Earnings Call Transcript - LADR Q1 2024

Operator, Operator

Good morning, and welcome to Ladder Capital Corp's earnings call for the first quarter of 2024. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended March 31, 2024. Before the call begins, I'd like to call your attention to the customary Safe Harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and 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 performance for the first quarter of 2024. Ladder generated distributable earnings of $42.3 million or $0.33 per share, resulting in a 10.8% return on equity. As of March 31, $1.2 billion or 23% of our $5.3 billion balance sheet was comprised of cash and cash equivalents. During the first quarter, we increased liquidity to over $1.5 billion, up from $950 million last year. We reduced adjusted leverage to 1.5x, down from 1.8x a year ago. We received approximately $400 million of payoffs in our loan and securities portfolio, including the full payoff of 15 balance sheet loans totaling $320 million. These payoffs represent the highest dollar amount of payoffs received since the first quarter of 2022. Following the end of the quarter, another 5 loans totaling $111 million paid off, bringing Ladder's total loan payoffs over the last 12 months to over $1 billion across 48 loans. In February, we celebrated our 10th anniversary as a public company, and we are proud to note that we have not wavered from our commitment to our core objective, driving for the highest possible return on equity, while prioritizing principal preservation and employing modest leverage. This disciplined strategy, supported by our diversified capital structure, has supported Ladder with stability and flexibility across market fluctuations. At the end of the first quarter, our balance sheet loan portfolio totaled $2.8 billion with a weighted average yield of 9.42% and limited future funding commitments totaling $128 million. Our earnings for the first quarter included a $1.5 million or 3.7% gain from contributing approximately $40 million of fixed rate loans through a recent CMBS securitization and providing Ladder with 10-year nonrecourse financing on 5 triple net lease real estate assets. In addition, we've been pivoting back to offense. Our originators are actively quoting new investments, and we are pleased to be back in the process of closing new loans under application. Given the historically high returns on equity generated by Ladder's conduit business, we are looking forward to capitalizing on opportunities presented by a steepening or at least uninverted yield curve, which is when this business works best. As forecasted during our fourth quarter earnings call, we successfully concluded foreclosure proceedings on a newly renovated Class A multifamily portfolio in Los Angeles, California. The only assets consisting of 28 units at a basis of $14 million or $500,000 per unit. Since assuming ownership in February, we successfully completed all renovations, obtained a certificate of occupancy for the property, and commenced leasing. We expect to lease the property to stabilization by the fall. Also in the first quarter, we placed 2 multifamily loans totaling $72.8 million on nonaccrual. The first is a $60.8 million loan secured by a portfolio of recently constructed apartment buildings in Manhattan, New York. The loan defaulted after the mezzanine lender, who made a $13.2 million loan behind our position sold secured. Our current exposure for this loan stands at approximately $385,000 per unit. The second loan is a $12 million loan collateralized by a 56-unit multifamily portfolio in the San Fernando Valley of California. Our current exposure for this loan stands at approximately $215,000 per unit. A receiver has been appointed as we pursue foreclosure to take title to the assets and complete the business plan for renovations and lease-up at the market rent. As Paul will address in more detail, there were no specific impairments identified during the quarter. We modestly increased our general CECL reserve to align with our assessment of current market conditions. We continue to believe that we are adequately reserved for any potential losses. We've also stated in the past that we distinguish between a default and a loss. Ladder's senior management team and Board collectively own over 11% of the company, effectively making us Ladder's largest shareholder. In full alignment with our stakeholders, our goal is to protect our investments by promptly addressing default and seeking the best long-term value for the company. With a robust capitalization and extensive real estate experience, we remain well positioned to navigate challenges such as market downturn or asset depreciation, while executing the necessary business plans to optimize the property value. Regarding our securities and real estate portfolio, we ended the first quarter with a $467 million securities portfolio, primarily consisting of AAA securities, earning an unleveraged yield of 6.84%. Our $963 million real estate portfolio is mainly comprised of net lease properties with long-term leases to investment grade credit and contributed $14.4 million in net rental income in the first quarter. The strength of our balance sheet and stability of our dividend are consistently reflected in our credit ratings from all 3 rating agencies, with 2 of the agencies rating Ladder just 1 notch below investment grade. It is worth noting that Ladder's 2 longer-dated unsecured bond issuances, which totaled $1.24 billion and comprised approximately 1/3 of our total debt outstanding, have an average remaining tenor of 4 years and a weighted average coupon of 4.5%, a rate that is lower than the entire current U.S. Treasury curve. We remain committed to financing our operations through the corporate unsecured bond market and stand prepared to issue new unsecured bonds when we believe the cost of capital is favorable. In conclusion, armed with ample dry powder, conservative leverage and a well-covered dividend, we are primed to go on offense as 2024 unfolds. With that, I'll turn the call over to Paul.

