Executive Summary / Key Takeaways

• Ladder Capital has successfully navigated recent commercial real estate volatility by prioritizing principal preservation, accumulating substantial liquidity, and maintaining a conservative balance sheet, culminating in record loan payoffs in 2024.
• The company is now pivoting to an offensive strategy, leveraging its $1.3 billion liquidity position and enhanced capital structure (including an $850 million undrawn revolver and 72% unsecured debt) to deploy capital into higher-yielding loans and securities.
• Management expects loan originations to significantly increase in 2025, targeting $1 billion in net loan growth and anticipating a return to historical quarterly origination run rates by early 2025, focusing on new acquisitions and newer vintage properties.
• Ladder's differentiated, internally managed model, credit-centric underwriting, and flexible capital allocation across loans, securities, and real estate provide a competitive advantage in capturing market share from constrained banks and less disciplined non-bank lenders.
• The company is actively pursuing investment grade credit ratings, a strategic goal supported by its balance sheet strength and liability management, which is expected to lower funding costs and enhance shareholder returns over the long term.

The Pivot: From Preservation to Opportunity in a Shifting CRE Landscape

Ladder Capital Corp, an internally-managed real estate investment trust, has carved out a distinct position in the commercial real estate finance sector since its founding in 2008. Operating across three complementary segments—Loans, Securities, and Real Estate—Ladder's overarching strategy centers on originating and investing in a diverse portfolio with a primary focus on senior secured assets. This credit-centric approach, coupled with the flexibility to allocate capital opportunistically across its business lines, has been foundational to its ability to navigate varying market conditions.

The period leading up to early 2025 has been marked by significant volatility in commercial real estate, fueled by the lingering effects of the global pandemic, rapidly rising interest rates, and broader macroeconomic uncertainty including escalating global trade tensions. This environment pressured asset values and created challenging refinancing conditions for many borrowers. However, Ladder's disciplined model proved resilient. In 2024, the company achieved record loan payoffs, receiving $1.7 billion in proceeds across 61 loan positions, including nearly $600 million in the fourth quarter alone. This remarkable performance, particularly in a difficult market, underscored the strength of Ladder's middle-market lending strategy and its focus on getting paid back.

This influx of capital, combined with proactive balance sheet management, has positioned Ladder with substantial liquidity. As of March 31, 2025, the company held $1.3 billion in liquidity, including $480 million in cash and cash equivalents, representing over 10% of total assets.

This liquidity is further bolstered by an $850 million unsecured corporate revolving credit facility, which remained undrawn at quarter-end and includes an accordion feature allowing for expansion up to $1.3 billion. Ladder has also strategically enhanced its liability structure, increasing the component of unsecured debt, which stood at 72% of total debt as of March 31, 2025. This includes $2.0 billion in senior unsecured notes maturing between 2025 and 2031. This robust balance sheet, characterized by modest adjusted leverage of just 1.4 times and 83% unencumbered assets, provides a fortress-like foundation from which Ladder is now pivoting to an offensive strategy.

Ladder's operational model, built on an in-house origination platform and experienced asset management team, provides a competitive edge. This integrated approach allows for rigorous, credit-centric underwriting and efficient execution. Management highlights that this structure enables real-time market intelligence, crucial for navigating fluctuating conditions and identifying attractive opportunities swiftly when competitors may be constrained. While specific proprietary technology platforms are not detailed, the emphasis on an integrated, experienced team and a disciplined process suggests that Ladder's operational efficiency and credit quality are derived from its human capital and established procedures, rather than distinct technological moats. This operational advantage contributes to the company's ability to underwrite loans effectively and manage assets proactively, including the capability to take back and monetize properties acquired through foreclosure, often at a gain to basis, as demonstrated by recent real estate sales.

