Earnings Call Transcript
Ladder Capital Corp (LADR)
Earnings Call Transcript - LADR Q4 2023
Operator, Operator
Good morning, and welcome to Ladder Capital Corp.'s Earnings Call for the Fourth Quarter of 2023. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter and year ended December 31, 2023. Before the call begins, I'd like to call your attention to the customary Safe Harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the Investor Relations section of our website. 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. We are pleased to provide an overview of Ladder's financial performance for the fourth quarter and full year 2023. In the fourth quarter, Ladder generated distributable earnings of $40 million, or $0.32 per share, resulting in a 10.5% return on equity. For the full year 2023, Ladder reported distributable earnings of $167.7 million, or $1.34 per share, generating a 10.9% return on equity. Ladder demonstrated notable financial strengthening across key metrics over the course of the year. With a smaller asset base and lower leverage, we achieved higher returns. Our adjusted leverage ratio stands at 0.7 times, excluding investment grade securities and unrestricted cash and cash equivalents. Distributable earnings increased 13% year-over-year, and undepreciated book value increased to $13.79. Our financial performance benefited from a positive correlation to rising interest rates, with net interest income growing 58%. Our commitment to an unsecured capital structure contributed to this growth. And we benefited from $1.6 billion of unsecured bonds at a low fixed rate weighted average coupon of 4.7%. We increased our liquidity position to over $1.3 billion by year-end with cash and cash equivalents up 67% year-over-year. In 2023, we received approximately $1 billion in cash from paydowns of loans and securities, which was accompanied by a $462 million or 11% reduction in total leverage. Future funding commitments also declined by over $100 million or 36% and our unencumbered assets increased to 55% of total assets. In addition, dividends coverage also rose to 146% in 2023, reinforcing the safety and durability of our dividends. Furthermore, our credit ratings were reaffirmed by all three rating agencies during the year, with two agencies continuing to rate Ladder just one notch below investment grade. In the face of significant market disruptions, the company's actions have notably strengthened our financial position, as evidenced by these positive trends. As we enter 2024 our efforts have left us well-positioned to quickly pivot to offense. Our originators continue to explore the markets in new investments in an environment we anticipate will offer compelling opportunities for well-capitalized lenders like Ladder, particularly given the pullback by the middle market banks. Regarding our loan portfolio, we received $727 million in repayments, reducing the portfolio balance by 19% from the start of the year. This amount includes the full payoff of 35 loans, and approximately $100 million in proceeds from the repayment of office loans. Subsequent to year-end, we received an additional $70 million in proceeds from the payoff of four unencumbered loans, including one office loan. We attribute our robust payoffs to our strategy of originating smaller loans in the middle market. This approach has afforded access to a broader range of capital sources for repayment, whether through refinancing or asset sale. Our balance sheet loan portfolio stands at $3.1 billion as of December 31, with a weighted average yield of 9.65% and an average loan size of $27 million. We have limited future funding commitments totaling only $204 million, with approximately two-thirds of that amount contingent upon favorable leasing activity or other positive developments of the underlying properties. In the fourth quarter, we successfully concluded foreclosure proceedings, resolving two loans on non-accrual. This includes a $23 million loan on a retail property on the Upper West Side of Manhattan, which had been on non-accrual since the second quarter of 2018, and a $35 million loan on a newly constructed multifamily in Pittsburgh, Pennsylvania, discussed on our third quarter earnings call. Lastly, in the fourth quarter, we placed one $15 million loan on non-accrual status. The loan is collateralized by a newly renovated multifamily portfolio in Los Angeles, California, and we anticipate taking title to the asset during the first half of 2024. As Paul will discuss, we did not identify any specific impairments during the quarter and increased our general CECL reserve to align with our assessment of current market conditions. Heading into 2024, we expect to pivot to office while continuing to actively monitor our loan portfolio. Despite the liquidity pullback from regional banks impacting our market, we believe that the long-term advantages for non-bank CRE lenders like Ladder, stemming from reduced competition for lending in our space, outweigh any short-term obstacles. In the meantime, we're continuing to work with our well-capitalized sponsors who in most cases, we've seen investing new capital into their assets, expecting a more palatable interest rate environment later this year. That said, as we have consistently demonstrated, even during the challenges posed by COVID, we make a clear distinction between a default and a loss. As a well-capitalized and experienced real estate owner we possess the capacity to proficiently own and manage the underlying real estate. Our ongoing objective will be to maximize our value at our conservative loan basis, particularly as we navigate the upcoming quarters with the current higher for now interest rate environment. Turning to our securities and real estate portfolio. Over the course of 2023, we received $196 million in paydowns in our securities portfolio, and acquired over $88 million of new positions, ending the year with a $486 million portfolio comprised primarily of Triple A securities earning an unlevered yield of 6.82%. Our $947 million real estate portfolio, mainly comprised of net lease properties with long-term leases to investment-grade tenants, contributed $15 million in net rental income in the fourth quarter, and $59 million in 2023. In summary, we entered 2024 with a strong balance sheet, substantial dry powder, modest leverage, and a well-covered dividend. As the commercial real estate market continues to reset, we remain focused on optimizing the credit of our existing loan book and we are well positioned to deploy our capital for the right opportunities that we believe will present themselves as transaction activity rebounds. With that, I'll turn the call over to Paul.
