Good afternoon, and welcome to Ladder Capital Corp's earnings call for the Q of 2022. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended 30 June 2022. 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. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.
Thank you, and good evening, everyone. For the Q2 of 2022, Ladder generated distributable earnings of $43.7 million, or $0.34 per share. In June, following five successive quarters of earnings and portfolio growth, we increased our quarterly dividend by 10% to $0.22 per share. Rising rates continue to provide a strong tailwind to our earnings, given our $4 billion predominantly floating rate loan portfolio and large component of long-term fixed rate unsecured bonds in our liability structure.
As Paul will discuss in more detail, our earnings in the quarter were again supplemented by real estate sales, with our assets continuing to sell at a significant premium to undepreciated book value. In the Q2 , we originated $371 million of loans, including 17 balance sheet loans totaling $365 million. More than 40% of those loans were made to repeat Ladder borrowers.
77% of our Q2 originations were either multifamily or manufactured housing, with our multifamily originations focused on newly constructed properties. Our balance sheet loan portfolio continues to be primarily comprised of lightly transitional middle market loans with a weighted average loan to value of 68%.
Due to the significant loan payoffs we received and our recent focus on newly built multifamily assets, our hotel and retail concentration in the balance sheet loan portfolio ended the quarter at 5% and 6% respectively. Further, in July, we received an early repayment of our largest hotel loan of $57 million, reducing our hotel exposure to less than 4%. Our real estate portfolio continues to contribute meaningfully to distributable earnings by consistently producing double-digit returns on equity.
The portfolio is primarily comprised of net leased properties with an investment-grade tenant and is financed with long-term non-mark-to-market debt. Our securities portfolio ended the quarter with a balance of $617 million. On the asset and liability front, our balance sheet has never been stronger. The credit quality of our portfolio is very solid, and 84% of our capital structure is comprised of equity, unsecured bonds and non-recourse, non-mark-to-market debt.
Approximately 50% of our assets are unencumbered, with 76% of those assets being comprised of cash and readily financiable senior secured first mortgage loans. Also in July, and despite volatile market conditions and tightening credit standards, we successfully extended, upsized, and reduced the cost of our revolving credit facility with our 9-bank syndicate, which now stands at $324 million.
With $2.9 billion of unencumbered assets, strong liquidity, a low 1.8 x adjusted leverage ratio, and 80% of our loan book now comprised of post-COVID originations, we are well positioned to continue to grow earnings by taking advantage of attractive opportunities in our space. In conclusion, our multi-cylindered business model is working, and we are very pleased with our positioning from a credit, earnings, and dividend perspective as we head into the second half of the year with the wind at our back in a rising interest rate environment. With that, I'll turn the call over to Paul.
Thank you, Pamela. As discussed in the Q2 , Ladder generated distributable earnings of $43.7 million or $0.34 per share. Our three segments continued to perform well during the Q2 . Our $4 billion balance sheet loan portfolio is primarily floating rate and diverse in terms of collateral and geography. During the Q2 , loan origination activity outpaced payoffs as we added a net $151 million in balance sheet loans.
As Pamela discussed, approximately 80% of our balance sheet loan portfolio was originated in the last 15 months with floors set at the time of origination. Therefore, our interest income continues to rise from increases in rates. This benefit is complemented by our liability structure, of which over 50% is fixed rate, including $1.6 billion of unsecured corporate bonds, with our nearest maturity in October 2025.
Q2 also included a $3.1 million reversal of previously recognized provision upon the successful resolution of a non-accrual office loan in Delaware. Our $1 billion real estate portfolio also continues to perform well and includes 158 net lease properties, representing approximately 2/3 of the segment. Our net lease tenants are strong credits, primarily investment grade rated, that are committed to long-term leases with an average remaining lease term of 10 years.
During the Q2 , we sold two properties, a multifamily property in Florida and a student housing property in Oklahoma, which produced a net gain of $15 million and were sold at an aggregate 30% premium to undepreciated book value. Turning to our securities portfolio, as of 30 June , our $617 million portfolio was 85% AAA rated, 98% investment grade rated, with a weighted average duration of approximately one year.
Moving to the right side of our balance sheet, our capital structure remains anchored by a conservative combination of unsecured corporate bonds, non-recourse CLOs and mortgage debt, with a corporate credit rating one notch away from investment grade from two of the three rating agencies. As of 30 June we had total liquidity of $483 million, and our adjusted leverage ratio stood at 1.8x.