Paul Miceli, CFO

Thank you, Pamela. In the first quarter of 2024, Ladder generated $42.3 million of distributable earnings or $0.33 of distributable EPS for a return on average equity of 10.8%. Earnings in the first quarter continued to be driven by strong net interest income from our loan and securities portfolios and stable net operating income from our real estate portfolio. Our balance sheet remains strong as the commercial real estate market continues to reset. As Pamela discussed, as of March 31, 2024, Ladder remains highly liquid with $1.2 billion of cash and cash equivalents or 23% of our balance sheet, as our cash position continues its increase since year-end. In addition, our $324 million unsecured revolver remains fully undrawn. The increase in cash was primarily driven by a healthy rate of loan payoffs in the first quarter, which totaled $357 million. Our loan portfolio totaled $2.8 billion as of quarter end across 100 balance sheet loans, representing 52% of our total assets. We did not record any specific impairments in the first quarter. However, we did increase our CECL reserve by $5.8 million, bringing our general reserve to $49 million or approximately 175 basis points of our loan portfolio. The increase was driven by the continued uncertainty in the state of the U.S. commercial real estate market and overall global market conditions. Our $963 million real estate segment continues to generate stable net operating income and includes 156 net leased properties, representing approximately 70% of the segment. Our net leased tenants are strong credits, primarily investment-grade rated and committed to long-term leases with an average remaining lease term of approximately 9 years. As we have historically demonstrated, we have a long track record at Ladder of maximizing the value of assets we own and operate. This skill set as a current owner and operator of real estate, combined with the strength and flexibility of our balance sheet, provide Ladder a solid foundation from which to successfully manage our owned real estate assets. As of March 31, the carrying value of our securities portfolio was $467 million. 99% of the portfolio was investment grade rated with 84% being AAA rated, and over 76% of the portfolio was unencumbered and readily financeable, finding an additional source of potential liquidity, complementing the $1.5 billion of same-day liquidity we had as of quarter end. Ladder's same day liquidity simply represents unrestricted cash and cash equivalents of over $1.2 billion, plus our undrawn unsecured corporate revolver capacity of $324 million. As discussed in our prior call, in the first quarter of 2024, we extended our corporate revolver with our 9 bank syndicate to a new 5-year turn amount to 2029. The facility carries an attractive interest rate of SOFR plus 250 basis points on an unsecured basis with potential rate reductions upon achievement of investment grade rating. We believe this enhancement demonstrates the strength of our capital structure as well as Ladder's long-standing relationship with these financial institutions. As of March 31, 2024, our adjusted leverage ratio is 1.5x and has continued to trend down as we delevered our balance sheet while producing steady earnings, strong dividend coverage and attractive double-digit return on equity in the first quarter of 2024. Unsecured corporate bonds remain the foundation of our capital structure with $1.6 billion outstanding or 43% of our total debt, a weighted average remaining maturity of nearly 4 years and an attractive fixed rate coupon of 4.7%. In the first quarter of 2024, we repurchased $2 million in principle of our unsecured bonds at 90% of par, generating $0.2 million of gains from the retirement of debt. As Pamela discussed, we remain committed to the corporate unsecured bond market as our primary source of financing. We're prepared to issue new unsecured bonds when we believe the cost of capital is favorable. As of March 31, our unencumbered asset pool stood at $3.0 billion or 57% of our balance sheet. 81% of this unencumbered asset pool is comprised of first mortgage loans, securities and unrestricted cash and cash equivalents. Our significant liquidity position and large pool of high-quality unencumbered assets continues to provide Ladder with strong financial flexibility. We believe this is reflected in our corporate credit ratings, which are 1 notch below investment grade from 2 of 3 rating agencies. Ladder's Undepreciated book value per share was $13.68 as of March 31, 2024, with 127.9 million shares outstanding. In the first quarter of 2024, we repurchased $647,000 of our common stock at a weighted average price of $10.78 per share. Subsequent to quarter end in April, Ladder's Board of Directors approved and increased the Ladder's share buyback authorization to $75 million. Finally, our dividend remains well covered. And in the first quarter, Ladder declared a $0.23 per share dividend, which was paid on April 15, 2024. For details on our first quarter 2024 operating results, please refer to our earnings supplement, 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. During the first quarter, Ladder continues to successfully navigate our business through the current credit cycle, accompanied by continuing tension in the Middle East, rising interest rates, persistent inflation and constant revision to predictions of what the Fed will do next. With regard to interest rate changes, we have not been significantly impacted due to the nature of our fixed rate liabilities that are termed out for years and our general low-leverage approach to managing our business. During the quarter, we were pleased to have reentered the loan securitization business, which we had been absent from for years. We are hopeful that we will continue to contribute loans to conduit deals in the quarters ahead, as this has historically been a high ROE business for us at Ladder. We also restarted our loan origination business, and we expect if market volatility and interest rates improved even marginally, our pace of loan closings should pick up in the quarters ahead. As 2024 began, in just the first 4 months, we've received loan payoffs or paydowns totaling $468 million with another $76 million in securities payoffs. We've received return of principal of approximately $544 million year-to-date. That pace of payoff in a rather low leverage company creates more liquidity at a time when new investments can be made at the highest interest rate in over a decade. Last week, the big banks reported that they were largely easing up on additional loan loss reserves because they believe that potential problems are limited and manageable. From Ladder's perspective, we generally feel the same way and believe we are adequately reserved for potential problems we foresee. While always cautious, we believe the lending market is thawing out and borrowers are beginning to accept that rates will simply be higher for a while, and they will need to plan accordingly as the year of free money seems to have come to an end. Armed with strong liquidity and a disciplined credit model, we look forward to the rest of 2024. We can now take some questions.

