At first glance, Ladder Capital Asset Management (LCAM) is anything but ‘boutique’. After all, it is the investment arm of Ladder Capital Corp (NYSE: LADR) – an internally managed commercial real estate finance Reit that counts TPG, KKR and Starwood among its peers.
Founded in 2008 by chief executive Brian Harris, Ladder Capital Corp emerged from the financial crisis as one of the pioneers of non-bank US commercial mortgage loans. Since 2009, it has facilitated commercial real estate secured mortgage and bond investing for high-net-worth and institutional investors through separate accounts and joint ventures. Ladder manages $6 billion in commercial real estate debt and equity assets as of December 31, 2017. LCAM was launched in 2011.
Largely made up of commercial mortgage-backed securities (CMBS), the commercial real estate debt space is not a new asset class, but it is one that has historically been more popular with institutional investors that can navigate the complexities of underwriting.
In October 2016, LCAM tried to change this by coming to the retail market with the Ladder Select Bond fund.
‘To the best of our knowledge, the Ladder Select Bond fund is the only pure-play CMBS and commercial real estate finance mutual fund in a daily liquidity, no load format,’ said Thomas Harney, head of merchant banking and capital markets at the firm.
While CMBS has existed as a component of real estate debt products in mutual funds for many years, the Select Bond fund solely targets CMBS and related investments secured by commercial real estate. ‘This allows an investor to make razor-sharp allocations strictly at their choice with a highly focused manager,’ Harney said.
One reason why specialized CMBS strategies like this have not been widely offered as mutual funds before is the asset class’s liquidity characteristics. In an era marked by investors desperately reaching for yield, real estate related securities have veered toward lower-quality, subordinated bonds, not sufficiently liquid for a 40 Act structure.
The Ladder strategy avoids this problem by focusing on senior secured bonds that are the first to receive principal and interest payments, as opposed to higher-risk junior issues that will be the first to take a loss if a borrower defaults.
‘It’s an inherently downside-protective approach. We stay super senior,’ Harney said. ‘It is designed not to be hit, given that it’s above that fray and froth.’
To Ladder, launching a mutual fund was a no-brainer, Harney said. ‘It was taking a core competency and trying to make it available in an interesting format – combining good seniority, security and liquidity,’ he said. The mutual fund is currently available in an institutional share class, with an advisor share class in the works.
From the ground up
LCAM does not simply dip into commercial real estate. It is the firm’s bread and butter – its bricks and mortar, if you will. As one of the largest non-bank originators of commercial mortgage loans, LCAM’s parent firm has amassed a deep understanding of the real estate markets, which informs its investment process.
‘The best CMBS fund managers analyze these securities down to the individual loan level,’ said Craig Sedmak, managing director and portfolio manager of the Select Bond fund.
‘The best of the best consider the valuation and cash flow of the individual buildings represented in the portfolio. The goal is to protect investor capital by ensuring that the value of the collateral – including the rent being collected – covers the price and return expectations of the CMBS bond.’
Ladder Capital’s presence in the commercial real estate space, boasting 22 originators across three offices, unlocks an insider’s view of the property types and borrower profiles – a competitive advantage over traditional fixed income managers, Sedmak explained.
The team focuses on senior mortgage loan opportunities in office spaces, multi-family complexes, retail centers and hospitality properties. Harney believes the portfolio’s typically short duration, as well as the asset class’s history of being less correlated to corporate bonds, means that it is well placed if rates rise further. ‘The majority of the portfolio is floating rate, and we do have the ability to hedge interest rates as well. It’s pretty well positioned in a rising rate environment,’ he said.