In the competitive landscape, Ladder operates alongside larger, more diversified players like Starwood Property Trust (STWD) and Blackstone Mortgage Trust (BXMT), as well as more specialized firms like Arbor Realty Trust (ABR) and KKR Real Estate Finance Trust (KREF). While larger competitors may benefit from scale and broader access to institutional deals, Ladder differentiates itself through its deep focus on the middle-market segment, its diversified business model spanning loans, securities, and real estate, and its emphasis on balance sheet strength and lower leverage. Management notes that the diminished lending capacity of regulated banks and the ongoing balance sheet issues faced by some non-bank competitors create a favorable environment for well-capitalized platforms like Ladder to capture market share. Ladder's ability to maintain steady book value and avoid material credit losses during recent volatility, unlike some peers whose book values were significantly impacted, further highlights the effectiveness of its conservative underwriting and asset management relative to competitors.

Financial Performance Reflecting Strategic Positioning

Ladder's financial performance in the first quarter of 2025 reflects the transitional phase following the significant loan payoffs of 2024 and the initial steps of capital redeployment. Distributable earnings for Q1 2025 were $25.5 million, or $0.20 per share, resulting in a return on equity of 6.6%. This compares to distributable earnings of $33.6 million, or $0.27 per share, and an 8.9% return on equity in Q4 2024. The sequential decrease in net interest income was primarily attributable to the net reduction in the loan portfolio balance due to 2024 payoffs, partially offset by lower interest expense following the redemption of the LCCM 2021-FL2 CLO. Compared to Q1 2024, net interest income saw a more significant decrease, driven by the substantial reduction in the average loan portfolio size over the year, although this was partially mitigated by increased interest income from a larger securities portfolio and lower overall borrowing costs.

Despite the temporary impact on net interest income from holding higher cash balances, other income streams showed resilience and growth. Fee and other income increased in Q1 2025 compared to both Q4 2024 and Q1 2024, primarily driven by an increase in unrealized and realized gains on securities and the timing of loan-related fees. The net result from derivative transactions also contributed positively, reflecting market movements impacting hedging positions. The Real Estate segment continued to generate stable net operating income, contributing $12.2 million in Q1 2025, although overall real estate operating income saw a slight decrease compared to prior periods due to property sales. A notable gain on real estate of $3.8 million was recognized in Q1 2025 from property sales, contrasting with no such gains in Q1 2024.

Operating expenses saw fluctuations. Compensation and employee benefits increased sequentially in Q1 2025 due to the immediate vesting of certain share grants but decreased year-over-year due to lower bonus compensation expense. Other operating and investment-related expenses generally decreased, reflecting reduced deal-related costs associated with a smaller loan portfolio. Depreciation and amortization also decreased, primarily due to prior period real estate sales.

Ladder's credit performance remains a key focus. As of March 31, 2025, the CECL reserve stood at $52 million, unchanged from December 31, 2024. Management believes this reserve level is adequate to cover potential losses, including consideration of ongoing macroeconomic shifts. The release of loan loss reserves in Q1 2025 was attributed to the decrease in the loan portfolio size, partially offset by adverse macroeconomic conditions. Non-accrual loans totaled $116.1 million across four loans (multi-family, mixed-use, office, and hotel) as of March 31, 2025, an increase from $76.9 million across two loans at the end of 2024. While this represents a concentration of credit issues, management's commentary suggests confidence in the adequacy of the reserve.

Outlook and Strategic Deployment

Management is optimistic about 2025, viewing the current environment as ripe for capital deployment. The strategic pivot is clear: migrate capital out of lower-yielding cash and T-bills into higher-yielding securities and, ultimately, into loans. In Q1 2025, Ladder began this shift, originating $329 million in new loans and acquiring $521 million in AAA securities. Loan originations included a $64 million fixed-rate conduit loan and $265 million in balance sheet loans, with 74% backed by multifamily or industrial assets, reflecting a focus on sectors perceived as more stable. The weighted average spread on balance sheet originations was 394 basis points over one-month SOFR, although management noted a wide range (270-700 bps) reflecting opportunistic "special situations."

The loan pipeline is growing, with approximately $250 million in new loans under application as of the Q1 2025 earnings call. Management explicitly guided for originations to exceed the Q1 pace and expects to originate in excess of $300 million per quarter going forward, targeting $1 billion in net loan growth for 2025. They anticipate reaching their historical quarterly origination run rate ($250 million - $400 million) by the first or second quarter of 2025. The focus for new lending is on new acquisitions with basis resets and refinances/recapitalizations for newer vintage properties and lease-ups, while expecting to be "very light on office originations."