Operator, Operator

Our first question comes from Sarah Barcomb with BTIG.

Sarah Barcomb, Analyst

I was hoping we could dig into originations a little bit. It sounds like you're out in the market, looking at new deals. I was hoping you could talk about the deals that you're looking at? Any color on the asset cost or pricing? And could you maybe give us some of your expectations for volume just given acquisitions might not pick up to the extent that we were expecting maybe 6 months ago, especially coming off this inflation trend today. Just hoping you can give us some color there.

Brian Harris, CEO

Thanks, Sarah. This is Brian. I'll address the volume question but will defer to Adam Siper regarding the originations we're experiencing. We have noticed a slight increase in originations, although it was from a very low point of zero. We have a few loans in the application process and have been providing more quotes. However, many deals are falling through, largely due to the current trajectory of rates and the recent widening of spreads. I would characterize our volume as being relatively subdued for the year, although we are optimistic that this is more about Ladder’s specific situation rather than the overall market. If I had to provide an estimate, I would suggest around $400 million for securitizable instruments in 2024, but I want to emphasize that this estimate comes with a significant margin for error. Adam, would you like to share what you are observing? He is our Head of Originations and can provide further insights.

Adam Siper, Head of Originations

Sure. Thanks, Brian. So we are definitely seeing a little bit of a slowdown based on the recent rate uptick, but there are still loans that need to be refinanced, that are either maturing construction loans for new multifamily property. We also have a, I'd say, a handful of industrial acquisitions that we're still pursuing that tends to be off-market and tougher to reproduce those opportunities, but highly attractive when we do find them. But we're also still seeing a benefit from the bank pullback, which is contributing to both balance sheet loan opportunities and conduit opportunities. I think that will continue for the next 12 months. So like Brian said, cautiously optimistic.

