Blind-pool reticence

When Ladder Capital first unveiled plans to float a commercial mortgage REIT in July, it followed in a line of other private fund managers looking to the public markets for equity. From Starwood Capital to Colony Capital and Apollo Global Management, US institutional investors were able to take their pick of blind pool debt-focused real estate investment trusts.

By September, it perhaps shouldn’t have been surprising that Ladder Capital and others were opting to “postpone” their IPO plans as investor appetite declined dramatically.

The US has $1.8 trillion of real estate debt coming due over the next four years and there is no credible game plan as to how we deal with that. Brian Harris

For that’s exactly what Ladder chief executive officer Brian Harris called the decision to pull plans for Ladder Capital Realty Finance (LCRF). “It’s just been postponed, not shelved,” he said in the firm’s first interview with PERE, which appeared in the December/January issue of the magazine.

Indeed, Harris sees a key role for vehicles such as LCRF in the future of commercial real estate, even if their current ability to raise capital has proved limited. “These REITs will become huge.” Part of the reason, Harris argued, was due to the fact there has been a “permanent change” in the lending community in the US.

“There are no more Wall Street investment banks out there. This will lead to a permanent shift in the mortgage finance business, and I don’t see it being done through banks.” Harris called the shift a “volcanic change” for the commercial property industry and something that would present a great opportunity for small lenders, private investment firms and REITs.

Although Harris admitted he had plenty of doubts over the REIT structure, not least the fact that a company has to distribute at least 90 percent of its taxable income to shareholders, he said REITs were “an effective vehicle for accessing pools of capital”. Harris admitted Ladder’s “mistakes” with LCRF were offering “a partial blind pool” and getting stuck in “messy tape”. Harris said the firm won’t reintroduce its REIT idea before the end of the year, however he said it could look at a private-to-public strategy in order to avoid institutional investors’ reticence over blind-pool structures.

Since forming in November 2008, Ladder has been an active purchaser of securities and mortgages. With $611 million of equity commitments, including from private equity backers TowerBrook Capital Partners, GI Partners and Meridian Capital Group, as well as a $300 million credit line, Ladder has closed on almost $2 billion of assets and sold about $100 million.

Harris said at first Ladder, rather than starting a lending programme as first envisaged, was buying AAA bank securities as a hedge against bank failures. “In 1998, when we stood at the edge of the abyss with Long Term Capital Management you bought short-term securities. This was an identical situation,” Harris said. When the time would traditionally have come to sell those securities, the US government introduced the Term Asset-Backed Securities Loan Facility (TALF) programme, helping extend the opportunity. TALF now accounts for a third of Ladder’s business, however the firm is fast moving into the origination business – something LCRF would also have been a part of.

 To date, Ladder has originated secured whole-loan mortgages on some shopping centres, nursing homes and Florida condo deals, according to Harris. “The US has $1.8 trillion of real estate debt coming due over the next four years and there is no credible game plan as to how we deal with that.”

Coupled with the absence of traditional lenders, Harris said the origination business is expected to be a great opportunity. “Respect for capital is back; there is a steep yield curve and as a mortgage lender that’s what I want to see; it’s all about asset-based lending at a time when values are not going to deteriorate as steeply as they’ve already done; and there is diminished competition. It’s very hard to write a bad loan in 2009.”

In fact, Harris went on to note that his job was very much like looking round a flea market. “There are some antiques in there and it’s just a case of looking for them. Yes, there’s a lot of junk, but there are some gems as well.”