Paul Miceli, CFO
Thank you, Pamela. As discussed in the fourth quarter of 2023, Ladder generated distributable earnings of $40 million, or $0.32 of distributable earnings per share. And for the full year in 2023, Ladder generated $167.7 million of distributable earnings or $1.34 of distributable earnings per share, a return on equity of 10.9% for 2023. Our strong earnings in 2023 were driven by robust net interest income, and steady net operating income from our real estate portfolio and benefited from our primarily fixed-rate liability structure. Our balance sheet loan book continued to receive a healthy rate of paydowns in the fourth quarter, which totaled $167 million. This was partially offset by $11 million of funding on existing commitments. The portfolio totaled $3.1 billion as of year-end across 116 loans and represented 56% of our total assets. As previously mentioned, in the fourth quarter of 2023, we completed the foreclosure proceedings on two non-accrual loans totaling $58 million. Overall, in 2023, we added three REO assets and sold $144 million hotel assets previously foreclosed on, which produced an $800,000 gain for distributable earnings, demonstrating our ability to maximize value on assets, where we proceed with foreclosure. In the fourth quarter, we increased our CECL reserve by $6 million, bringing our general reserve to $43 million, or an approximate 137 basis points of our loan portfolio. The increase was driven by the current macro view of the state of the U.S. commercial real estate market and overall global macroeconomic conditions. We continue to believe the credit quality of our loan portfolio benefits from the diversity and collateral, geography as well as granularity, given our small average loan size, which was demonstrated by the $727 million in proceeds received from paydown in 2023, including the full payoff of 35 loans. Our $947 million real estate segment continues to perform well, providing a stable source of net operating income to earnings. The portfolio includes 156 net leased 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 nine years. As of December 31, the carrying value of our securities portfolio was $486 million, 99% of the portfolio was investment grade rated, with 86% being triple A rated. Over 71% of the portfolio was unencumbered as of year-end and readily financeable providing an additional source of potential liquidity, complementing the $1.3 billion of same-day liquidity we had as of year-end. Ladder's same-day liquidity simply represents unrestricted cash and cash equivalents of over $1 billion, plus our undrawn unsecured corporate revolver capacity of $324 million. It's worth noting in January of 2024, we extended our corporate revolver with our nine-bank syndicate to a new five-year term, out to 2029. The facility carries an attractive interest rate of SOFR plus 250 basis points on an unsecured basis, with further reductions upon achievement of investment grade ratings. This enhancement demonstrates the strength of our capital structure as well as Ladder's strong relationships with these financial institutions. As of December 31, 2023, our adjusted leverage ratio was 1.6 times, which was down year-over-year as we delever our balance sheet while producing steady earnings, strong dividend coverage, and an attractive double-digit return on equity. Unsecured corporate bonds remain the foundation to our capital structure, with $1.6 billion outstanding or 41% of our debt, with a weighted average maturity of nearly four years, and an attractive fixed-rate coupon of 4.7%. I'll also note in 2023 we repurchased $68 million in principal of our unsecured bonds at 83.5% of par, generating $10.7 million of gains. As of December 31, our unencumbered asset pool stood at $3 billion, or 55% of our balance sheet. 81% of this unencumbered asset pool is comprised of first mortgage loans, securities, and unrestricted cash and cash equivalents. We believe our liquidity position and large pool of high-quality unencumbered assets provided Ladder with strong financial flexibility in 2023 and continues to do so as we enter 2024. And as Pamela discussed, is reflected in our corporate credit rating that is one notch from investment grade from two of three rating agencies, with all three rating agencies reaffirming our credit rating in 2023. In 2023, we also repurchased $2.5 million of our common stock at a weighted average price of $9.22 per share, and our current share buyback authorization of $50 million has $44 million of remaining capacity as of December 31, 2023. Ladder's undepreciated book value per share was $13.79 at December 31, 2023, with $126.9 million shares outstanding. Finally, as Pamela discussed, our dividend is well covered, and in the fourth quarter Ladder declared a $0.23 per share dividend, which was paid on January 16, 2024. For more details on our fourth quarter and full year 2023 operating results, please refer to our earnings supplement which is available on our website as well as our annual report on Form 10-K, which we expect to file in the coming days. With that I will turn the call over to Brian.