Sarah Barcomb, Analyst

Okay. And maybe switching gears to the in-place portfolio. Also just keeping in mind the high inflation trend and the uptick in rates. What is your expectation to foreclose on more multifamily or maybe office assets later this year if rates stay where they are? And could you give us an update on recent sponsor decision-making in this environment? And maybe some debt yields on the multitenant assets where you could foreclose?

Brian Harris, CEO

Sure, Craig. Regarding debt yields in multifamily, I'll likely turn it over to you. However, on a macro level, I anticipate an increase in foreclosures. I've consistently stated that the latter half of 2021 and the first half of 2022 marked a challenging 12-month period for buyers. Typically, problems appear about two years later, as the first year tends to be financed and the second year often sees some success. I expect the situation to change by the end of the third quarter this year, largely due to the timing from late 2021 to early 2022. In the multifamily sector, we shifted to newer properties in late 2021. The older properties faced issues due to renovations in late 2021 and early 2022, which led to significant construction cost overruns, rising labor costs, as well as increased insurance and operating expenses. This created a compounded impact on the sector, resulting in noticeable setbacks. We believed that newer properties would mitigate these overruns and required just leasing, supported by a recent $80 million loan payoff this quarter on a new project in Ohio. However, it's important to acknowledge that interest rates have risen considerably. I am puzzled by the Fed's perspective on decreasing inflation, as I do not see it decreasing currently. Therefore, I expect rents to keep increasing, which should be beneficial. The insurance aspect of the multifamily segment remains particularly challenging. Nevertheless, having a robust cushion as a hybrid REIT, which incorporates both mortgages and properties, alleviates much of my concern. We quickly took ownership of a property in California, completed minor renovations on some units, obtained a certificate of occupancy, and have already leased about 50% of it. During this quarter, we placed a $60 million New York City apartment complex in default. This situation is unique as I have never seen a brand-new apartment building in New York handed back to a lender. We’re not there yet, but it indicates a trend. The two loans mentioned by Pamela include that $60 million one and another property valued around $12 million. We indeed have a mezzanine lender on the larger project, showing some restraint from Ladder, as the initial loan request was for a greater amount than what was offered. A $12 million mezzanine loan has essentially been eliminated, indicating potential equity losses. If we were to gain control of that property soon, the price would be under $400,000 per unit for a new building in Manhattan. That figure isn’t bad, especially since rents in Manhattan have consistently risen. Consequently, I’m not overly worried about foreclosures. As mentioned on past calls, a default does not equate to a loss. While we’ve increased our CECL reserves, we won’t disclose specifics as we don’t want to suggest we have capacity for repayment when the loans are due. The conversation here is more about broader market trends than our current observations. Whenever we issue a foreclosure notice, we receive inquiries from potential buyers, many of whom are the original sellers to the borrowers we lent to. Therefore, I anticipate a lot of changes in ownership toward the year's end, with quite a few properties potentially returned to lenders. Still, I believe cautious lenders will face relatively minor losses, with some deals potentially turning profitable due to acquisitions. Newer properties remain advantageous in the context of a housing shortage, which gives us confidence. Craig, you might have some insights on the debt yields for the assets we are reclaiming, so please share those details.

Craig Robertson, Analyst

Yes, sure, Brian. When we look at the overall portfolio, on our multi portfolio, at about 85% occupancy portfolio-wide we see debt yields in the high 5s to low 6s. We see that stabilizing in the mid-7s. As Pamela mentioned, we've taken a significant amount of payoffs over the past 12 months and over half of that has been in multifamily, which has been in that same low 6s debt yield in place when those payoffs occurred. So we feel very good about the debt yields we're seeing and the path to getting these assets stabilizing into that mid-7s debt yield territory.

