2023-03-20 08:05:27 ET
Summary
- Ladder Capital now trades at a significant discount to book value.
- Management is positioning the portfolio towards safer asset classes with multifamily as its biggest underlying segment.
- It carries a strong balance sheet and pays a well-covered 10%+ yield.
I like baseball, among other sports, because it teaches you how to be resilient in the face of adversity. There are also many sports analogies that apply to the real world, including financial investments.
To quote the great baseball legend, Yogi Berra, “stocks are the only place where people don’t want to buy when things go on sale.” This only creates opportunities for value investors, however, as the market pendulum overcorrects, resulting in high-yielding bargains.
This brings me to Ladder Capital ( LADR ), which as shown below, is now trading at lows not seen since the end of September last year, pushing its dividend yield past the 10% mark. Let’s explore what makes now an opportune time to layer capital into this high yielding stock.
Why LADR?
Ladder Capital is an internally-managed commercial mortgage REIT that's focused on generating senior secured loans collateralized by high-quality properties in the middle-market.
At present, LADR’s portfolio carries $6.0 billion of assets across CRE loans, securities, and equity. It’s also well-positioned for the current high interest rate environment, as 90% of its loan portfolio is comprised of floating-rate first mortgage loans.
At the same time, 48% of LADR’s liabilities are fixed rate. This includes $1.6 billion worth of long-term unsecured corporate bonds with a 4.7% weighted average coupon, thereby enabling LADR to take advantage of increasing investment spreads.
Meanwhile, LADR appears to be doing rather well, as it generated $0.31 in distributable earnings per share during the fourth quarter, which comes to an after-tax return on equity of 10.2%. This also results in a strong dividend coverage ratio of 1.35x, based on the current quarterly dividend rate of $0.23 per share.
Management is also positioning the portfolio towards safer asset classes, as $1.2 billion of the balance sheet loans originated during 2022 were either multifamily or manufactured housing. As shown below, multifamily now represents LADR’s biggest asset class in its balance sheet loan portfolio, followed by office and multiuse at 25% and 19%, respectively.
Moreover, LADR currently sees a healthy 4.25% weighted average investment spread and a weighted average coupon of 8.25% on its balance sheet loan portfolio. LADR’s current portfolio has also been de-risked considering that 82% of the loan portfolio is comprised of post-COVID loans that reflect conservatively reset valuations.
In particular, management highlighted the quality of its office loans, which are primarily comprised of Class A and / or Sunbelt region properties, as described in the recent conference call :
We've continued to see stable performance in our office loan portfolio, which comprises 25% of our total loan portfolio. If you exclude our two largest office loans, both of which Brian will address when he discusses our office investments in more detail shortly, that percentage drops to just 18% with a $25 million average loan size, consistent with the rest of our portfolio.
Further, our average last dollar loan exposure is $112 per square foot, a testament to our focus on basis. 65% of our office loans are acquisition loans, 69% are on Class A properties, 58% are located in the Sunbelt and 72% of our office loans are post-COVID loans.
Admittedly, risk is currently elevated for LADR, as delinquencies in commercial real estate loans rose sequentially from 0.58% to 0.65% during the fourth quarter. While this doesn’t appear to be substantial, it’s something worth paying attention.
However, LADR appears to be well-positioned for potential headwinds with a strong balance sheet, with a debt to equity ratio of just 1.9x, sitting well below 2.5x and 3.8x of commercial mortgage REIT peers Starwood Property Trust ( STWD ) and Blackstone Mortgage Trust ( BXMT ), respectively.
Importantly, insiders have significant skin in the game. This is reflected by the management team and directors owning more than 10% of LADR's outstanding shares.
It also seems that most of the near-term risks are more than priced into the stock at the current price of $8.99 with a price to undepreciated book value of 0.66x, equating to a substantial 34% discount to book. Analysts have a conservative price target on the stock at $13.00, which still equates to potentially very strong total returns from the current price.
Investor Takeaway
Ladder Capital is an attractive option for investors with a well covered 10.2% yield and a relatively strong balance sheet compared to peers. While risk is currently elevated in the loan portfolio, management appears to have positioned the company in a strong position with conservatively reset loan portfolio. Lastly, the stock appears to be significantly undervalued at present. As such, investors looking for a high income stream may want to give LADR a hard look at current prices.
For further details see:
Ladder Capital: Time To Batter Up On This Super Yield