As Pamela mentioned, in July, we successfully extended, upsized, and reduced the cost of our revolving credit facility. The facility was extended for five years to July 2027, upsized 22% from $266 to 324 million. Furthermore, the interest rate was reduced to SOFR plus 250 basis points, with further reductions upon achievement of investment grade ratings.
This upsize of our revolver adds an additional tool to our financial flexibility that complements our large pool of unencumbered assets. As of 30 June , our unencumbered asset pool stood at $2.9 billion, and 76% of the pool was comprised of first mortgage loans and cash. During the quarter, we repurchased $6 million of our unsecured corporate bonds at an average price of 88.6% of par.
Also during the Q2 , we repurchased 400,000 shares of our common stock at a weighted average price of $10.11. In July, our board of directors increased the authorization level for our share buyback program to $50 million. Our undepreciated book value per share was $13.57 at quarter end, while GAAP book value per share was $11.84 based on $126.8 million shares outstanding from 30 June .
Finally, as Pamela discussed, in the Q2 , we declared a $0.22 per share dividend, representing an increase of 10%, which was paid on 15 July . For more details on our Q2 operating results, please refer to our earnings supplements, which is available on our website, as well as our 10-Q, which we expect to file tomorrow. With that, I will now turn the call over to Brian.
Thank you, Paul. The Q2 was a continuation of what we've seen over the last five quarters. We produced strong earnings from different parts of our multi-cylinder business model and benefited from our carefully constructed capital structure after correctly forecasting the Federal Reserve's hawkish plans to battle soaring inflation.
In our last call, we indicated that we felt the Fed would have little choice but to raise rates into a slowing economy, and that Ladder would benefit from aggressive rate hikes. So far this year, the Fed has increased the federal funds rate by 225 basis points and is likely to continue to hike rates through year-end. Because our earnings are positively correlated to rising short-term rates, we're experiencing a tailwind in our distributable earnings. I'd like to point out one item that illustrates one component of our earnings momentum.
Over the last 12 months, our top line interest income has increased to $65.3 million in the Q2 of 2022 from $37.6 million in the Q2 of 2021. However, our interest expense actually has fallen over the same period from $45.2 million in 2021 to $42.7 million in the Q2 of 2022.
This kind of operational efficiency is helping to drive our earnings, and we are very pleased to report an after-tax annualized return on average equity of 11.3% in a very volatile Q2 . We expect the bulk of our earnings in the Q3 and Q4 to come from growing net interest margin from our loan and securities portfolio and net operating income from our real estate portfolio.
Our highly curated real estate holdings are expected to continue to deliver strong returns in the years ahead, and as cap rates rise, we expect to add to our real estate holdings over the next couple of years. For the second half of the year, we expect the market volatility to continue as the market wrestles with the inflation versus recession question that central bankers are trying to manage.
As the Fed has raised rates and slowed the U.S. economy, they've also strengthened the U.S. dollar, making earnings more difficult for multinational companies. Ladder does not own any financial investments outside of the United States, so we don't need to manage any exchange rates.
As we look to the Q3 and Q4 , we have Ladder on very firm footing with plenty of liquidity to deploy into a wide array of investment opportunities that invariably present themselves after a rapid rise in interest rates like we've experienced this year. We intend to take full advantage of market dislocations and feel very optimistic about our earnings in the quarters ahead. As the Fed cools the U.S. economy, our decades of experience will guide us in our lending efforts, staying focused on job one. Always protect the principal column. I'll now go to Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate the line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Steven DeLaney with JMP Securities. Please proceed.
On the great quarter and the progress on the balance sheet. As always, I think it's important that we look at your earnings and try to at least identify the gain revenue because clients will always ask us that. It's great that you have it. The $0.34, it looks like there were gains on real estate of about $0.12, so let's call it down to $0.22. Then you had some loss on your investment securities i t looked like about $0.02. Something in the $0.24 to 0.25 P aul, would something in the $0.24 to 0.25, if we were to look at your earnings ex gains, is that a number that you feel is reasonable?
We didn't have any losses on securities this quarter i think you might be looking at
Oh.
Our mark to market on our loans held for sale t hat really should be looked at, offset by our hedging gains.
