8.5% with a stock price that we believe has been pulled down by the broader market concerns around private credit. We'll note that our dividend remains stable and our asset base continues to turn over into freshly originated loans, AAA securities, high-quality real estate equity investments. With a stable earnings base complemented by our investment-grade capital structure, we believe there's ample room for our dividend yield to tighten, specifically when compared to other investment-grade REITs with similar credit ratings to Ladder. We continue to expand our investor outreach efforts now as an investment-grade company, and we look forward to further educating the market on our story. Building on Pamela's overview of our performance, I'll highlight a few additional insights to how each of our segments fared in the third quarter. As of September 30, 2025, our loan portfolio totaled $1.9 billion with a weighted average yield of approximately 8.2%. As of quarter end, we had 3 loans on non-accrual totaling $123 million or 2.6% of total assets. In the third quarter, we resolved 2 non-accrual loans, the first through the payoff of a $16 million loan through the sale by a sponsor of 2 mixed-use properties in New York City; and the second through a foreclosure of a loan collateralized by an office property in Maryland with a carrying value of $22.7 million. No new loans were added to non-accrual in the third quarter. Our CECL reserve remained steady at $52 million or $0.41 per share. We believe this reserve is adequate to cover any potential losses in our loan portfolio, including consideration of the ongoing macroeconomic shifts in the U.S. and global economy. As of September 30, 2025, our securities portfolio totaled $1.9 billion with a weighted average yield of 5.7%, of which 99% was investment-grade and 96% was AAA-rated, underscoring the portfolio's high credit quality. As of quarter end, approximately 80% of the portfolio of almost entirely AAA securities were unencumbered and readily financeable, providing an additional source of liquidity, complementing our same-day liquidity of $879 million. In the third quarter, our $960 million real estate segment continued to generate stable net operating income. The portfolio includes 149 net lease properties, primarily investment-grade credits committed to long-term leases with an average lease term of 7 years remaining. For further information on Ladder's third quarter 2025 operating results, refer to our earnings supplement presentation, which is available on our website and our 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, CEO

Thanks, Paul. The third quarter was a particularly gratifying one, highlighted by the successful completion of our first corporate unsecured issuance as an investment-grade issuer. We now have access to a much larger investor base in the investment-grade market than the high-yield market where we had issued our prior 7 offerings over the last 13 years. Having access to this larger pool of capital should allow us to further optimize our liability management in the years to come. We believe that by being a regular issuer in the investment-grade corporate bond market, we will be able to lower our overall interest expense to a greater extent than what we could expect in the secured repo and high-yield markets. We prioritized getting to investment-grade ratings several years ago. So having that distinction today from 2 of the 3 major rating agencies is very satisfying, and we plan to maintain or improve our ratings over time. While Ladder has historically been grouped into a peer group of other commercial mortgage REITs, we believe we are more properly compared against other investment-grade rated property REITs who finance their operations like we do, primarily with the use of corporate unsecured debt and large unsecured revolvers. If we succeed in curating an equity investor base that views us more in line with investment-grade property REITs, we think our stock price will start to reflect a lower required dividend yield more in line with how these investment-grade property REITs with lower leverage are valued. In the fourth quarter and beyond, we expect to continue adding to our inventory of higher-yielding balance sheet loans, while staying nimble enough to pivot into securities acquisitions during periods of high volatility when these investments provide extraordinary opportunities to add safer, more liquid investments as market turbulence flares up. We are hopeful that the yield curve will steepen much more next year as the Fed makes good on market predictions of several cuts to the Fed funds rate. This in turn should pave the way for more regular contributions to securitizations. We are always on the lookout for opportunities to own more real estate, but we expect most of the lift to earnings next year to come from organic growth of our loan portfolio. We're expecting to finish this transformational year on a positive note as market conditions do appear to favor our business model as we head into 2026. We can take some questions now.

Operator, Operator

Our first question comes from Jade Rahmani with KBW.

Jade Rahmani, Analyst

I'm interested to know if you're doing anything differently on the origination side from prior to the IG rating. Perhaps that has opened you up to deals that are closer to stabilization or perhaps larger in size. Clearly, the IG rating might give you a competitive advantage over non-bank lenders. So if you could provide any color on that, it would be helpful.