Brian Harris, CEO
Thanks, Paul. We were happy when 2023 came to an end, and also very pleased with our financial results from start to finish. I credit our success to having gotten our company ready for turbulent markets in the years leading up to 2023. I intend to highlight our differentiated liability structure with a large component of fixed-rate debt when explaining why things went well at Ladder during the year. But in truth, it's more complicated than that. Over 10 years ago, we decided to finance our business with a greater concentration of corporate unsecured fixed-rate debt, forgoing the typical mortgage REIT model of using repo lines to lever returns, even though floating rate repo finance was cheaper at the time when we issued the bonds. We realized after what happened to the U.S. banking system in 2007 and 2008 that there would be fewer banks, larger banks, and more highly regulated banks. So we felt the usual bank financing models in use might need some shoring up as they were becoming more problematic in an increasingly volatile world with less cushion against market shocks. While we never saw a pandemic coming, or the enormous global central bank intervention that took place in response to it, these items only serve to cement our case to manage our company with safer debt, even if it came at a higher cost, using less leverage, just as we indicated we wouldn't do when we founded Ladder in the fall of 2008. We stay true to that model and while it was helpful that we got the timing and direction of the Fed's hiking cycle correct, our constant vigilance around avoiding credit mistakes has really been the linchpin to our success. While not perfect by any means, we believe we were better than most in our approach towards lending over the last three years. Although we're not without some headaches in these difficult times, our disciplined approach and keeping our exposure and assets at a reasonable basis has served us well once again, as it has for the better part of our lengthy careers. In March of last year, after a few banks failed largely due to a basic lack of understanding about duration, on the part of bank CEOs and regulators, the funding model for regional banks in the U.S. changed. These changes may very well be permanent. If banks don't compensate savers with appropriate interest rates on deposits, we now see how easily savers can and will move their savings to where their capital is treated better. At Ladder, we own over $1 billion of T-Bills that are approximately 5.4% and mature in less than 90 days. This is not as a result of any plan we have, but rather a luxury we enjoy, because we issued about $1.3 billion of fixed-rate unsecured bonds, with an average rate of just 4.5% with a remaining average maturity of about four years. We now have a rather barbelled asset base of T-Bills at 5.4% and a loan portfolio that earns an unlevered return of approximately 9.7%. This combination allows us to cover our quarterly cash dividend using only modest leverage during these precarious times in commercial real estate, while the deficit at the US Treasury is spiraling out of control. Our fortress-like balance sheet allows us to turn our attention to getting through the current downturn in commercial real estate values in the aftermath of soaring interest rates and with a banking system with little appetite to finance new commercial real estate loans. We've navigated this environment with considerable success so far. In 2023, as mentioned earlier, we received $727 million in proceeds from paydowns on balance sheet loans, which did include the full payoff of 35 loans. We also received $196.1 million of principal paydowns and payoff in our CMBS and CLO securities portfolio, further increasing our liquidity as a result of our low leverage business model. Because of our high level of liquidity, we are able to work with our sponsors on loans that are having difficulty refinancing. However, if we share this benefit with those borrowers, the borrowers too must pitch in with additional capital to keep the asset in their control. We've been fortunate so far having modified some large loans after substantial new equity was posted to create more time to resolve stress from higher rates. In 2023, we received $119 million in additional equity from our borrowers on 56 loans. We have also received additional credit enhancement in the form of well-heeled sponsors providing full recourse on some of our larger loans outstanding. In our equity portfolio, our largest office property is triple net leased for another eight years with decades' worth of extensions available to the tenant who happens to be one of the largest banks in the United States. In this case, the tenant is currently putting the finishing touches on buildings that we own that they rent, at a tenant cost between $250 and $300 million, including construction of a new 1,400 space parking deck, so they can concentrate even more employees into these buildings. We're just not worried about that one. I'll wrap things up here by thanking our employees who worked so hard last year in a daily environment of falling asset prices. We recorded distributable earnings of $168 million in a year where asset bases got smaller every quarter, yet we continued to produce double-digit ROEs while holding substantial levels of cash. We feel the Fed is at least done raising rates for the time being. If they do begin to lower rates this will come as welcome relief to property owners. With less competition for lending assignments from regional banks, private credit is indeed moving in to take part in this vast addressable opportunity, and we have every intention of taking advantage of our already strong position in mortgage lending and plan to deploy our large cash holdings into something more interesting than T-Bills. Thanks for listening. Operator, we can open the line for some questions now.
