Ladder Capital Corp (LADR) Earnings Call Transcript

Good morning, and welcome to Ladder Capital Corp.'s Earnings Call for the Second Quarter of 2026. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended June 30, 2026. 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.

Good morning, and thank you for joining us today. Ladder had a strong second quarter with robust origination activity and continued earnings growth. We generated distributable earnings of $30.8 million or $0.24 per share with modest adjusted leverage of 2.3x. Ladder's business model is performing well, yet our stock still trades at a meaningful discount to book value, a value we feel confident in and one that has remained stable throughout the cycle. We have 3 levers that should help narrow that discount over time. Combined with a dividend yield of over 9%, closing that gap would put a total return potential above 30% from here. First, continued rotation to higher-yielding loans build earnings power. Our investment-grade balance sheet gives us the liquidity and financial flexibility to continue rotating capital into loans without compromising on credit and our stable book value reflects that discipline. Second, generating gains from sales across our multi-cylinder strategy from securities, real estate and conduit loans continues to be part of our playbook, and a source of earnings we don't think is fully reflected in our valuation today. And third, with our stock price currently trading below book value, every share we repurchase adds to book value per share, a lever we'll use opportunistically alongside loan growth. I'll explain how you're already seeing progress in each of these areas. Rotating into loans. Year-to-date, we have originated $1.2 billion in new loans with our loan portfolio growing 75% over the trailing 12 months. Balance sheet loans now make up approximately 50% of total assets, and we expect that share to continue to climb. 85% of our loan portfolio has been originated in the past 2 years at conservative loan to values on reset bases, resulting in recently underwritten loans, not a legacy book carried at peak cycle values. That rotation is showing up in the results. Our net interest margin has trended higher year-over-year as we rotated out of lower-yielding securities and replaced legacy loans with these new recently originated ones even as all-in rates on new originations have come down. In the second quarter, we made over $800 million of new investments, over $550 million in new loans at a weighted average yield of 7.2% and $333 million in AAA investment-grade rated securities at a weighted average yield of 5.15%. These investments are predominantly floating rate, while our liability structure is largely fixed rate. So higher rates from here should benefit earnings. Every dollar we rotate from securities yielding approximately 5% into floating rate first mortgages yielding over 7% picks up about 200 basis points of income on that capital, which would flow directly through to earnings. Notably, our second quarter loan originations included a $268 million loan for the acquisition of a Class A office and retail building in Midtown Manhattan, along with a $10 million or 6% equity co-investment in the property. The loan was made at a 62% loan to cost on a reset basis to a repeat borrower. Origination momentum has continued into the third quarter with an active pipeline of approximately $500 million of new loans under application and in closing. With payoffs expected to stay light through year-end, we expect net portfolio growth to build each quarter for the remainder of 2026. Overall, transaction volume across the market has picked up, broadening our opportunity set as a lender, and we continue to canvas for the best risk-adjusted returns. Our primary focus remains middle market income-producing collateral, mainly multifamily and industrial. On office, to be clear, we're not making a directional bet on the sector. But in select markets, we're finding compelling opportunities where leasing momentum has returned and basis has reset sharply. We favor cities with low prime rates and a return to in-person work, and we underwrite each of these loans on its own reset basis, not on a view of office broadly. Supplementing carry with gains. Gains from our multicylinder business strategy, security sales, real estate, and conduit can be lumpy from quarter-to-quarter, but they've been a consistent contributor to earnings by design since our founding. Because of that consistency, Ladder is better evaluated year-over-year rather than quarter-to-quarter, a distinction we believe gets lost in how our stock is valued today. Our $1.9 billion securities portfolio, representing 33% of total assets is predominantly AAA rated and has served as a primary source of capital as our loan origination activity accelerates. During the quarter, we reduced our securities portfolio with net sales producing $1.8 million in gains. As we continue to fund new loans, we expect the securities portfolio share of total assets to contract further with the pace driven by loan origination activity, not a retreat from securities as an asset class. Our $1 billion real estate portfolio generated $18 million of net operating income in the second quarter. We also realized a $1.7 million gain to distributable earnings tied to a $13 million distribution from a cash out refinancing of a joint venture equity investment we made in a Manhattan office property in 2024. Over the course of our ownership, property occupancy increased 52% to 94%, with NOI increasing over 200% from acquisition, another example of unlocking value above our cost basis in select assets. This is not unique to one property. Across our real estate portfolio, we carry several assets below the value we would expect to realize, and we anticipate capturing that value as we selectively monetize positions over time, though the timing of any given sale is never guaranteed. Overall, we realized approximately $4.1 million of gains this quarter across all 3 of our cylinders, $1.8 million from security sales, $1.7 million from our real estate equity and $600,000 from our conduit business. These gains are not always sizable individually, but this is our multicylinder business model working the way it's supposed to, earnings support that builds over the year rather than in any single quarter. Share repurchases. As Paul will discuss, we continue to repurchase stock at a discount to book value this quarter. Stock repurchases remain one of the more accretive uses of capital available to us today, increasing book value with every share repurchase at today's market price. In closing, we can't control our stock price, but we can control many of the inputs that help drive it. An investment-grade capital structure and rising higher quality earnings should attract a broader base of investors, including equity REIT holders, supporting the kind of stock performance that would move us towards that 30-plus percent total return, where shareholders have paid a yield of over 9% in the meantime. We've built a strong track record earning the confidence of a new core base of investment-grade bondholders. When we issued our inaugural investment-grade bond, we effectively refreshed our fixed income investor base, attracting high-quality institutional buyers who bought the latter story and drove our bond spreads materially tighter. Now we're turning that same attention and effort to the equity side. Over the second half of the year, we plan on taking our story directly to current and prospective shareholders, widening the audience and candidly, going to work on our stock. Looking ahead, our priorities remain unchanged: originate high-quality investments across loan securities, and real estate with a particular focus on our loan segment while maintaining the credit discipline that has always defined Ladder. Management and the Board remain Ladder's largest shareholder group, which keeps our incentive squarely aligned with yours, protecting principal, delivering an attractive return on equity and building long-term value for every shareholder alongside us. With that, I'll turn the call over to Paul.