Brian Harris, CEO

Sure, thanks, Jade. Yes, we are focusing on slightly larger transactions, which provides more stability in financing. This way, we don't have to worry about whether individual lenders view the assets similarly. However, I wouldn’t say there is wholesale indifference. Slightly larger transactions do mean everything is a bit more profitable as our funding costs decrease. The significant change I notice in this cycle compared to the last is that the assets we are lending on are of much higher quality than the older garden apartment buildings and warehouse properties. Looking at the assets we're financing, they are predominantly newly built Class A apartment complexes, often with resort-style features. Many of the industrial portfolios are also quite new due to the recent onshoring trends.

Jade Rahmani, Analyst

And on the origination side, I noticed a difference between fundings and commitments upfront that seemed, at least from the outside, a little larger than historically. Were there any construction loans in there or any large CapEx projects in those deals, if you could provide any color?

Brian Harris, CEO

We generally don't write construction loans, so there are none in the portfolio you're looking at. As for heavy capital expenditure projects, if you're noticing a somewhat wider spread than you anticipated, it's not due to a higher construction component or significant tenant improvements. We're simply seeing some improvements. The portfolio remains largely unchanged, primarily consisting of industrial and multifamily assets, though that may evolve. We haven't been avoiding hotels; we've recently put one under application, but we haven't encountered many opportunities in that space. Our focus is primarily on acquisitions where the borrower is purchasing at a reset basis, which can be quite advantageous, rather than on cash-out refinances. The only cash-out refinances we engage in are when someone is transitioning from a construction loan on an apartment building, which may be only 50% leased and hence often has about 30% to 40% equity. In those cases, a cash-out refinance may occur once the property is completed and partially leased. Other than that, we mainly engage in standard lending for apartments and industrial properties.

Operator, Operator

Our next question comes from the line of Steve Delaney with Citizens JMP.

Steve Delaney, Analyst

Congrats on the strong quarter. I want to start with lending. It seems you're optimistic about the market and have substantial capacity. Let's focus on the $1.9 billion loan portfolio instead of the overall $5 billion. You appear to be becoming more active in this area. Looking forward over the next year, do you anticipate further and significant growth in the $1.9 billion loan portfolio? Can you provide an estimate of how much larger the loan portfolio might grow given your current capital base?

Brian Harris, CEO

Sure. Thanks, Steve. Let's start with capital first. In the second half of 2024, we took in over $1 billion in loan payoffs, and while we began originating loans more frequently, we weren't doing so at that pace. As a result, each quarter, the loan book decreased slightly. This is the first quarter in some time where we've originated more loans than have paid off, and we anticipate that trend will continue. The fourth quarter has started off strong. I expect, as I mentioned earlier, that organic growth will come from building up the bridge book, which is our current focus. We are pleased with current spreads, which are less competitive than a few months ago, as often happens mid-year. I would anticipate that our $1.9 billion portfolio will likely increase by around $1 billion, and if I had to bet, I'd go with the over on that figure. We are quite active right now, and business tends to generate more business. A strong origination quarter attracts attention from both borrowers and brokers, leading to increased inquiries. Additionally, we currently have over $500 million in loans under application. The closing rate can be uncertain due to volatility from political and geopolitical factors, but generally, I expect our loan book to potentially return to around $3.4 billion, where it was a couple of years ago. This growth will likely come from a few sources: our undrawn larger revolver, and our securities, which are currently paying off faster than loans. This reflects the recent payoffs and the capital markets becoming more favorable for single asset transactions. With the paydown of AAAs in a CLO, that financing has become less popular, leading to increased calls on those bonds, a trend we expect to continue. I believe our securities portfolio will decrease through attrition and sales; as mentioned this quarter, we sold just over $250 million worth. We currently hold more than $2 billion in securities, and I expect that figure to decline, but I foresee an increase in our loan inventory.

Steve Delaney, Analyst

That's really helpful, Brian. In terms of comparison, you mentioned the property REITs and their valuation is something to be envious of, whether it's on a price-to-earnings or a dividend yield basis. Looking at the ROE at 8.3%, I find it solid, but in terms of valuation and where the stock is trading relative to book value, some improvement would be beneficial. An ROE in the 9% to 10% range could positively impact the stock price and your valuation relative to book. Is improving the ROE in a prudent manner part of your vision for the next 1 to 2 years? Do you believe your current strategy will help raise your ROE?