Operator, Operator
Thank you. We will now start the question-and-answer session. The first question comes from Sarah Barcomb with BTIG. Please go ahead.
Sarah Barcomb, Analyst
Hey, good morning, everyone. Thanks for taking the question. So you mentioned in the prepared remarks that you're positioned to quickly pivot to offense, and there's a vast opportunity for private credit here. So should we expect Ladder to start originating new loans as soon as this quarter? Or are you waiting for the Fed to start cutting rates? I'm just looking for more detail on what and when would allow you to be more constructive and start putting that large cash balance to work. Thank you.
Brian Harris, CEO
Thank you, Sarah. Yes, we plan to start originating loans this quarter. To be fully transparent, we have been quoting loans through the fourth quarter as well, although we haven't had much success in getting applications signed. Interestingly, we are often losing loan opportunities to insurance companies offering lower rates and proceeds, as borrowers tend to prefer the lower rates, or to companies we've never heard of. This indicates that private markets are actively pushing capital into the sector. However, I don't expect this trend to continue. We are quoting conduit loans and bridge loans, and we prefer acquisitions over refinances for obvious reasons, though this likely limits our opportunities since most current market offerings are refinances. As acquisition activity increases, we expect to be more active. There is no intentional strategy on our part to hoard capital at this time. With a 5.40% T-Bill rate, we can purchase securities in the CLO and CMBS sectors at attractive levels, and we have been tactically adding to those positions, mostly in securities. In fact, during this call, we purchased $10 million. Moving forward, we are likely to continue acquiring more securities than making loans, but we are quoting loans on a daily basis.
Sarah Barcomb, Analyst
Okay, great. Thanks. I appreciate the comments on the competitive set there too. That's interesting. Maybe just going back to the in-place portfolio for my follow-up, just because the specific CECL remains pretty low relative to peers, and we don't have risk rankings on the loan level here, I was just hoping whether you think there's certain aspects of your portfolio that could maybe start to become a bigger concern if rates remain elevated throughout the course of the year, or for longer. So maybe you could comment on the performance of your 2021 and 2022 vintage multifamily assets. Those kind of stick out to me. Could we start to see more keys coming back there? Appreciate any comments here. Thank you.
Brian Harris, CEO
Sure. The end of 2021 was a precarious time for multi-family properties due to low cap rates and high available leverage in the market. We are likely to continue experiencing some strain in the market during the first half of this year. When I mention the market, I don't specifically mean Ladder, but the broader landscape. I don't think we've fully emerged from this situation. However, we feel like we're approaching a turning point. I anticipate rates may decline slightly, based on recent observations, and cap rates have definitely decreased due to forward purchasing caps. Currently, we are seeing a decline in equity returns on equity but have yet to face significant issues in our debt portfolio. As long as rates remain stable or decrease, I remain optimistic. However, if rates were to rise, the recent events surrounding the New York Community Bank remind us that this is a real possibility. I believe we may face another challenging six months. I'm not overly concerned about our position compared to others in our CECL reserves since we've concentrated on smaller loans, typically around $20 million to $25 million, rather than the larger $200 million to $300 million loans, which are particularly challenging to finance at present. While uncertainties exist regarding future outcomes, we can reflect on the last year, which was certainly difficult, yet we still secured 35 payoffs. Since the beginning of the year, we've received an additional $70 million in payoffs. These outcomes support our strategy with smaller loans and diversification. While we do recognize some stress in the market, the trend has been positive so far. However, if the carrying costs for these assets remain high, it raises concerns about whether a sponsor can sustain their finances. Fortunately, sponsors capable of holding on are managing to do so. Yet, if conditions worsen significantly or they deplete their equity options, we may start to see some properties entering the market.
Sarah Barcomb, Analyst
Okay, thank you, Brian.
Operator, Operator
Next question, Steven Laws with Raymond James. Please go ahead.
Steven Laws, Analyst
Hi, good morning. I wanted to follow up on Sarah's question. Can you discuss the relative returns you are observing in new loan originations compared to securities? Did you purchase any securities a week or two ago? Additionally, what types of securities do you find most appealing? I believe, Brian, you mentioned that you bought some this morning.