Brian Harris, CEO

And Sarah, to wrap up my response to your question about borrower behavior, our observations indicate that it remains quite steady. Borrowers are generally unhappy with the interest rates. When there's a significant shift of 500 basis points from equity to lending, it understandably leads to dissatisfaction. However, most borrowers stand firm with their commitments. They are purchasing caps, and we prefer to have the actual cap in place rather than relying on guarantees, as it allows us to depend on a third party for payment security. We've seen some encouraging developments, particularly with our office portfolio. For instance, in California, a wealthy individual guaranteed a loan and provided the necessary reserves, thus easing concerns about ongoing payments. In Westchester, another sponsor sold a different property, paid us down partially as requested, and set aside a $17 million reserve, demonstrating their commitment to the asset. They may not be in the best mood, but they are still taking steps to protect their investments. Ultimately, if they have the resources, they will act. Many of the assets in default are simply due to the sponsors lacking further capital.

Operator, Operator

Our next question comes from the line of Stephen Laws with Raymond James.

Stephen Laws, Analyst

I guess, first off, congrats on your 10th anniversary that you mentioned Pamela. Seems like yesterday, we were all at a dinner just ahead of your IPO, but a nice milestone for you guys. You touched a lot on originations. I appreciate the color there. As I think back to kind of almost 10 years ago, you guys did some other things that we don't really see in the portfolio. You bought some attractive assets through distressed lenders. It seems like you may be getting some of those back from distressed lenders. But as you think about the amount of capital deployed, you have to deploy, if you thought about looking at buying existing loan pools at some discount or looking to buy hard real estate assets? Can you talk about any investment opportunities being outside of newly originated loans and securities investments?

Brian Harris, CEO

Sure. In our last call, someone asked me about my favorite investment, and I mentioned CLO AAAs because they are liquid, safe, and can be financed comfortably. As a company with low leverage, the financing aspect isn’t a significant concern for us. However, I'm noticing appealing equity opportunities arising, especially in properties being sold for much less than their purchase price just 2 or 3 years ago. The challenge lies in financing the purchase rather than the purchase itself. There’s a distinction based on whether the asset generates cash flow. If it doesn’t, it may not work well in a dividend-paying REIT, but if it does, particularly with longer-term leases, that's where we're focusing our efforts. Looking ahead, I anticipate that we might purchase a couple of office buildings, as some opportunities are attractive. While we aren't primarily operators of office buildings, we may collaborate with others in this endeavor. Overall, we find these prospects increasingly appealing compared to CLO AAAs and treasuries yielding 5.5%.

Stephen Laws, Analyst

You think that's a '24 event or do you think those opportunities really more early next year?

Brian Harris, CEO

I believe it will be in 2024. However, I don't expect a large number, but you might see one or two before the end of the year. We currently have a couple in consideration. We are not yet under contract for anything, but we are actively looking and exploring potential opportunities. So yes, I think we'll make some moves before the year concludes. However, I want to clarify that we do not have any contracts at this time.

Stephen Laws, Analyst

Sure. One other question, if I may. When you think about, obviously, a lot of liquidity, a lot of excess liquidity. Where do you want to operate? Hard to say normal in this world. But in normal times, what is the right amount of liquidity? When you think about returns available today as you deploy what you consider excess liquidity, how much earnings accretion can you or incremental earnings power can be generated once this money goes to work?

Brian Harris, CEO

If we have 1.5 times adjusted leverage, we could easily go up to 2.5 times. We prefer to operate our leverage between 2 and 3 times rather than at 1.5 times. Regarding how much liquidity is sufficient, the answer is more. We feel confident about our liquidity as interest rates rise and market conditions worsen. We have various options to generate earnings, such as buying back stock and managing our bond portfolio. We borrowed more on our bond maturities in 2027 and 2029 than we initially planned, expecting to handle $750 million maturing at once. This gives us several opportunities, and we assess this against payoff rates and market prices. I've noted before that if dividends and bond yields are similar, it's usually better to buy the bond since it will need to be purchased eventually. Currently, our bond yields are between 7% and 7.5%, whereas our dividend is in the high 8s. Therefore, we would likely prefer stock transactions at this time. While we have adequate capital, I must be cautious about stating how much excess liquidity we possess. We could easily convert our inventory and increase by another $1.5 billion, depending on whether we want leveraged or unlevered returns. We can quickly ramp up earnings, and while I expected to do this faster with securities, the pace of new originations hasn't met our expectations.