You're absolutely right. It was the sale of loans. It's not your securities.
There's some SG&A to be netted off those numbers.
Got it.
We did have a reversal of a provision when we resolved the non-accrual loan at a gain effectively. I think you're in the ballpark, Steve DeLaney, maybe slightly lower on the run rate.
Okay. Well, that's very helpful. Thank you. We'll try to clarify that in a note. Then I guess, Brian, this thing cuts both ways on the interplay between interest rates and cap rates. I'm curious w ell, obviously, you mentioned on your real estate side, and you're obviously still, you know, finding some gains, and your timing may have been earlier in the quarter before everything blew out as it has. But it sounds like you still think you will realize some o n the other hand, you may be opportunistic and if things get really crazy with cap rates and buy more.
On your loan portfolio, are you starting to see any signs that borrowers who have projects that are completed, reasonably completed and could be considering an investment sale process are just deciding to extend their loan with you and ride this out? I guess the question is there. Could there be less turnover in your portfolio, which I would think would be something of a benefit on really good, almost fully developed properties?
Yeah. See, we're not running into too many extensions right now because about 80% of the portfolio is new. If you remember, it's probably.
Got it. Yes.
We just started in the Q2 of 2021. We're not even near the first maturity date on 80% of the portfolio. That said, I can speak generally, and I think what's going on right now is, you know, properties that were purchased a long time ago, in particular apartment buildings y ou know those rent increases have been attractive enough that they're keeping everybody in the game. Regardless of rates, it probably doesn't matter.
What has got into trouble are the guys who bought the 3% and 4% caps in the last 12 months and anticipating they were gonna have a period of rehab and maybe a Class C going to a Class B apartment building and raising rent, you know, 30% to 40%.
I think that portion of the population, when you throw in gas and, yeah, just generalization around food and shelter i think there's a limit to how far you can push those rents. I don't think rents are having a problem. I do think some of the equity numbers are not penciling out on recent purchases where people were paying up.
What really happened is when the Fed lowered rates effectively for 10 years, financial assets inflated. It's important to realize that what you're witnessing right now, when you said everything blew up, all you're seeing is the Fed trying to slow down the economy and the economy is slowing down. It's the opposite of them lowering rates and creating all kinds of liquidity and puffing up financial assets n ow you're seeing the opposite.
This feels very much like a constructive situation i t doesn't feel like, you know, no one can fix it t his feels like exactly what they want to happen. Housing prices were getting a little crazy. If they really want us, if it's going too slow for them or if the pace of decline in the economy is too fast, they can easily, you know, slow things down and sell less mortgage-backed securities and do lots of other things. I think we're in a healthy economy t his should be a shallow recession, and it feels very much under control at this point.
I think, no question. They waited too long. Since they've acted aggressively, the 10-year has come down 80-some basis points from a top of 3.50 on 14 June to where we are today at 2.67. You got to give the Fed some props for that. Thank you and good comments, Brian.
Steve, you know what I would just add also, I know, you know, we talked about how credit spreads got really wide, especially in the CLO business. I think that was a function of a technical, and I think we've talked about this, where the two-year was just galloping higher and LIBOR wasn't moving. I know at the end of today, the two-year is at 2.86 and three-month LIBOR is at 78. All those spread widenings I think that you saw, which-
Yeah.
They were done for technical reasons, there was spread too far below the two-year. I think you're gonna see a sharp reversal and a tightening in spreads here.
That's awesome color. I think everybody will appreciate that. Thank you, Brian.
Sure.
Our next question is from Jade Rahmani with KBW. Please proceed.
Thanks very much. Brian, where are you seeing the best relative value? You noted that as cap rates increase, you think Ladder would be looking to buy more real estate. In the past, you've also bought back bonds, and I think that some of the mortgage REIT bonds might be attractive. Where would you look to incrementally allocate capital?
It is a target rich environment right now. It is hard to find things that are not very attractive at this point, because a lot of the steam has been taken out of some of the prices. I'll go in order i think like in the short term, when we purchased some of those bonds, we had some corporate bonds outstanding. The short bond that's due in 2025 for us, we were purchasing that between sort of $91 and $92. The 2027 was around $82, and the 2029 was actually around $78. There was an Apollo 2029 trading in the low $70s at one point.