Brian Harris, CEO
We have been mainly focusing on transactions that we have owned for a while and are adding to, or more importantly, we've noticed a lack of differentiation in pricing between static deals, where every loan in the pool is known, and managed deals, where you may not know the loans in the pool. Therefore, we have concentrated on the static side. This morning, we acquired a 2021 static deal, and we are familiar with all the loans in the pool, which are performing well. I can't comment on the new issue market because we didn't purchase those bonds, so I'm not sure about that. However, the assets we are acquiring in securities are yielding high-teens to low-20s if we leverage them. But given our cash reserves, we haven't been using leverage. You'll see that a significant portion of our interest expense has decreased, and the secured debt we're carrying has reduced because we are paying off expensive repo financing and only using leverage when necessary.
Steven Laws, Analyst
Regarding our liquidity of $1.3 billion and cash of $1 billion, how much cash or liquidity would you typically want to maintain in a normal operating environment, or conversely, how much of your liquidity do you plan to utilize? What is the additional earnings potential once that capital is deployed?
Brian Harris, CEO
I think it's powerful. And I think under normal circumstances, which, I wonder if we'll ever see them again, going back, I think to the end of 2019 is the last time I can imagine that, I could say that was when we were in normal times. But in normal times, if we can go that far, I would say we would carry about $50 million to $100 million in cash. And as long as we've got the revolver, which, as Paul mentioned, we've extended for another five years with all of our lenders, that's plenty of day-to-day liquidity. So we could in theory, depart with $1.2 billion in cash. If you run that leverage at even one to one that's $2.4 billion in assets. If you ran it to three to one it's $3.5 billion in assets with all assets unlevered yielding 6%, 7%. So that's powerful earnings power.
Steven Laws, Analyst
Yeah, seems like a lot of upside there. And then pretty conservative on the dividend for a payout standpoint. Thoughts around that. Is that something that will need to move up given REIT taxable income as this money is deployed? Or how do you look at your dividend level?
Brian Harris, CEO
We believe that the next movement will be upward rather than downward. However, I do not want to make any predictions regarding our dividend policy during this call. Currently, we are not planning any changes, and we do not feel pressured to do so for any regulatory reasons related to REIT accounting. The primary reason for this is our belief that capital is crucial at this moment. We feel that the availability of capital enables us to pursue various opportunities that will exceed our current dividend. Consequently, we think this is a market where investors would prefer us to retain cash for investment at higher yields, which can enhance the dividend later rather than now. For the most part, discussions surrounding dividends tend to focus on those being cut rather than raised. Nonetheless, we are quite comfortable with our situation and appreciate having ample cash. We hope to issue another bond deal before the end of the first half, which would provide us with significant liquidity. In that case, we might have to slightly lower our returns. However, at present, we are being very cautious and selective about the investments we make.
Steven Laws, Analyst
Great appreciate the comments this morning, Brian. Thank you.
Operator, Operator
Next question, Steve DeLaney with Citizens JMP. Please go ahead.
Steve DeLaney, Analyst
Good morning, Brian, Pamela and everyone. Nice to be on with you, nice to see the market rewarding you, strong report this morning in sort of a choppy tape. Just curious, Brian, you've talked about the balance sheet lending capacity, kind of opportunistically getting ahead a little bit. But any thoughts about the CMBS conduit lending market? Obviously, weak on a quarterly basis, on average about 750 million in 2023. More importantly, very weak profitability. Kind of, there's got to be a lot of good floating rate loans out there, where property owners are just maybe waiting for a break in the 10 year. And then they'll try to hit a 10-year fixed rate loan. What's your view of conduit lending over the next one to two years? And should we expect Ladder to be involved? Thank you.
Brian Harris, CEO
Ladder will definitely be involved, and we anticipate activity will increase. It's already showing signs of growth, reminiscent of 2008 when we began. Back then, the securitization business was very slow with minimal volumes due to high spreads. Currently, spreads are not particularly high; it’s the elevated interest rates that are impacting the situation. Ultimately, it comes down to the cost of money, which is a key factor in this scenario. Additionally, there is minimal difference between five-year and ten-year terms on the credit curve, which creates a conflict. Borrowers prefer 10-year loans, while lenders typically favor 5-year loans. This creates a challenge because issuing a five-year loan in the conduit space can lead to issues with BPCE mechanics, where yields can reach the 20s. If the goal is to achieve a 20% return over five years, versus a lower return for ten years, that creates some tension. However, I believe borrowers will prevail in this disagreement, leading to the emergence of 10-year products as there are many investors seeking longer durations. This was supported yesterday by the successful placement of the largest ever 10-year options. Although the current market is difficult, particularly due to work from home challenges affecting even stable sectors like multifamily housing, with rising expenses in insurance and taxes, the market typically rebounds. Historically, situations like this precede good opportunities. Back in 2009 or 2010, we were generating over $100 million annually from the conduit business. I believe we can reach that level again, but we’ll need normalization of the yield curve. We were making progress toward that until recently, and it will likely be more of a discussion for the second half of the year rather than the first half.