Thank you, Pamela. Good morning. During the second quarter, Ladder generated distributable earnings of $30.8 million or $0.24 per share. Our investment-grade balance sheet continues to be in a position of strength, powering our multicylinder strategy. We maintain modest leverage and a highly resilient unsecured capital structure with unsecured debt representing 67% of our total debt at an attractive cost of capital. As of quarter end, our adjusted leverage ratio was 2.3x, and we maintained robust liquidity of $1.1 billion, including same-day capacity on our unsecured revolver and cash. During the second quarter, we fully drew down the $275 million unsecured term loan we closed in the first quarter, which is priced at 140 basis points over SOFR. Alongside this facility, our $1.25 billion unsecured corporate revolver continues to be a valuable asset, allowing for funding flexibility with same-day liquidity at SOFR plus 125 basis points, driving our ability to execute our capital deployment strategy. Our unencumbered asset pool represented 73% of total assets as of June 30. 85% of this pool is comprised of first mortgage loans, investment-grade securities and unrestricted cash. These highly liquid senior secured unencumbered assets do more than expand our liquidity. They provide a high-caliber asset base that directly supports our unsecured liability structure. Subsequent to quarter end, S&P revised their outlook on Ladder to positive, one step closer to investment grade and the second positive rating action S&P has taken on Ladder this year following their upgrade to BB+ in January. The action is reflective of Ladder's strengthening balance sheet and track record of disciplined leverage, sound credit management and durable predominantly unsecured funding profile. An upgrade to investment grade from S&P would bring Ladder's credit rating in line with Moody's and Fitch, where we are already investment grade. We'd like to thank the team at S&P for their diligence and partnership throughout this process, and we look forward to continuing to build on that relationship. As of June 30, Ladder's undepreciated book value per share was $13.44, which is net of $0.37 per share of CECL reserve established. In the second quarter, we repurchased $8 million of common stock or 800,000 shares at a weighted average share price of $10.03 per share or a 25% discount to book value. Year-to-date in 2026, we have repurchased $21 million of our common stock or 2.1 million shares at a weighted average share price of $10.10 per share. As of June 30, $92 million remains outstanding on our stock repurchase program. Overall, we continue to believe in our book value, and we will seek to continue to opportunistically utilize our buyback program while our stock is trading at a meaningful discount. In the second quarter, we declared a $0.23 per share dividend, which was paid on July 15, 2026. Over time, continued rotation of capital into our loan segment, along with the earnings power of our multi-cylinder strategy could be a tailwind to dividend coverage. Turning to credit quality. In the second quarter, we added 1 loan to nonaccrual status collateralized by an office asset in Minneapolis, Minnesota with a carrying value of $13.4 million. We anticipate resolution of this loan by the fourth quarter. As of June 30, our CECL reserve remained steady at $47 million or $0.37 per share. We continue to believe this reserve level is sufficient to cover potential losses across our loan portfolio. During the quarter, we resolved one loan through foreclosure, an $8 billion (sic) [ $8 million ] loan collateralized by an office property in Birmingham, Alabama that we now own at $30 per square foot. Our plan is to stabilize this asset and maximize value for a potential sale in the future. As of June 30, our securities portfolio totaled $1.9 billion with a weighted average yield of 5.19%. Notably, 99% of the portfolio was investment grade and 96% was AAA rated with a weighted average duration of approximately 3 years, underscoring its high credit quality and overall liquidity. As of quarter end, approximately 50% or $925 million of our securities portfolio remain unencumbered, complementing our $1.1 billion of same-day liquidity. We believe this combined firepower reinforces the strength of our balance sheet and positions Ladder to organically fund loan origination to drive future earnings growth. Our $1 billion Real Estate segment continued to generate stable net operating income in the second quarter. The portfolio includes 149 net lease properties comprised primarily of investment-grade credits committed to long-term leases with an average remaining lease term of 6.2 years. For further details of our second quarter 2026 operating results, please refer to our earnings supplement and our investor presentation, both available on our website as well as our quarterly report on Form 10-Q, which we expect to file in the coming days. With that, I'll let Brian take it from here.

