BXMT - Ladder Capital: Raise Your Cash Flow With This 8.5% Yield

2023-08-15 08:30:00 ET

Summary

• Ladder Capital is a high-yielding stock with a diversified portfolio of commercial mortgages and real estate assets.
• The company has strong fundamentals, including a 10.8% return on equity and a robust dividend coverage ratio.
• LADR is well-prepared for adversity, with a sizable cash balance and relatively low debt, and trades at a significant discount to undepreciated book value.

Building up one’s cash flow is one of the most important things that you can do to secure financial freedom. Yet, most people are stuck with what I would call a ‘middle-class mindset’, which is to accumulate capital in a target dated retirement fund, and withdraw 4% principal from it every year regardless of market ups and downs.

A better idea may be to build up one’s income ladder, with a mix of high, mid, and even low yielding (but faster growing) stocks that can give an overall satisfactory yield to fund living expenses, vacations, and/or one’s retirement.

This brings me to the high-yielding stock, Ladder Capital ( LADR ), which I last covered here in July. The stock has pulled back by 8% since hitting a near term high of $11.72 last month. In this article, I provide an update on recent quarterly results and discuss why LADR remains an appealing stock at present for high income, so let’s get started!

Why LADR?

Ladder Capital is an internally managed commercial mortgage REIT, the benefits of which include high alignment of management interest with that of shareholders. This is supported by high insider ownership, with the management team and directors owning over 10% of the company.

Unlike Blackstone Mortgage ( BXMT ), which has a pure-play focus on commercial mortgages, LADR takes a diversified approach by owning net leased commercial real estate and a mortgage-backed securities portfolio, of which 82% is AAA-rated or agency-backed, and over 99% is investment-grade rated. As shown below, three-quarters of the portfolio is invested in commercial mortgages, 15% in physical real estate, and the remaining 10% in securities.

Meanwhile, LADR continues to demonstrate strong fundamentals with a 10.8% return on average equity and distributable EPS of $0.33, roughly in-line with the $0.34 generated in the prior year period. This equates to a robust 1.43x dividend coverage ratio, and over the past five quarters, dividend coverage has ranged from 1.17x to 1.65x.

LADR’s commercial mortgage portfolio is supported by 99% senior secured first mortgage loans with a weighted average loan-to-value of 67%. They carry 2.3-year weighted average extended maturity and 84% of the loans were generated post-COVID, meaning that property collateral was hand-picked with the current macroeconomic landscape in mind. As shown below, office represents 26% of the loan portfolio with multifamily, mixed use, and industrial property types making up 61%.

The real estate portfolio is also contributing nicely to the bottom line, generating $16 million of net rental income during Q2. Over 70% of the real estate assets are net leased properties with strong necessity-based tenants, 69% of which are investment grade rated and have a weighted average lease term of over 9 years.

Risks to LADR include higher than expected interest rates, which would raise its cost of funding while also increasing the potential for a borrower default. Also, while regional banks have pulled back a bit, they are far from being out of the game, as management noted that they are being aggressive in chasing business, and this could put pressure on LADR’s profit margins.

Nonetheless, LADR is well-prepared for adversity, as it currently holds a sizable cash balance of $777 million, or 14% of its assets. Including its undrawn unsecured revolving line of credit, LADR has $1.1 billion of same-day liquidity. This gives it a buffer against a worst-case margin call, as well as financial flexibility to pursue opportunistic deals. LADR is also modestly leveraged with a debt to equity ratio of 1.7x, sitting below the 2.4x of Starwood Property Trust ( STWD ) and 3.4x of Blackstone Mortgage Trust.

Lastly, LADR was able to grow its undepreciated book value per share to $13.72, an increase of $0.08 sequentially and $0.15 compared to the prior year period. The undepreciated book value also includes BXMT increasing its CECL reserve to $32 million to account for the potential of loan defaults.

At the current price of $10.72, LADR trades at a 22% discount with a price to undepreciated book ratio of 0.78x. It also carries a forward PE of 7.96, which is generally for companies that are projected to have a perpetual decline in earnings.

Given the strong dividend coverage ratio, portfolio composition, and high dividend yield of 8.5%, I believe LADR deserves to trade at a price to undepreciated book value in the 0.9x to 1.0x range, and analysts have a consensus Buy rating with an average price target of $12.21.

Investor Takeaway

Ladder Capital remains an appealing stock at present for income investors due to its high-yield and strong dividend coverage ratio. The company is also well-positioned to ride out the inevitable market cycles with it having a sizable cash balance, relatively low debt by industry standards, and investments in real estate properties that are primarily net leased to necessity based tenants. With a sizable discount to undepreciated book value and high insider ownership, income and value investors ought to consider LADR at the current price.

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