These weren't trading at those discounts because anybody thinks that the companies are having a problem t hat's just where Double B are trading with eight years of duration or seven or eight years left on them w e see a little advantage of that h owever, the yields that we were looking at on all three of those were really around 8% to 9%.
As I said, we had an 11.3% return this year on assets in the quarter rather. We're not having any trouble hitting a double-digit number across the board. I think in the short term, one of the easiest places to add will be in the static CLO portfolios of Class A bonds because they, you know what the collateral is i t's not gonna change.
I think we saw one last week where a complete multifamily deal traded, the AAA's priced at 275 over LIBOR. With a WAM of up to 275. That levers to about a 24% return, and it is 90% levered if you, but you can lower that if you feel like it. In those deals is about 85% levered.
It's clearly an attractive buy. The other one that I liked in particular, we've been trying to find them, we have found a few lately, are the A-S bonds from 2019, because they have the Class A in front of them paying off, otherwise there's very little left. In some of those cases, the subordination level is in the 70%. They're effectively insulated from credit losses.
They're still underloved because they have office buildings and a few hotels and some industrial properties. We're looking for those, and we really like them. In the long term, I would say the stretch senior business is going to come back, meaning a lot of the deals that are getting done today are 65% to 70% leverage i t's just the right thing to do when you've got declining rents or any form of liquidity disruption.
You know, I think that when they come up with the refi or another little hidden landmine in a lot of these deals is the LIBOR cap. LIBOR caps are very. A lot of them, LIBOR moves so fast that a lot of the caps from 2020 are at 1.5%. If they come up for an extension and LIBOR is at 3% when they have to buy 1.5% cap, these get extraordinarily expensive.
I think that there's gonna be opportunities there. We actually had a situation where we sold one of our properties and the cap that we had put in place just a year earlier was worth 20% of the gain that we took when we unwound the contract. It's a little wonky, but there are plenty of opportunities out there. I think, unfortunately, I think the least attractive one is the actual loan origination process. I think that's gonna correct itself very quickly because I do think these. I don't think you're gonna see Class A on CLO deals at 275 anymore. I think that's gonna stamp in pretty hard.
Putting that in context with respect to Ladder, should we expect the company to be buying more securities? Should we expect the company to slow originations, you know, pivot that way? What do you think this bodes for Ladder's plans for the rest of the year?
Well, I think we did slow origination a little bit inadvertently w e didn't do it on purpose w hat happened was rates moved up so quickly that some transactions just fell out because, you know, the yields were falling apart on the equity side. Others did get to the finish lines, but they still had slightly lower prices.
No, I think we're gonna pick up in our origination because we believe spreads are going to tighten in the CLO space. Yeah, so we're pretty comfortable with what's gonna happen w e're gonna move our spreads in on origination. As far as securities go, I would love to add a lot of securities where they've been pricing in the last few months, but I don't think we're gonna be able to. We might get $100 million or $200 million, but I don't think we're gonna be able to buy, you know, a large amount of AAA bonds that are yielding 21%.
Okay. In terms of the real estate portfolio, do you anticipate continued sales for the rest of this year or steady state? What's realistic to expect?
Well, things are for sale at Ladder often, if people wanna buy something a gain, it's the 1031 market sometimes drives pricing. We felt that cap rates were quite low and interest rates were very low, so we put our portfolio in places, especially in some of the high dollars per foot assets that we own.
The way we look at, we want, we like cap rates wider when we're acquiring, but we also have to have an accompanying low interest rate in order to create the right spread to lever the return. I think we will be adding because I think cap rates are just going higher.
I don't know whether that has to do, I don't know if i, If the stretch senior is a lot of people are writing 65% loans, and we will too, but if you wanna write a 75% loan, you know, we could do a 65% senior and a 10% mezz and just push it together into a first mortgage. I think we've got that kind of flexibility. I think that's another really good opportunity. It's not for everybody, but it's gonna be, you know, on the best credit sectors we'll do that.
In terms of credit across the portfolio, and a looming, you know, potential or probable recession, what's been the company's approach? Are you buckling down in terms of asset management, making sure that credits across the portfolio look good? How do you feel about the credit standpoint?
I think, you know, the credit's in great shape right now, and I think you have to go back 18 months to see, like how we got there. We had originated some loans that were not in the multifamily area because we thought they were very attractive and nobody was, you know, making those loans. We got most of those into two CLOs that we did last year.