Steve DeLaney, Analyst
Thank you for that. I would like to add that it seems you're being selective with your buybacks. When you engage in buybacks, you're eliminating permanent capital, and in response to Steven's question, paying out a dividend also leads to the reduction of permanent capital. My perspective is that if the stock is valued around 80% of book value or lower, it’s more prudent to buy back shares instead of increasing the dividend. That’s just my personal opinion. Thank you for your time.
Brian Harris, CEO
I would say, Steve, just also if you look back at our stock repurchases, they kind of kick in at a certain level. And I think if you actually do a little review of that history, you'll find your comment to be pretty prescient.
Operator, Operator
Next question, Jade Rahmani with KBW. Please go ahead.
Jade Rahmani, Analyst
Thank you very much. Just a follow-up to Sarah's question about multifamily. I was reviewing a report on multifamily and it's called multifamily mortgage credit risk, lessons from history and there's some comments in there that stand out. It's a boom and bust asset class. And the ease of build creates excess supply, which results in lower vacancy. So I think in addition to the expense headwinds, you noted, there's also pressure on new lease rent, and probably occupancies will dip in the Sunbelt market. So can you comment on multifamily Sunbelt exposure? What do you see happening there? And just framing expectations, I mean, I think that with upcoming maturities in some of these low-cap rate deals, there inevitably will be a lot of pressure when it comes to qualify for a refinance.
Brian Harris, CEO
I'm going to ask Craig Robertson to address part of this. However, I want to mention that I don't believe the Sunbelt will face as many issues as some might expect, largely due to U.S. demographics. The baby boomers are still retiring and aging, and there is a steady influx of people moving to the Sunbelt. As long as the stock market continues to reach record highs and home values remain elevated, this trend will persist, even if individuals are holding on to their low-rate mortgages in cities like Boston, Philadelphia, and New York. Regarding our exposure in the Sunbelt, it seems to be performing adequately. Any stress we see is primarily related to management handling too many assets simultaneously, which can lead to challenges in maintaining focus and managing operating expenses. Rents are stable, although there's some overbuilding in certain areas, particularly in Austin, Texas, and parts of North Carolina. While rents may not be exactly where we desire them, they are close enough, and many are being met without the planned improvements being implemented. Consequently, there has been less capital expenditure than anticipated. So Craig, do you have any insights about our specific Sunbelt exposure that you would like to add?
Craig Robertson, Analyst
No, I mean, hard to add much to that. I think when we look at the Sunbelt exposure, the rents really are holding up. We tended to land on either newly built product or product at lower leverage points. So I think when we look at how the assets are performing, we still feel very comfortable at where we own them at our bases and at the yields that the properties are generating. And when we have had short term blips in sponsorship, it's been possible to write them by examining the business plans, reevaluating and take them through. So occupancy has held up across the portfolio. And I think we've avoided largely a lot of the markets where that focus is right now. And they're exhibiting some of the stress, and Austin is a great example of that.
Jade Rahmani, Analyst
So I assume you're implying that there's little Austin exposure. Can you just comment on the debt yields that these properties are at, or soon to be at based on your underwriting?
Craig Robertson, Analyst
Yeah, right now, our multi-portfolio shows a debt yield in the high fives at 85% of occupancy with business plans still ongoing. We see those going up as they continue to lease. As I said, we're in mid-80s occupancy with lease up and turns going. And when we pro forma it forward, even with current expense levels and current rents, we see those normalizing at levels that we're very comfortable with in the mid-sevens and plus depending on the asset.
Jade Rahmani, Analyst
And that's on a debt yield basis?
Craig Robertson, Analyst
That's on a debt yield basis. Yes.
Jade Rahmani, Analyst
Okay, so I mean that could present challenges for the equity within that. Those debt yields don't leave that much room.
Brian Harris, CEO
The equity calculations on properties that were purchased 2 to 2.5 years ago are not as favorable as they were back then. The challenges have become evident in the equity, but there have still been positive returns once the business plans are executed, which is reflected in our payoffs.
