Why this CRE lender went solo in the securitization market
Don’t take it personally.
That’s the message Brian Harris, CEO of Ladder Capital, has sent to the investment banks his company has worked with over the past decade.
In June, Ladder struck out on its own in the commercial mortgage-backed securities market, repackaging $626 million of loans the firm had originated itself. Previously Ladder had contributed assets as collateral for other issuers’ deals — 43 of them over the years.
“I’ve often said our ability to operate independently should be viewed in addition to our desire and ability to work with banks and others in pool transactions,” Harris said on a conference call this week to discuss quarterly results. “This should not indicate we have had any disagreement with our partners or any desire not to work with them in the future.”
The solo debut was notable since securitizations overall have been losing share in the commercial real estate lending market to insurance companies, in part due to new “skin in the game” requirements for sponsors of CMBS deals.
Industrywide CMBS issuance is running ahead of last year’s pace at $34.4 billion in the first half, up by over a third from the year-earlier period, according to Kroll Bond Rating Agency. But that’s still far behind the pace in the several years prior, when issuance was closer to $100 billion a year.
With fewer deals coming to market, a stand-alone finance company with limited balance sheet capacity can’t always wait to piggyback on Wall Street’s transactions.
Ladder decided to strike out its own because “sometimes the timing [of a multiseller transaction] doesn’t work, or the calendar is busy,” Harris said.
He devoted a large portion of the conference call to the deal, which the company, a real estate investment trust, views as a success, even if pricing was not as favorable as it would have liked.
Harris stressed that there was nothing special about the loans used as collateral for this deal; they are typical of loans it has contributed to multiseller deals in the past. He also downplayed the burden of holding on to economic risk in the deal, pointing out that Ladder has purchased certain classes of bonds issued in prior multiseller deals as well.
In this case, Ladder retained a 2% “vertical strip” consisting of a portion of each tranche of securities issued, while selling a 3% “horizontal strip” of securities representing the first risk of loss to a third party, the private equity firm Kohlberg Kravis Roberts.
There was some discussion on the call about whether this strategy for complying with risk retention, known as the “L-shaped” strategy, might have created the wrong impression for mortgage-bond investors. Harris said some investors may have interpreted Ladder’s decision to sell the horizontal strip to a third party as “some opaqueness about where bonds would clear.” He emphasized that Ladder had sufficient capital to retain the securities itself — and may do so in a future transaction.
“It was a less-than-stellar execution,” the CEO acknowledged in response to a question from an analyst.
“We need to get ourselves out in front of investors more,” he said. “Not only were we desirous to hold [the risk retention stake], but we also want to own more [bonds]. We knew every loan in the pool; if ever there was a pool we would want to buy, it’s [this one].”
Ladder expects to return to the CMBS market in the next few months. The REIT has $200 million of loans on its balance sheet that can be used as collateral for either solo or multiseller deals.
The company’s lending business produced 73% of its core earnings in the second quarter; 26 percentage points of that came from the execution of the conduit transaction and 47 percentage points from loans it holds on balance sheet.
Ladder may also come to market later this year with a securitization of short-term, floating-rate loans used to finance commercial properties that are being fixed up or converted from one kind of use to another. Known as commercial real estate collateralized loan obligations, these transactions have proven very popular with investors this year.
Harris said Ladder had considered doing a CRE CLO this year, but opted to raise capital by issuing unsecured corporate debt instead. The next time the company needs to raise capital, it will look at other options such as the sale of securities or a CRE CLO, he said.