Thanks, Paul. Given the quarter was more or less as expected, I won't focus too much on the numbers Paul and Pamela gave you other than to reinforce how our business plan is unfolding right on schedule. Our loan portfolio is continuing to show steady growth funded by our numerous options of unsecured liabilities and the sale and paydowns of unencumbered securities as we allocate more capital each quarter to higher-yielding products. We expect this rotational pattern into higher-yielding first mortgage loans to continue through year-end, and we expect to issue additional unsecured corporate debt to refinance our 4.25% bonds maturing in early 2027. I'd note that we don't have to issue more debt given our $1.25 billion undrawn corporate revolver, but we do expect to issue new debt over the next 6 months when an attractive window opens for issuance. We were pleased to hear that S&P had moved Ladder to positive outlook recently and hope that our next bond issuance will be rated investment grade by 3 rating agencies. We spent a lot of time and effort on our liability complex over the years and it's very rewarding to see benefits that come from our consistent and conservative approach towards liquidity, leverage and most importantly, credit. When the office sector began to alarm investors after the pandemic, we highlighted our top 5 exposures in an earnings call in the fourth quarter of 2022. At the time, our largest equity exposure to office were 2 similarly sized portfolios, one in Florida, one in Virginia, totaling $242 million. The Virginia portfolio has since been sold at our basis, and we anticipate selling the Florida portfolio above our current basis before year-end. We also had 3 mortgage loans secured by office properties, one in Alabama for $66 million, which has since paid off in full and 2 in Florida, totaling approximately $326 million. Of that, a $215 million mortgage on a Miami office building paid off in full in the second quarter of this year, and the remaining loan was paid down by approximately $30 million a while ago from $110 million to $80 million today, where we still carry it. We expect this loan to pay off by year-end also. In a sector that delivered huge losses in many companies we competed with, we now look reasonably likely to benefit from a full return of capital on our 5 largest office exposures as depicted 4 years ago. There are no guarantees this will go as planned, but is the base case scenario we are operating under. We seem to have fared better than most over this difficult time period, and this is why we have had lower charge-offs and have maintained a fairly steady book value for our share price. Our debt complex is now in place to safely support our growing asset base, and we are very pleased with the reception bond investors welcomed us with as we issued our first investment-grade corporate bond last summer. In short, they understood our conservative approach towards investing in commercial real estate, but now we have to turn our full attention to our stock price that seemingly reflects none of the differentiated features of our company. These features include, but are not limited to: 1. An internally managed structure; 2. Our middle market lending preferences; 3. Our conservative use of leverage; 4. Our access to many low-cost options to finance our businesses; 5. Our balanced approach to risk/reward relationships when allocating capital; 6. Our stable book value and attractive quarterly cash dividend; and 7. An ownership structure where management and the Board are among the largest shareholders of the company. We believe the equity markets incorrectly compare us to other commercial mortgage REITs based solely on what we own on the asset side of our balance sheet. It seems that common ownership of various commercial real estate-related products is where that analysis ends. We think there is much more to comparative analysis than similar asset types, and we will now work tirelessly to broaden our investor base to include investors who generally invest in lower-yielding investment-grade property REITs, regional banks and T-bills. We think our correct comp set should be chosen by how we finance our assets rather than by what assets we own. This is difficult, but let's remember that Ladder is the only investment-grade commercial mortgage REIT in the United States. So naturally, we will need to market our company to investors that have not seen anything quite like us in a very long time. We needed to get the liability side of Ladder squared away first, given how integral our differentiated financing methodology is to understanding the value of our shares over time. We are not looking to convert holders of non-investment-grade commercial mortgage REITs with tenuously high dividends into owning our stock instead. Rather, we are trying to convert holders of lower-yielding investment-grade property REITs into our 9-plus percent dividend yielding investment-grade company. We are also aiming to convert a small portion of record levels of cash and T-bills and money market funds into owning our nearly 3x higher yielding but still conservative commercial mortgage REIT that also happens to be the only investment-grade mortgage REIT in the country. We kick off this effort starting today, and I direct your attention to just one slide in our online investor presentation, Slide 5. This slide condenses my words into an easy-to-understand illustration, and I welcome comments regarding our approach to accessing investors who seek higher yields in a cash-heavy market with our one-of-a-kind vehicle. We can now take some questions.