Jade Rahmani, Analyst
Okay, so as a base case, let's say a property gets to 7%, or 6.5% debt yield. Just allowing some inflation pressure. What do you think happens in that situation when the loan comes up for maturity?
Brian Harris, CEO
We anticipate that the sponsor will either acquire a cap and replenish reserves if necessary or potentially reduce the debt to a level with which we are comfortable. If that's not the case, we will consider whether they wish to explore obtaining an additional layer of debt through the mezzanine market. We have observed some of this, which could fulfill several goals aside from reinstating our lease to the equity. The reality is that owning real estate today is more costly than it was 2.5 years ago, which is a fact attributable to the market rather than any specific party. We aren't overly worried about it. For example, we took ownership of a property in Pittsburgh, which is primarily multifamily and newly built. There aren't any issues with this property. In fact, we are evaluating the possibility of approaching Freddie Mac at this time. However, the sponsor either lacked the financial resources or didn't believe it was worth their effort to continue supporting a core return on equity based on figures from 2.5 years ago. As I mentioned previously, most of the difficulties we are observing now are predominantly on the equity side. Sponsors are faced with the decision of whether to invest additional funds despite their initial return on equity recalculation not yielding the desired results, or to simply withdraw from the situation. Moreover, we take great pride in not categorizing defaults as losses until we genuinely have evidence that a loss has occurred. Currently, most of the challenges noted are significantly rooted in equity. Back in 2021, we began noticing highly leveraged properties being acquired at low cap rates. That's around the time when Ladder Capital transitioned to fixed-rate two-year loans, inclusive of various fees. This attracted a new range of properties exiting their construction loans. Consequently, we are now managing fixed-rate loans that are maturing and are performing well, which are also new. The borrower needs to determine how to refinance, pay down, or extend their loans. We're willing to assist them in this process, provided they are maintaining their performance. However, the return on equity calculations are not what they had anticipated. Currently, agency refinancing is situated in the mid-5% range, and there are preparations available, along with the option for the sponsor to sell the asset at the discussed debt yields, which we are also observing.
Pamela McCormack, President
The only thing I wanted to add is of our payoffs in this year 40% were in multifamily. So agree with your comment, but caveat that you're seeing sponsors defending, especially when it's not a widely syndicated asset, and they're invested in the asset. We are seeing them pay off and we are seeing them defend. And as Brian said, we're comfortable at our bases in any event, and I think some of this could actually lead to opportunity.
Jade Rahmani, Analyst
It probably will. Thanks very much.
Operator, Operator
Next question comes from Matthew Howlett with B. Riley Securities. Please go ahead.
Matthew Howlett, Analyst
Yeah. Hey, thanks for taking my question. Just to follow up on the theme around credit. And I look at the headlines every day on commercial real estate, bearish term like they're saying, a trillion in losses for the office sector, and I look at the fear and the stock prices, even the lenders. But your portfolio's holding up well. It's managing higher interest rates. You have taken very few properties back. What's the disconnect? I mean, Brian, you talked about the sponsors are going to still holding on for a while now. Do we really need to see rates just come down, cap rates come down for this to all work out or not see this crisis in defaults that some of the headlines are suggesting?
Brian Harris, CEO
I don't believe that's the case. What you're noticing, especially in the headlines, tends to focus on larger cities and media hubs. A significant amount of lending occurred in Washington, DC, and other major gateway cities, which are facing challenges beyond just high interest rates. There’s a work-from-home aspect to consider, along with an increase in crime and a wealth exodus from certain states. People are relocating from some Northeast cities to the Sunbelt due to tax reasons. These issues can be addressed; they’re not insurmountable, but the market is undergoing a reset, which will be difficult. The disconnect at Ladder relates to our portfolio of primarily smaller loans, though we do have a few large ones, including a couple over $100 million—two of which are in Miami or Aventura, which we believe is arguably the best office market in the U.S. We are cautious, and there's skepticism about large institutions returning properties, but ultimately, they are economic entities that are returning non-recourse loans. This will lead to a reset and stabilize at a new level. The positive aspect is that we are witnessing transactions in those buildings. If banks begin selling commercial real estate mortgages at substantial discounts, it will increase pressure as well. It's crucial to understand where the lending has occurred. Ladder does not compete in the most competitive markets against other lenders; we focus on flyover states and smaller populations. We always believed the pandemic would expand the workforce availability, allowing people to remain in places like St. Louis, Memphis, and Houston rather than relocating to Los Angeles or New York. That is a significant disconnect, if it exists. There's pressure across the board, but the work-from-home issue isn't a major change since many people were already working three to four days a week, and companies are shifting towards five days. The real issue lies in places like Washington, DC, where the federal government is still operating under emergency COVID protocols, leading employees to work from home. Starbucks and McDonald's are closing in certain cities, not due to an inherent problem with the city, but because people are staying home. This may also explain why the apartment market might be more resilient than expected. We believe the apartment situation isn't as dire as many assume. The true challenge arose when people financed properties with three caps when they probably should have considered six caps, which would normalize things much faster.
