Ladder Capital Corp.‘s (LADR) shares are a “Buy” on the drop. The commercial mortgage REIT covers its dividend with core earnings, has a conservative payout ratio, and net interest income upside in a rising rate environment. The irrational sell-off, in my opinion, offers investors an entry opportunity in the stock and an investment in LADR yields 8.1 percent.
Ladder Capital Corp.’s shares sold off after the company released rather good fourth-quarter results at the end of February, which is surprising to me. Hence, I think the drop affords opportunistic income investors with an interesting buying opportunity as shares are close to being oversold based on the Relative Strength Index.
Ladder Capital Corp. – Portfolio Overview
Ladder Capital Corp. is a commercial real estate finance company with an equity value of $2.1 billion. The company is structured as a real estate investment trust, meaning Ladder Capital Corp. pays out the majority of its earnings as dividends.
Ladder Capital Corp. invests primarily in balance sheet first mortgage loans, conduit first mortgage loans and mezzanine loans. Balance sheet first mortgage loans accounted for the lion’s share of Ladder Capital Corp.’s portfolio (91 percent) at the end of the December quarter.
Ladder Capital Corp.’s commercial lending portfolio was valued at $3.5 billion at the end of last quarter and the portfolio was comprised of 198 loans with an average loan size of $20 million.
Here’s a more detailed breakdown of Ladder Capital Corp.’s core lending portfolio.
Ladder Capital Corp. has aggressively grown its balance sheet first mortgage loans in the last several years because they are generally linked to floating rates. In fact, the REIT has grown its exposure to balance sheet loans by a factor of 6.2x in the last five years.
Source: Ladder Capital Corp.
Ladder Capital Corp., however, does not only invest into commercial real estate loans but also has direct commercial real estate investments. The commercial real estate equity portfolio was valued at $1.0 billion at the end of the December quarter and included mainly offices and retail stores.
71 percent of Ladder Capital Corp.’s loans are linked to floating rates, setting the company up for net interest income gains as long as the Federal Reserve hikes short-term interest rates.
According to management, a 100 basis point increase in LIBOR will boost the company’s net interest income by $0.16/share annually going forward.
Ladder Capital Corp. covers its payout with core earnings and has above-average distribution coverage stats. The real estate finance company pulled in an average of $0.42/share in core earnings in the last twelve quarters compared to an average dividend rate of $0.30/share.
Here are Ladder Capital Corp.’s updated dividend coverage stats (based on the REIT’s recurring monthly cash dividend per Class A common stock).
Ladder Capital Corp. is not only a high-yield income vehicle with a dividend yield in excess of eight percent, but the company is also aggressively growing its dividend payout. The company has raised its payout three times since Q3 2017. The current quarterly dividend payout sits at $0.34/share, meaning an investment in LADR yields 8.1 percent.
Ladder Capital Corp. has become more affordable on the drop. Today, income investors wanting to secure a covered 8 percent dividend from a leading commercial mortgage REIT pay just ~9.3x Q4 2018 run-rate core earnings and ~1.39x book value.
And here’s how Ladder Capital Corp. compares against its peers in the sector in terms of price-to-book ratio.
Risk Factors Investors Need To Consider
Ladder Capital Corp. is vulnerable to a downturn in commercial real estate. Origination volumes remained strong in 2018, and there are no signs of a slowdown yet. However, slowing economic growth in the United States in 2019 and weaker origination volumes in the commercial real estate market are risk factors investors have to account for. An economic downturn would most likely hurt Ladder Capital Corp.’s ability to originate new loans and pressure on the company’s distribution could build as a result.
I can’t help but like Ladder Capital Corp. on the drop. The real estate finance company is a leading player in the industry, has a large floating-rate loan portfolio and considerable NII upside in a rising rate environment. The REIT’s core earnings payout ratio is conservative, and management has proven to be shareholder-friendly, handing quite a few dividend raises to shareholders in the last few years. Importantly, shares have become cheaper on the irrational sell-off, and LADR is now close to being oversold. Strong Buy for income and capital appreciation.
Disclosure: I am/we are long LADR, STWD, BXMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.