[Operator Instructions] Our first question comes from Timothy D'Agostino with B. Riley.

Congrats on the quarter. It seems like the rotation from securities into loan portfolio picked up this quarter. And if I'm reading Slide 9 correctly, it seems like most of the securities sold came from 3- to 5-year duration. And so I guess thinking about as that rotation continues through year-end, like how do you go about selecting what securities to sell? Just trying to get a better understanding of why it might be longer duration. [Technical Difficulty]

[Operator Instructions]

Apologies for the disconnect, but we're back.

Yes, we can hear you.

Awesome. Yes. So it seems like the shift from securities to the loan portfolio picked up this quarter. And it seems, if I'm reading Slide 9 correctly, that most of that rotation came from longer duration securities in the 3 to 5 years. So I was just wondering, how do you think about the selection of what securities to sell as you rotate that capital?

Sure. We -- this is Brian, by the way. We generally just group them into what is the objective of the day. And if the objective is simply to fund a new loan that we're originating and we need the cash for it, we'll generally sell something that is paid down quite a bit with a low factor because we've owned it for several years. So the -- while it's quite safe, the instrument, it might be a 20% LTV across a pool of assets, it's going to pay off near term. So anything that looks like it's about to pay off is what we select first when we're just trying to generate cash to close loans. Sometimes when markets get -- especially when rates rise a little bit, spreads can tighten. And so we did see some attractive pricing, too. And everything we sold was a floater. So when you say longer duration, it's still kind of it's very hard to make a lot of money on a floating rate AAA because it just doesn't swing around a lot in price. But we were able to sell quite a few at a gain of about 0.5 point. And that added, I think, $1.8 million to the quarter. So the selection criteria is usually what's about to be cash first. Secondly, what are we up and maybe feel mispriced about that we might be selling at a high price. And then last, we've never gotten to that. But if we ever got to it, we would then start taking larger positions to generate capital quickly. But the beauty of that AAA sale complex is that you get your cash 24 hours later.

Okay. Great. And then I guess with that rotation, obviously, the 2 percentage points you pick up from 5% securities to 7% loans, I guess, could you help us quantify maybe the costs associated with that rotation just to get a better understanding of the process?

I may be misunderstanding the question, but there is no cost to it, to my knowledge. We simply sell the securities, get cash and then fund the loan. For instance, in April, I believe we got paid off on $215 million in the Miami office loan. And I think 2 days later, we made another loan for $268 million. So I don't know what kind of cost you're talking about. You mean breakage costs or hedge costs?

No, I was thinking more of like cost to originate that next loan. Obviously, you're picking up the 2%. But in the meantime, as you originate the loan and put that money to work, I was thinking how much does that cost you kind of maybe corporate overhead origination costs that might eat into it in that quarter?