Matthew Howlett, Analyst
Absolutely. Brian, do you think what’s happening with New York Community Bancorp will lead to a crisis similar to 2008 or 2009? Do you see this as an opportunity for Ladder? Do you think that as these banks sell assets and step back from lending, it will create a reversal as more banks face challenges?
Brian Harris, CEO
I have an opinion on this, although I don't possess any insider information and I'm not entirely sure of the specifics. However, it's clear that something unusual is occurring. New York Community Bank was involved in the resolution of Signature Bank, which implies that the FDIC must have assessed their condition before allowing them to take on assets from Signature Bank. They must have been in good standing less than a year ago. So the question is, what changed? They do have substantial loans, and it has been mentioned that one problematic loan was a coop loan in New York, which I find hard to believe since coop loans typically don’t borrow much. When they do, it’s generally at low leverage. However, they do hold a significant number of rent-controlled loans, and likely some office loans that might be overly large for them. There's a disconnect here that I find difficult to understand. This situation seems different from what we saw with Signature Bank and Silicon Valley Bank, which had long-term assets that required marking down the entire portfolio if one was sold. It seems that they have some defaults, which I can't believe they were unaware of, but this appears to be unique to their situation. That said, lenders heavily vested in rent-controlled and rent-stabilized apartments may face challenges due to recent changes in those markets, though I don't think it will lead to their downfall. There will likely be some losses. Regarding opportunities, I'm uncertain. We've purchased loans from New York Community Bank previously, but not during this period. They have a solid reputation as a lender, and while Signature was a bit more aggressive, they were not bad at all. We wouldn’t shy away from buying loans from them if they were available, but I suspect they might be more inclined to sell office loans in New York, which could be less appealing for us.
Matthew Howlett, Analyst
Yeah, I know there was some packages, now, at least on the residential side and other stuff. Last question, you referenced the bond deal in the first half of this year. You've been masterful in how you've structured the balance sheet, or would you be talking about a CLO or non-secured deal? Just curious, would you want to go tip a little bit towards more floating rate debt? Or do you feel like, you got the way, you have it structured now the fixed-rate debt, you want to keep it exactly the way you've done it?
Brian Harris, CEO
I think my comment and view is personal that way. I don't see a new CLO deal going out until we start originating more loans. We have two out there right now. They're just coming off their managed period. So they'll start paying down soon. But as far as a new issue, that would be a fixed-rate unsecured hopefully longer than seven years, because we do have a 2029 outstanding, which will come due, and we'd like to always take out more term rather than inside of the longest security we've got. But given the liquidity situation we've got, we're frankly not going to borrow money unless it's cheap. And much to people who invest in mortgage REITs right now want to lend money because it's expensive. And so there's a little bit of a disconnect there. However, we did see some signs of life there. There was a mortgage REIT that did issue a $1 billion unsecured the other day, at pretty attractive term. What's that?
Matthew Howlett, Analyst
Over 7%? Correct. We're looking at the same one.
Brian Harris, CEO
Yes, that's correct. I believe the company's name was Mr. Cooper, and the spreads tightened about 50 from where they were previously. There has been a significant shortage of supply in that market, and I would like to pursue opportunities there by issuing more unsecured corporate debt. However, the recent increase in spreads and the issues surrounding New York Community Bank have likely put that on hold for a while. I do think that as we approach a more normalized yield curve and if the two-year yield decreases again, we may consider moving forward then. We need to ensure we can lend money at rates that exceed our borrowing costs.
Operator, Operator
I would now like to turn the call over to Brian Harris for closing remarks.
Brian Harris, CEO
Long year, difficult year, successful year at Ladder. Thank you to our investors, our employees, bondholders and we appreciate you staying with us. It was a stressful time. But we tend to do well in those periods of time. And we are very optimistic about the future here. We think that most of the difficulties are going to be ending around June or July and then things will be a lot better from there. And we're hoping to hit a point where all of our products are contributing to our earnings each quarter. So thank you all and we'll see at the end of the first quarter.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.