Those are financed, you know, for a long time i t's match funded in that regard. Around November, we felt that multifamily was, you know, a lot of people thought that spread widening was a year-end phenomenon w e did not believe that. We moved to focus on new apartment buildings that were coming off construction loans, and we would take the lease up risk.
I would tell you, if you'd asked me this question in March, I would have told you that the two property types I'm pretty comfortable with are apartments because housing prices, you know, the whole daisy chain h ousing prices got crazy, so people couldn't have the down payments to purchase or loan a property at a newer price.
What happened is they stayed in their apartments. Then you have the two graduating classes of college kids because before nobody moved in because of the pandemic. This year they all graduated y ou had a lot of demand going on. Then people who sold their homes because they were fearing such high prices, they also moved into apartments.
The apartment market is and was and is very, very attractive. Rents will go higher. I think at the lower end of apartments, it's gonna be harder because the income is being zapped by gasoline prices, food prices and rent.
On the higher end, though, I think there's a lot of room where people can afford those things e ven in the senior housing area, the cost of living adjustment is gonna be very high this year. Most of those cost of living adjustments are Social Security gonna be passed through to rent, I think. You know, how are we preparing for it? We started preparing for it last November when we moved to newer multifamily. Today, we see less proceeds because rates are higher.
But we're very comfortable a s Pamela mentioned, we had three payoffs in the end of the quarter and in the first week of July, where we had a modified hotel loan for $57 million, and that paid off a year early. It was not levered.
We had a Delaware office building, which had been, you know, a defaulted loan that we had been managing, and we wound up reversing $3.5 million there. In addition to that, we got a payoff on a mall, which was up to $8 million. That was also unlevered w e took in $112 million in cash over a couple of weeks. While that hurts a little bit on your P&L, we think it's readily replaceable because we haven't on those assets.
Thank you.
Yep.
Our next question is from Ricardo Chinchilla with Deutsche Bank. Please proceed.
Hey, guys. Thanks for taking the question. I was wondering if you could comment on, you know, how you feel your liquidity position is for a recession at this point in time. You know, try to compare your position and your strategy towards this next recession versus the prior recession. Maybe, you know, what policies have you implemented to be prepared or what lessons did you learn from the last recession that you are thinking about, you know, applying into this next recession, particularly when looking for opportunities where to, you know, make incremental gains.
If you don't mind, can you tell me the last recession you're talking about?
The big recession. The last recession. 2008, maybe.
2008. In 2008, where I'll call it the Great Recession, where effectively residential homes were overlevered. I was running the global commercial real estate group at UBS. My team and I had been winding down the portfolio for a year and a half at that point. When we left UBS, we left around June of 2008. We were actually up close to $200 million. That wasn't because we were making that much money t hat was because we were selling everything. Is that a telegraphed recession, I thought. It didn't really anybody. You saw first defaults on subprime mortgages in certain areas, 20% the first month.
I always question the wisdom of making loans to individuals that the only thing you know about them is they don't usually pay their bills. We avoided that, and we got out of that pretty clean for the most part i wouldn't say all the banks did, certainly t hey were just buying things in bulk and securitizing them. It was mostly a residential mortgage problem, I think. That's when we set up Ladder. You know, the team that I left and the team that I left with set up the company through private equities that ultimately went public. Not many of the individuals at Ladder were with me in 2008 at that time.
As far as going into this recession, we are very low levered, relatively. We're one notch below investment grade at two of the three rating agencies. That's been a long-term goal. Most people who know us have been saying that for, I don't know, eight years or so. Getting laughed at a lot eight years ago n ot getting laughed at anymore, though. We have plenty of cash w e just extended and upsized the revolver, the corporate revolver to $324 million. MLT did a great job on that. We have lots of cash, and we have great access to the corporate bond market.
I would just point out that we have one of the differentiating features of Ladder is we have $1.6 billion in corporate bonds outstanding, none of which are due until 2024. The bulk of them are not due until 2025, 2027, 2029. The rate on the $1.3 billion that's due in 2027 and 2029 is on average about 4.5% fixed. As LIBOR goes higher and we're now writing loans at 6.5% to 7%. The bottom line, because we're still paying, you know, 4.5% on that $1.3 billion of corporate bonds.