The securities portfolio serves as an important interim step for capital deployment. Ladder acquired $521 million in AAA securities in Q1 2025 at a weighted average unlevered yield of 5.79% and continued adding to this portfolio in April 2025 as spreads widened. Management views these unlevered AAA securities as providing attractive yields (potentially levering into the low double digits) and significant liquidity ($1.5 billion unlevered as of March 31, 2025), complementing the cash position while the loan pipeline builds. They expect to favor loans over securities in the quarters ahead but retain the flexibility to pivot based on market conditions.

Management anticipates a steepening of the treasury yield curve, with short-term rates falling (driven by expected Fed cuts) and longer-term rates rising (due to inflation and the U.S. deficit). They believe this scenario would be supportive of their conduit securitization business, which is viewed as the highest ROE product, although it has been muted in recent years due to the inverted yield curve. A steepening curve could make fixed-rate lending and securitization more attractive.

A key strategic goal remains achieving investment grade credit ratings from at least two agencies. Ladder received positive outlooks from Moody's and Fitch and an upgrade from S&P in 2024, positioning it just one notch below investment grade with two agencies. The recent upsizing of the Revolving Credit Facility and the $500 million unsecured bond issuance in 2024 are seen as meaningful steps towards this goal. Achieving investment grade is expected to lower funding costs (potentially saving 50+ basis points initially on new unsecured debt) and broaden the investor base, enhancing long-term shareholder returns.

Ladder also sees potential opportunities in CRE equity investments, particularly in situations involving basis resets, and is open to strategic partnerships like sidecars or ventures with insurance companies as capital is deployed, although no such initiatives are currently underway.

Risks and Considerations

Despite the optimistic outlook and strong positioning, several risks warrant consideration. Continued market volatility, particularly unexpected shifts in interest rates or credit spreads, could impact asset values and profitability. While Ladder hedges interest rate risk, primarily on longer-duration assets, hedging strategies may not fully protect against all market movements. Credit risk remains inherent in commercial real estate lending, and while Ladder's underwriting is credit-centric and the CECL reserve is deemed adequate, adverse changes in property performance, borrower financial health, or macroeconomic conditions could lead to increased non-accruals, impairments, or losses, particularly in challenged sectors like office or specific geographic markets. The concentration of the portfolio in commercial real estate also exposes the company to sector-specific downturns.

Competition, while perceived as reduced from constrained banks, remains present from debt funds and other non-bank lenders. The market for attractive new acquisitions can be competitive, potentially pressuring yields. Furthermore, the pace of loan originations and securities purchases is subject to market conditions and the availability of suitable opportunities, which could impact the speed of capital deployment and earnings growth. Regulatory changes, including those impacting banks and investment advisers, also pose potential risks.

Conclusion

Ladder Capital has emerged from a period of significant market volatility with a strengthened balance sheet, ample liquidity, and a validated credit-centric business model. The record loan payoffs in 2024, while temporarily impacting reported earnings, have provided the capital necessary for a strategic pivot to offense. Leveraging its fortress balance sheet, diversified funding sources, and operational expertise, Ladder is well-positioned to capitalize on opportunities arising from the ongoing reset in commercial real estate and the reduced lending capacity of traditional financial institutions.

The company's focus on deploying its substantial liquidity into higher-yielding loans and securities, coupled with the potential recovery of its high-ROE conduit business in a steepening yield curve environment, supports a positive outlook for earnings growth in 2025. The pursuit of investment grade ratings represents a long-term strategic initiative aimed at further lowering the cost of capital and enhancing shareholder value. While risks related to market volatility and credit performance persist, Ladder's disciplined underwriting, proactive asset management, and conservative leverage profile provide a degree of resilience. For investors seeking exposure to the commercial real estate recovery through a well-capitalized, experienced, and strategically nimble platform, Ladder Capital presents a compelling investment thesis centered on capitalizing on market opportunities from a position of strength.