Brian Harris, CEO

I agree with all aspects of your question. Our plan is to increase our loan origination and manage the cash aspect of our liquidity. As you recall, we held a significant amount of T-bills when they were yielding 5.5%. This situation kept us from engaging in tighter mortgage loans because we prioritized liquidity and the security of our assets. However, with the Fed lowering rates and signaling further cuts, we now have a favorable mix of floating and fixed-rate liabilities. We anticipate a decrease in our cost of funds. The revolver is currently priced at SOFR plus 1.25%. If I believe the Fed will reduce rates by 100 basis points, which seems plausible given Powell's recent comments and the next Fed official's anticipated policies, we could see SOFR drop to around 3%. This would allow us to borrow unsecured at 4.25%, which is an encouraging prospect. We have floors in our bridge loan portfolio at approximately 6% to 6.25%. Consequently, the rates at which we can currently issue loans have actually increased in the last quarter. We will keep moving forward with this strategy. Once we manage the cash component of our liquidity, we will start divesting or reducing our securities. Our goal is to increase our balance sheet assets by $1 billion to $2 billion and achieve a profit margin boost of 3% to 4%. If we can replace a security yielding 5.5% with a loan portfolio earning 8.5%, we believe it will significantly enhance our dividends, return on equity, and overall earnings. This strategy is straightforward and aligns with our stated goals. The only challenge has been the rapid turnover of high-yielding instruments, which we prefer to retain. However, when they near their expiration, it's beneficial for them to pay off, and we've succeeded in achieving this. Our credit quality remains stable and strong; our borrowers are reliable and not facing financial difficulties from over-leveraged properties. Overall, the market conditions are favorable for a thriving lending business at Ladder, with the stock market at record highs, low spreads, and declining rates.

Operator, Operator

Our next question comes from Tom Catherwood with BTIG.

William Catherwood, Analyst

Brian, I wanted to revisit something you mentioned in response to Steve's question to ensure I understood it correctly. Did you say that the rates we can obtain on loans have increased, not decreased? Did I get that right?

Brian Harris, CEO

The loans we are considering have indeed seen some changes recently. I keep an eye on various spreads, such as corporate and mortgage spreads. Over the past couple of months, the mortgage-backed securities portfolio from the Fed has been allowed to run off, making the agency securities market less tight than expected. The Fed is letting approximately $30 billion roll off, though I may not be precise on that figure. After April, with the onset of tariff discussions, the commercial sector shifted as it typically does. Each January, we attend a convention in Miami where optimism runs high, and companies anticipate their best year yet, leading to increased trading until mid-June. Around that point, there tends to be a realization that prices may be too high, prompting a shift towards selling and reduced aggressiveness. At Ladder, we've noticed a favorable trend in loan sizes. Typically, we prefer loans between $25 million and $30 million aimed at middle-market lenders, but we occasionally explore larger loans. Banks are hesitant to engage in $100 million loans, considering them too small for their balance sheets, while $1 billion loans are more feasible for consortiums. The $100 million loans also seem somewhat out of reach for many CLO issuers we compete with. Currently, we are content with loans in the $50 million to $100 million range and plan to maintain that focus. While it's important not to think we've shifted our strategy with larger loans, we continue to process a good number of smaller loans as well. However, loans around $100 million are more appealing due to their newer, better financial characteristics and higher rates, owing to a relatively less competitive landscape recently. It's worth noting that the first half of the year was quite tight, limiting our loan originations while we purchased securities instead. Observing the CLO market can provide further insight; there's an influx of CLOs available with spreads in the AAA category being slightly wider than a few months ago. The VIX has also increased, indicating more volatility in political discussions, which allows us to find attractive opportunities. We have established a reputation for reliability, traditionally seeing better production in the second half of the year compared to the first. This pattern relates to seasonality, as insurance companies typically allocate their fixed-income investments by mid-year, reducing competitive pressures. Therefore, we prefer to increase our activity as we approach year-end.

William Catherwood, Analyst

Got it. I really appreciate that answer, Brian. If I think about sources and uses, and I know you laid it out before regarding funding, if the spreads and securities are somewhat widening and the revolver is priced at SOFR plus 125, wouldn't it make sense to put everything on the revolver and then term it out with unsecured once you reach $400 million or $500 million and just keep repeating that? Or do you think selling down securities while using the revolver provides some other benefit?