That's really the operating leverage we keep talking about. It's showing up i mentioned in my comments, you know, what has gone on with the top line interest income line versus our interest expense. I think we're as well positioned as anyone, and we do believe this is gonna be a mild recession. Again, the Fed caused this t hey did this on purpose.
It was very expensive to hire people y ou couldn't get enough people h ousing prices were out of control. Gasoline was flying. They wanted to slow the economy down. I know that a lot of people haven't seen a recession like this, but this is a little bit of what happened. It's not something to be afraid of.
This is not an overleveraged, you know, situation where there's I think China is having a 2008 style downturn in their real estate sector. I say there's gonna be a relatively shallow recession and a quick recovery. I don't really think it's a great idea to have zero interest rates for 10 years, so hopefully we won't revisit that again.
Perfect. That was very helpful. Thank you so much for taking the question.
Sure.
Our next question is from Eric Hagen with BTIG. Please proceed.
Hey, thanks g ood afternoon, guys. Hope you're well. For loans that are maturing this year, I imagine some sponsors that have typically relied on financing from the CMBS market or an asset sale. In cases where those options are either unattractive or uneconomical, what do you think is the source of takeout, if you will, in those kinds of situations? Thanks.
Well, if it's in a CLO, I think the issuer is going to be very accommodative in modifying the terms and just keeping it going. To the extent that is done on any line or if the loan is due at a bank, I think the banks, especially with regulators, are gonna be less tolerant.
As a result of that, I think the for sale sign will go up on the property or else, as I mentioned earlier, that stretch senior concept, whereas the guy's gonna say, "I can't really refinance the loan I had, even though I didn't do anything wrong." You know, rents are doing what they're supposed to be doing, but interest rates have just eclipsed all of the income we've gained. Taxes in certain places are going higher.
A lot of the effort on the part of the equity sponsor has been for naught. Whereas I do think from the lender's perspective, you're gonna have a situation which I would think, you know, when you've got cap rates in the 6% to 7%, this is more normal.
There's less leverage and people who can't meet their maturity date with the full balance might very well wind up in a first mortgage with a mezzanine, or as I oftentimes call that, a stretch senior t hose are attractive because it isn't like the properties are falling out of bed in value t hey're simply drifting down because cap rates are going up because interest rates have moved. Once interest rates stop climbing, the value tends to stabilize pretty quickly.
With the dollar being very strong, I think there's a whole lot of international interest too that might make this a very interesting, you know, scenario going forward. We really like what we see coming here. It may be a little difficult for some of the equity guys that are not well capitalized, but the debt guys should be fine.
That's a really interesting perspective t hank you. You know, in the net lease portfolio, can you discuss how well matched the underlying lease term is with the mortgage financing that you have against it? Does that have any bearing, I mean, the matching, have any bearing on the assets that you choose to sell? In cases where there's maybe a more meaningful mismatch in term, how do you think investors should approach the value that they're getting there?
It's a big portfolio. It's 168 triple net properties. I will say that, for instance, I know that we have four BJ's Wholesale Clubs, and we've owned them for 10 years. They're in CMBS deals, and they're open to prepayment without penalty in September.
That's about $45 million worth of mortgages that have been out there for 10 years. I believe even at higher interest rates, given the fact that in those 10 years, BJ's Wholesale Clubs went from a private company to a public company. Obviously, the pandemic didn't hurt them. The cap rates have really collapsed there.
We've got a reasonable gain there if we wanna sell them h owever, we also have a fortunate scenario that if we refinance them, we'll probably refinance into higher proceeds and do a cash out refinance. The cash flows are excellent.
The lease terms are 10 years. The average lease term is 10 years. We're pretty comfortable with those assets and what we can do either with them o nce we've put them into another CMBS deal, we can't really sell them because the prepayment penalty is too high, although the loans are assumable. It's a little hard to talk generally. We don't usually sell things if there's large prepayment penalties or if we do, we ask the buyer to pay that prepayment penalty f or the most part, they've been accommodating that.
We don't have a lot of leverage in that portfolio. The reason most buyers do pay that prepayment penalty is because they're able to borrow more than the debt we put on those assets. We like that portfolio. We've been selling it w e'll always sell it if it feels like the price is right, but we're happy to hold it forever. We think that we have assets and tenants and we actually pay very close attention to dollars per foot, if in case we get the thing back vacant.