Operator, Operator

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

Jade Rahmani, Analyst

In terms of the current originations environment, could you give any color on your attitude today versus 1 quarter ago? I mean, clearly, the company is sitting on a very strong liquidity position early in the year at CREFC, everyone was super bullish about volumes picking up. Would you say there was not an opportunity to ramp up originations in the quarter? You passed on a lot of deals you didn't like or the market was too competitive? And how does that compare with where things are today?

Brian Harris, CEO

Sure. Yes, if you remember, Jade, back in January at CREFC, this is a world where people had decided that the Fed was going to cut rates 6 or 7 times. That is just 4 months ago. All of that has changed at this point. We never thought that. I wouldn't say that our attitude has changed at all. I think we'd like to originate more loans than we have originated, but that desire will not overwhelm our credit discipline. We have seen several quotes be accepted, transactions about to happen that fell apart. One of the things that has happened, especially in the near term, interest rates have moved very quickly higher in the part of the curve where most of the securitized exits take place. Some is just market conditions. It's very attractive right now. If you've got a 5.3% SOFR and you've got a 4.75% here, yes, then you can put on a lot of interest carry there. I hesitate to buy longer duration fixed rate instruments because you have to hedge them and with a flat interest rate curve, it's difficult to do that and make money. Our attitude is a bit, what I would say is, we thought was going to happen. I think we said we thought rates would go up. We don't think they're going much higher from here, but they could go a little higher, and volatility will continue throughout the year. Before talking about China or the U.S. economy, we'll probably be talking about a rally in rates because they're slowing down in the economies. If we talk about the lack of discipline in the fiscal side of the United States and their treasury, the way they borrow money, we'll probably be talking about higher rates. So I don't think it's going to just flat line between those 2. I think it will be down 1 day and up the next. When I got on the call here, I was looking at about 4.73, 10 year; that's probably the top of that for a little while and it will probably head back down. But I think we'll see it again before year-end. The desire is here. We think it's very hard to make a bad loan right now. There is just a real problem with demand here because the commercial real estate sector seems to be getting worse. We concur with that thinking, although we do think it is near the end and we think the worst has passed. Did that answer you or is it too vague?

Jade Rahmani, Analyst

I understand there's a mixed market and that you're acknowledging a challenge with borrower demand. It's difficult to finalize deals because lenders are not showing much interest. I'd like to ask you if you could expand on that.

Brian Harris, CEO

I'll give you further evidence of that. Yes, I mean, if you take a look at conduit deals now, I mean, in the last cycle, there were a couple of labels out there that would have 2 or 3 names, contributing into a deal. We now see conduit transactions with 10, 11, 12 originators, some of them with 1 loan in the pool. So that tells you all you really need to know about how you aggregate it. It's just not easy and that has nothing to do with Ladder. That has to do with conditions in the market. But when you see 12 originators get together and they allow 3 or 4 of them to contribute 1 loan, that is indicative of a lack of supply.

Jade Rahmani, Analyst

And putting on your fortune teller hat, do you think that Ladder will do more balance sheet originations than conduit? Is conduit going to be a small part of the business? Or do you see a big opportunity there?

Brian Harris, CEO

I think the balance sheet side of the business will be bigger than conduit, but not because we want it to be. I just think as long as the yield curve is inverted, and I think it stays that way for a bit longer, the conduit business will have its own set of challenges. However, if the yield curve gets steeper and the 2-year drops, and the 10-year rises, that's when that business will take off.

Jade Rahmani, Analyst

And then lastly, if I could squeeze another one in on the net lease portfolio. Just give your high-level thoughts on the portfolio. How are you feeling about that space and the outlook? There has been a little bit of pressure in the Dollar Tree retailer in particular. I know you all have Dollar Generals, but just tenant demand and what you see about the overall portfolio's lease duration?