Brian Harris, CEO

I believe we have a diverse range of products at Ladder. Looking specifically at the securities side, companies like AGNC and Annaly are offering dividends of 14% to 15%, and they're highly levered, often around 7x to 8x. While that level of leverage is too high for us, the government-backed securities have a lot of duration risk. Currently, if we leverage these securities, which we can, the financing cost would be approximately SOFR plus 50 on a AAA rating. If we're purchasing at 150, there's a significant spread to take advantage of, allowing us to leverage up to about 15%, though that's quite a bit of leverage. Our strategy is not merely to lower funding costs to increase leverage. Instead, we aim to focus more on extending unsecured debt over the coming years. Unlike before when we were investment grade and would consider issuing bonds due to rapid growth and capital needs, our current approach would lean towards utilizing our revolver if we anticipate the Fed cutting rates by 75 to 100 basis points. At that point, we would likely draw from the revolver since we expect it to drop to a low-4% rate. We want to avoid drawing too much to ensure we maintain a favorable position for agencies and investors regarding our bond offerings. In my view, securities are not meant for long-term investment for us; they serve as a temporary measure while we seek better opportunities in loans. I'm optimistic that our patience will pay off, especially since Paul noted that the spread on the loans we originated around $500 million was approximately 279 basis points, and I expect the spread in the fourth quarter to be even wider.

Operator, Operator

Our next question is a follow-up from Jade Rahmani with KBW.

Jade Rahmani, Analyst

Just curious if you would contemplate launching a securities fund, if you can deliver 15% type returns with leverage, you could put the leverage in the fund, not on Ladder's balance sheet and create value for investors looking for that type of return profile. And of course, comparing to residential mortgage securities, commercial has a lot more predictable duration. So you don't have the prepayment volatility that the agency REITs deal with.

Brian Harris, CEO

Yes, we have done something similar in the past. When we first launched, we managed a few investment portfolios for people we knew because some securities can become undervalued, yet many individuals don't know how to acquire them. Often, we receive inquiries asking us to invest in certain assets. Currently, we have an asset yielding around 15%, which is generally appealing, though it involves significant leverage. We have considered various options in the past, including pairing with a residential mortgage segment since we understand that business, but we haven’t pursued it. Additionally, we have contemplated spinning off our triple net portfolio due to its low valuation. The focus for 2026 will be on fine-tuning our strategies and determining the appropriate cap rates. Our internal management seems to lack value at present. There are several steps we can take moving forward, but our initial priority will be to establish ourselves as an investment-grade company. At this stage in the cycle, we prefer the commercial mortgage sector over residential, although residential could become interesting if there’s an oversupply caused by the Fed’s absence. While these opportunities are appealing, they do come with substantial duration. We are open to maintaining assets yielding 15% or selling lower-yielding ones to recycle capital, which is an option we are considering, as evidenced by the small sales we conducted in the third quarter.

Jade Rahmani, Analyst

And then the New York office equity investment you made, how are you feeling about that? Is that a long-term hold? It looks like it was pretty prescient in terms of timing. But could you also remind us the size of that?

Brian Harris, CEO

Sure. We're a minority investor in the equity for that project and may consider participating in the debt side later, but for now, we have a loan from an insurance company. We invested around $13 million or $14 million in the building at 780 Third Avenue, which was approximately 50% occupied at the time. I believe it is now over 90% leased in just under 1.5 years. We are pleased with this investment, as it is a high-quality building despite Third Avenue not being typically known for such properties. Many lower-quality buildings in the area are being converted to residential spaces, and their tenants are seeking alternatives. We’ve seen increased demand as Park Avenue tenants displaced by JPMorgan's expansion have turned to Third Avenue. This has exceeded our expectations, and we wish we had pursued more opportunities like this. We're currently exploring another project that is larger than 780 Third Avenue, which we are excited about. Transportation hubs in New York City generally perform better and have recovered faster as people return to office life. Our offices are full, and while we haven't mandated a five-day workweek, most employees are opting to return. We have a positive outlook on certain segments of the office market, although we acknowledge some older properties may become obsolete. We are satisfied with our current position and are open to making more investments. Regarding the long-term hold, we plan to retain the investment for a while.

Operator, Operator

We have no further questions at this time. Mr. Harris, I'd like to turn the floor back over to you for closing comments.

Brian Harris, CEO

Thanks, everybody, for listening and those who dialed in afterwards. And good year 2025, we're in the fourth quarter. The reason I say that now is because we're not going to talk again until after the new year comes and we get through the audited financials. But a lot of this is just falling into place the way we largely expected it. The only real surprises were the rapid paydowns that took place in the second half of last year, but we're catching up quickly. We've had an inflection point here in the last quarter where we originated more than paid off, and we think that, that is going to be a consistent theme over the next 4 or 5 quarters. So thank you for tuning in, and we'll catch up with you after the new year.

Operator, Operator

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