Overall, we've been selling here and there, but not at all a concern w e think we are filled with options. With five, six years left on the mortgages, we're not selling those t he prepayment penalty is simply too high, although going down as rates rise.
The real estate book has ample gains in it. I think we've taken quite a few of them at this point, but when people are buying cap rates very tight and they're able to finesse themselves at very low interest rates, I think you have to sell them sometimes. I sometimes say I love our real estate assets, but it's like the kids going off to college. You're gonna miss them, but they have to go. That's the way we approach it.
That's very interesting. Thank you very much. Appreciate it.
As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Matthew Howlett with B. Riley Securities. Please proceed.
Thanks for taking my question. You, Brian Harris, on the, you know, last quarter you talked about the $0.04 impact of LIBOR at $1.50 at the end of June. Now we're well over, you know, close to $2.5. Can you just talk a little bit about the cadence on what to expect the Q3 and Q4 given the Fed hike this week and then what probably maybe 50 basis points, you know, in September?
Yeah, I mean last quarter in our last call, I think we were talking. It's funny, we mentioned I think if our estimates were if the Fed raised. We kind of talk about the Fed funds rate and LIBOR as if they're the same, so forgive me there. They do track together.
No one thought, I think at the time in April when we were talking that the Fed would raise rates 200 basis points by year-end. We did. However, we did not think they would do it before the end of the next quarter. They did that all very quickly t hese 2 75 have really been a little bit of a surprise. Not a surprise in the last week, but certainly from the April perspective.
At that time, I think we said on a gross basis, if 100 basis points, given where we were with our portfolio, would probably add $0.16 a share. 200 basis points would add $0.36 a share gross. I always knock off about 15% of that for expenses. At $0.36 you would maybe call it, you know, $0.28 or $0.29 a share.
The other part of that was that we had an estimate of what would pay off going into that. The second part was we had an estimate of what we would originate going into that also. I think the origination part of that conversation has been a little bit slow, but I don't think it's a problem i think it's just delayed because there are transactions that we're working on right now that have been going on for a while, but you know, the loan prices are just not as high as they were, you know, two to three months ago t here's some price negotiations going on.
You know, I'm pretty comfortable that the market is a little rate shock because it moves so quickly. However, I'm relatively certain through many years of experience that the commercial real estate market will do just fine with rates at 6%. I don't think that's gonna be a problem. It just takes a little while for those rates to set in. I do anticipate if the Fed and I think the Fed will keep raising rates.
I think they're probably gonna get to around 3% by the end of the year. Yeah, I would expect our top line interest income to keep rising. As you know, our fixed rate $1.6 billion does not rise with it, so it's just additive and there's a lot of operating leverage as a result of that. We have to pick up the origination a little.
Gotcha. How inclined are you to keep raising the dividend? I mean, obviously you covered the dividend thanks to the real estate gains from the real estate sales this quarter i know there's obviously, you know. How much going into what you think will be a potentially soft landing but a minor recession, how much do you wanna, you know, raise the dividend?
I'd love raising the dividend. I'm one of the biggest shareholders in the company. However, Paul, you can chime in here or Pamela, but I'm pretty sure we're covering the dividend now out of interest, and expect to cover it again in the third and Q4s . You know, unless the Fed starts cutting rates or we stop originating loans, I don't see that ending. I suspect we've got an attractive runway here.
I will never get tired of raising the dividend as long as the funds are available. I think we've really built a machine right now that has the ability. If people say, "What are you gonna raise the dividend to?" I say, "Well, tell me where the Fed's going." You know, I have all the confidence in the world in our origination machine as well as our credit standards. We'll get that right. I think the world is simply less liquid than it used to be, and that just benefits lenders. I think we're one of them. I'm very optimistic about the quarters ahead here.
Last thing, just what's the update on the, I mean, investment grade? I mean, I'm a little surprised to hear the bonds, your bonds are trading that much of a discount when you're, you know, a notch away from investment grade i t just seems so ridiculous to me w here are you in terms of the rating agencies? You know, I know you hit the line if you could go down if you get the upgrade. Just how important that is to, you know, to you and how close are we?
Well, I won't speak on behalf of rating agencies. I'll speak on behalf of my opinion. You know, we have some general guidelines as to how rating agencies t hey have different guidelines, but we generally understand how they look at it. You know, we don't think we're too far away from that if we wanted to do it. Rates got too high for us to attempt to get that done. Like I said, instead of that being a problem, we made it into an opportunity and we acquired some of our bonds back.
