Laddered equity: 7.6% return, strong fundamentals (NYSE: LADR)

marsmeena29

Origins for Ladder Capital Corporation (NYSE: LADR) remained strong in the second quarter and the mortgage trust again covered its dividend with distributable earnings.

Ladder Capital benefited from good commercial real estate market conditions and strong demand for new origins.

The stock is an attractive addition to an income-focused investment portfolio, as its 7.6% yield is covered by distributable earnings and it continues to trade at a slight discount to its book value.

Solid portfolio, solid origins

Ladder Capital’s commercial loan portfolio is concentrated in multifamily and office properties, which represent 32% and 25% of the trust’s total real estate investments, respectively.

As of June 30, 2022, multi-family and office properties accounted for 57% of Ladder Capital’s real estate exposure, with the remaining 43% allocated to mixed-use, hotel, retail, industrial and pre-engineered properties.

At the end of 2Q-22, Ladder Capital’s first mortgage portfolio was valued at $4.0 billion, compared to $3.9 billion in the prior quarter. The value of Ladder Capital’s loan portfolio increased due to new originations.

In 2022, the origins of Ladder Capital are still going strong. Ladder Capital issued $371 million in new loans in 2Q-22, after issuing $732 million in new first mortgage loans in 1Q-22.

Ladder Capital issued an additional $38 million in new loans in 3Q-22. The demand for new loans indicates that the commercial real estate market is doing well.

Overview of loan portfolio

Overview of loan portfolio (Ladder Capital Corp.)

Ladder Capital’s earnings rebounded as the real estate market recovered from Covid-19. In 2Q-22, the trust’s loan assets generated $0.34 per share in distributable earnings, a 240% year-over-year increase. Ladder Capital’s distributable EPS increased for the fourth consecutive quarter in the second quarter.

distributable profit

distributable profit (Ladder Capital Corp.)

Ladder Capital’s 2Q-22 distributable EPS of $0.34 per share compares to a dividend payout of $0.20 per share. The dividend has since been increased by 10% to $0.22 per share. Over the previous twelve months, the trust earned $0.94 per share in distributable income while paying out $0.80 per share, for a payout ratio of 85%.

The payout ratio

The payout ratio (Table created by author using trust information)

A Key Feature for Ladder Capital’s Earnings Growth: Exposure to Floating Rate Loans

Ladder Capital’s loan portfolio is 90% floating rate loans, which will generate higher interest income if the central bank continues to raise rates.

The central bank has already made two consecutive rate hikes of 75 basis points in June and July, and further hikes are expected to boost Ladder Capital’s net interest income. A 100 basis point increase in interest rates should result in additional annual income of $0.21 per share, according to Ladder Capital’s Interest Rate Sensitivity Table.

Interest rate increases

Interest rate increases (Ladder Capital Corp.)

Always trade at a discount

Ladder Capital not only offers a 7.6% return fully covered by distributable earnings, but its stock also trades at a discount to its book value.

The current price-to-book ratio is 0.96x, indicating a 4% discount to book value. Ladder Capital peers, Starwood Property Trust (STWD) and Blackstone Mortgage Trust (BXMT)both trade at a premium to book value, and I think Ladder Capital, given its strong origination position and performing portfolio, could do that as well.

Chart
LADR Price vs. Book Value by YCharts

Why Ladder Capital Might See a Lower Stock Price

Ladder Capital’s success as a mortgage origination platform is tied to the state of the commercial real estate market in the United States. If commercial real estate investors reduce their investment in the commercial real estate market and vacancy rates begin to rise, origination demand will likely slow.

As Ladder Capital has a large loan allocation to the cyclical office sector, a downturn in the office real estate market could impact the Trust’s origination volume and distributable earnings growth.

My conclusion

Ladder Capital is currently in good shape and performing well. Mounts were not as strong in the second quarter as in the first, but a cyclical decline in mounts is not yet an issue.

Additionally, Ladder Capital’s dividend is still covered by distributable earnings and the stock is trading at a discount to its book value.

With a covered dividend yield of 7.6% and strong fundamentals, Ladder Capital stock is, in my view, a good buy for income-oriented investors.

Sallie R. Loera