Yes. Given we have that large revolver that has a same-day delivery on cash, we don't travel with a lot of cash overnight anymore. We also have such low leverage that the idea of a margin call would be pretty surprising, too, because half of the assets are unencumbered completely. But -- so the cost -- the opportunity cost, if you will, would be -- we take -- we come out of securities at 5%. We might stick it overnight into a money market fund at 3.75% and then whenever the loan closes. But we usually sell those securities in tandem with loans closing. We don't -- they're not random events. They take place together.

Our next question will hear from John Nicodemias with BTIG.

In the past, your team has cited concentration risk with respect to your origination decisions, including the origination year. Now that about -- if I have my numbers right, 37% of your loan book has been originated this year and 85% across 2025 and 2026. How is that average vintage setup affecting your deployment plans for the back half of the year?

In very rough numbers, we try to set the company up to originate $400 million to $500 million a quarter. We're not particularly concerned if we don't originate that much nor are we concerned if we originate twice as much. But -- so the we're not going to experience a lot of paydowns after now. Most of our legacy loan portfolio has paid off. So I think we were experiencing some large payoff quarters, which I'm sure you saw. And we were redeploying that capital and sometimes that took a little while, but we're past that point now. So I would say if we're going to fund additional loans, and we will and that 85% -- that 50% of the inventory will climb over time into the loan book. But when we do that, we'll probably either access the corporate revolver that is undrawn or else we'll just sell AAA securities. I think we have about $900 million of those with no leverage on them. So it's a 24-hour turnaround for cash. I don't know if I'm answering you right there, but I think the message is that paydowns are slowing down dramatically, but not because of the credit reason just because they got older, and they're hitting maturities.

Got it. No, that's very helpful, Brian. And then other one for me. During the last quarter's call, you discussed how much borrower appetite can quickly shift due to either a change in rates or macro volatility. With rates markedly up since then, volatility is still present, obviously, we've seen what's gone on the past couple of days. How have you been seeing borrowers react both late in the second quarter and now that we're into the third quarter here?

Yes. Well, higher rates will deter all but the most ardent borrowers that need to get something done. So I think the first thing you'll see with the higher rates is there's actually an initial push to close loans because those that are under application want to get them closed because they're afraid rates might move even higher. But after that, there's usually a gap and things slow down, and you'll see this in mortgage servicers and how the residential market works. But borrower appetite is very picky right now. So it is a rather competitive environment. And they are -- at least in our floating rate book, our spreads have been rising. So that sounds like I contradicted myself. But what we're doing now that we're getting more deployed and we have less headroom to go on our maximum asset base that will optimize over time. And so as of now, we've kind of stiffened on price and also on credit conditions. So whereas we might have been a little aggressively competing on any given multifamily loan a year ago, we're a lot less so now. We pretty much set our prices. And if borrowers want to close, they will. What we are seeing more of, though, and I don't think it has anything to do with interest rates is there's a lot of price discovery popping up as office buildings are being sold by lenders either who had foreclosed or else who are selling the notes at a deep discount in cooperation with the next buyer and the old borrower. So that's happening. But there seems to be this sense in the United States that the office market is recovering, and it is to some degree. But I would point out that it's really just 2 cities that are really doing well, and that's San Francisco and New York. There is -- I don't see any recovery whatsoever in Chicago or Los Angeles or Washington, D.C., where the government drives a lot of that business. So -- but you do see a lot of activity in those cities. And what's happening is lenders on legacy assets are throwing in the towel and they're finally they're just taking their medicine and taking the loss. So you'll see a lot of prints, but I don't want you to think there's a lot of borrowing going on there. There's -- it's usually very challenged assets that are going to take quite a while to stabilize. We're happy to do some of those with the right party who can execute their business plan. But when it's a refinance of somebody who is already having a problem and he's had a loan for 5 years, I would not expect much to change in the next couple of years with the same owner. So I think the long story there is the market is -- Ladder is getting fuller on its inventory. So Ladder is charging more for a smaller amount of liquidity remaining to redeploy.

And next, I'll move to Chris Muller with Citizens Capital.

Congrats on a solid quarter here. So I guess picking up on a prior line of questioning here. You guys have talked about pretty extensively being able to flip capital from the securities portfolio to the bridge portfolio. But bridge portfolio is up about $1 billion year-over-year and securities portfolio is pretty flat. So that gives you plenty of capacity to grow the bridge portfolio going forward. I guess how do you think that dynamic plays out in the back half of the year? Could we see the securities portfolio get down to like $1 billion-ish type number? Or is that too aggressive of a pace?