Brian Harris, CEO

We have relatively long-term leases still. Paul, you can start looking at it. I don't remember it right now. But I know we've got quite a bit of time. We have always been cautious around Dollar stores in certain places where we felt like the Dollar store model originally, I think, coming out of Family Dollar, is like a single employee in sometimes tough parts of town. There was a certain amount of slippage, theft, if you will, that was accepted. However, in our Dollar General portfolio, that is a curated portfolio largely in rural areas around lakes and fishing areas, where there is wide geography and not tons of supermarkets around. We see a lot of sales of tobacco products and beer and very little theft. I just looked at 3 about our Dollar Generals in Florida, and all 3 of them recently extended their leases for 5 years. I wouldn't call them a totally rural area, but I certainly wouldn't call them inner city either. So we've been very cautious around that. And when we bought our Dollar Generals, we tended to buy about 2 out of every 10 we looked at. We think that, that selection criteria will protect us through this. We do worry about some inner-city retail. There are clearly a few problems in the drugstore chain area, but they are big companies that can probably make adjustments and figure out a way to get through it. Amazon, for instance, just figured out how much the top 20 items are that CVS sells. They just went at it that way. But I suspect CVS will now open up a warehouse with those 20 items in it and deliver it to your home just as fast. So I'm going to let them fight and not get overly concerned about it. But I don't really feel like we've got too much trouble as far as the obsolescence part of this goes. We stuck to drugstores, supermarkets and a couple of Dollar stores. By and large, they're doing very well.

Operator, Operator

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

Steven Delaney, Analyst

Congrats on a strong start to 2024. Great to hear about the conduit business. I just want to circle that up a little bit. Pamela, did you mention that the gain on sale on that $1.5 million loan was about 370 basis points?

Brian Harris, CEO

Yes. She is on mute. And yes, it is 3.6%, and it was on 40, I think $41 million. Pamela are you there?

Steven Delaney, Analyst

I apologize, $41 million of loan, $1.5 million gain. Got it. Got it. And how $400 million, obviously, a big number. I know historically, this has been your highest ROE business segment. Can you give us some sense of how that might ramp between the first half of this year and the back half just in terms of very rough numbers? Just trying to get a sense of how that might step up over the next 3 quarters of the year.

Brian Harris, CEO

It's currently a slow period. As we approach May, I need to adjust our expectations for the latter part of the year. This slowdown is influenced by external factors that are beyond our control. If you had asked me a month and a half ago, I would have predicted an aggressive next quarter. However, the recent rise in interest rates has impacted our new origination pipeline, leading people to hesitate as they speculate whether rates will revert to where they were two months ago. There's often a brief pause during such transitions, and we are experiencing that pause now. Nevertheless, there is significant demand in the conduit business, provided we can generate the necessary collateral and bonds. While interest rates are high and spreads are somewhat narrow, it remains a favorable time to be in the business. However, we are struggling to meet the raw material demands.

Steven Delaney, Analyst

Thank you for clarifying that your goals for the year are heavily weighted towards the end, so we will be cautious about that. A lot has already been discussed, so I won’t go into detail, but I want to take a moment to look at the bigger picture. I appreciate the stock buyback and the adjustments made. Regarding the dividend, I understand we are emerging from a challenging period, and it may be too soon to consider shifting from a defense to an offense strategy or decreasing your cash reserves. However, I’d like to know what it would take for management and the Board to feel comfortable regarding the dividend. Your last increase was in late 2022. What indicators would you need to see as this year progresses or into next year to ensure good dividend coverage based on this quarter's earnings? Can you specify one or two factors that would give you the confidence to raise the dividend?