Well, the rating agencies don't stand still s ome of them will take a look at what they think or whatever recession is that's coming. You know, given that our 80% of our assets, we took a lot of payoffs after the pandemic started. Because we had very high floors and we had very good credits when the Fed lowered rates w e got paid off more than most. I think you might remember it wasn't that long ago we were holding $2 billion in cash.
Yeah.
We simply moved that $2 billion into the loan category w e're only levered 1.8x. We are going to maintain rational leverage and hopefully allow us to have the option of making a run at going to an investment grade level with an issuance. You know, a lot of things have to fall into place there, and none of them are promised. We've studied this ad nauseam, and we understand where we have to be as long as the goalposts don't move too much.
As far as the bonds getting down and trading that low, that was indiscriminate selling. You know, we were not singled out as one of the bad ones or the good ones t hey were totally selling everything as high-yield sold off, as the fears of recession take hold, which surprises me because so much of the high-yield complex is energy-related, and a lot of it was being caused by an energy crisis.
You know, I'll never figure out what makes each house useful how to sell things. Rather than fight with it, I'll just try to take advantage of it as it presents itself. You know, when we see yields in the 8s and 9s on our own paper, we can beat 8 or 9 ROE pretty easily. I can make a case for not buying them back.
Given that we're uniquely positioned to take a 20-point gain. The night we buy the bond, which no one else can do because they'd have to wait for the principal to come to them in eight to seven or eight years, you know, sometimes that's a little tempting. It's also, by the way, one of the unique features of Ladder in that, you know, we have that ability to go buy a lot of our debt back in the open market at deep discounts. If you're on a repo line, you don't have that opportunity.
And we-
Yeah.
I mean, we'll see the peers, but I doubt many of them bought back their, you know, the good part of their debt or some of the securitization debt i m glad to see Ladder doing it y ou know, my message to the board would be, you know, keep buying back both debt and stock when it's, you know, when it's there for you i think that's one of the benefits of being internally managed.
Exactly.
We try to always buy them both because we don't want bond investors thinking we don't want equity investors thinking we're just, you know, taking care of the bond guys, and we don't want bond investors thinking we just buy stock back. In this case, given the sell-off that took place, and it was the worst half year in 40 years in the stock market.
That presents great opportunities and we had plenty of cash, so we didn't buy a lot. You know, we spent a little bit, but we were doing very well in the overall portfolio. If those opportunities present themselves, you should expect us to wade in there. That's, I also wanna point out, during the pandemic, when our bonds sold off, you know, we bought them then too w e bought about 100 of them. Those were the 2027s that are out there now. There used to be 750 of them out there, now there's 650.
Those are very nice instruments to have in the open market. If the overall market gets shaky and you're in good shape, we always try to be on the front foot, and as I said today, we are on the front foot. We're not against buying other people's instruments either. When the whole sector gets sold off for no reason, again, we'll step in there and take advantage of it.
That's what I mean by we got a dividend in the low sevens. We've got yields on our bonds in the sevens. Should we buy them back? Yeah, that's pretty cheap. We can make so much more by investing money right now, and I think that's how we best serve our shareholders.
Just one follow up on that d o you think, you know, some of the bigger REITs could have problems, mortgage rates, you know, with big hotel or big office exposure, and there could be an opportunity for you guys to step in somewhere?
I don't know. I don't pay too much attention to other companies. You know, the sectors, the office market, we're gonna have to see where it goes. I'm generally optimistic i think that come September, I think the country is getting one more summer in. Even though most people are acting like there's nothing wrong out there, no one's in the office. I think in the fall, the office market will come back. I think the hotel sector is doing fine right now. The only reason you're not seeing a lot of financing there is because they don't have 12 months of trailing twelve cash flows. Once they do, I think hotels are gonna should be just fine.
Thanks a lot. Thanks for answering my questions.
Sure.
We have reached the end of our question and answer session. I'll turn it back to Brian Harris for closing comments.
Don't have too much to say other than, you know, we're focused on our plan. Our plan has come full circle at this point, and did what they were supposed to do w e're set up to take advantage of it, and rates are higher. That benefits lender. We really do look forward to the year ahead. These are good times for us. Thanks for staying with us and listening to us, and we'll speak next quarter.
Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.