Brian Harris, CEO

We talk about this frequently, and there is a lot of conversation regarding the possibility of increasing our dividend, while sentiment suggests we should overlook external factors. The truth is, to feel more secure, we require a broader context in the stock market. Most market gains recently have been driven by multiple expansions despite declining earnings. It's evident that a few stocks are leading this trend, which doesn’t seem like a stable situation. As interest rates keep rising, our high and secure dividend is backed by ample cash and low leverage. Given our significant insider ownership, we have strong motivation to increase the dividend if it appears beneficial. At this moment, we believe we can achieve earnings far exceeding our dividend, which should ideally lead to a higher stock price. However, due to existing market volatility, unexpected opportunities can arise without warning. There are numerous strategies available for us to enhance earnings. Still, the main factor that would likely reassure us is to wake up one day not hearing about real estate. The media's extensive focus on commercial real estate, repeating the same narratives, creates the impression that we may be nearing the bottom. I was advised long ago that when you can no longer hear anything negative about a situation, you might be at the bottom. I believe we are at that point now. I’m not against raising our dividend at this time. It wouldn’t be challenging to manage, especially with our cash reserves. However, I would prefer to allocate our cash towards sustainable investment opportunities rather than just for dividend support.

Steven Delaney, Analyst

Yes, it's challenging to drive progress. If you increase the dividend, you would hope the stock market responds positively. However, the current sentiment in the market towards real estate might not guarantee that response.

Operator, Operator

Our final question this morning comes from the line of Matt Howlett with B. Riley Securities.

Matthew Howlett, Analyst

It's just a quick one, Brian. I mean, I thought it's a pretty bold statement just to go on and say we think the commercial real estate cycles at a bottom or the worst is over. I think some of the banks have said that. But if that's my question to you, how should we model this general CECL reserve? I know it's not part of distributable, but people do look at it. We look at it every quarter. If there are onerous assumptions in it today, moving forward, if the worst is over, is that going to come down, if we look at basically what you have in place as being maybe released at some point?

Brian Harris, CEO

I think, as I mentioned, the situation in commercial real estate indicates that while we believe conditions are still deteriorating, they are doing so at a slower rate. Most of the issues in commercial real estate are already known to those who hold loans. We feel that we have a clearer understanding of potential problems. However, factors like government actions, global events, and technological changes can shift the landscape quickly. The absence of regional banks in the refinancing market presents significant opportunities when we feel confident that real estate values are stabilizing. Regarding our CECL reserve, I suspect we may need to increase it slightly next quarter, but likely not by another $7 million. The outcome depends on future developments. The impact of receiving $500 million in principal payments is significant. While we can discuss the performance of the office sector or our loan portfolio, the importance of $500 million in payoffs is undeniable. This also enhances our liquidity in a company that is 1.5 times leveraged. I don't want to downplay it, but it's a good position to be in. Previously, we held substantial cash with each payoff; now we see returns close to 5.5%, comparable to AAA CLO yields at 7%. These conditions are relatively favorable for investors with liquidity, and I expect that trend to continue. When it comes to commercial real estate, as long as properties are being sold for a fraction of their values from three years ago, we haven't reached a true bottom yet. However, much of the real estate landscape is not experiencing this extreme, despite what media coverage suggests. It seems like a typical real estate cycle to me, albeit exacerbated by ten years of zero interest rates. We have time to build up leverage, but nothing matches the levels seen in late 2021 and early 2022. Looking beyond 2024, new property production is limited after 2022, which will naturally slow the market. Those retaining their assets will do so, while others may lose theirs. There's considerable strain in the mezzanine and multifamily sectors, where investors bought at tight cap rates but are now facing high expenses despite increased rents. We're not predicting a bottom; I’m simply noting that I’m no longer surprised by market developments. Seeing someone set aside large reserves or sell a property at a greatly reduced price is becoming more common. With SOFR at 5.3% and needing to purchase a cap, costs are rising, prompting some to reassess their investment strategies.

Matthew Howlett, Analyst

Well, certainly your Ladder is certainly in an enviable position with all the excess capital. I appreciate all the color and congrats on a really good quarter.

Operator, Operator

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Harris for any final comments.

Brian Harris, CEO

Just thank you for paying attention to us today. I know it's a difficult day in the market and getting a lot of mixed signals. But we feel pretty comfortable and we appreciate you taking the time to understand us. Thank you.

Operator, Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.