Ladder Capital: Cash Is King

seekingalpha04-30

The mortgage REIT sector has many high-yielding stocks with double-digit yields, but caution is advised.Ladder Capital Corp is a favorite pick in the mortgage REIT sector due to its strong balance ...

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Just take a look at these mouthwatering dividend yields:  Cherry Hill (CHMIT): 17.3% NexPoint Residential (NREF): 15.2% AGNC Investment (AGNC): 15.4% Granite Pointe (GPMT): 16.9% Annaly Capital (NLY): 14.0%.  I don’t know about you, but I get nervous when I see double-digit yields. As long as I’ve been writing on Seeking Alpha (over 14 years), I’ve never witnessed many double-digit yielding stocks that have made me rich (not one, actually). Call me “old school,” but I firmly believe that slow-and-steady stocks win the race. As my friend Chuck Carnevale has taught me, “the faster a business grows its earnings and cash flows, the greater the long-term returns it will generate for its stakeholders over the long run.” Just look at the 2023 growth numbers for these same mREITs: 2023 EPS Growth  CHMI: -8% NREF: -33% AGNC: -16% GPMT: -218% NLY: -32%.  Of course, that’s not to say an investor can’t profit from high-yielding stocks, but as usual, I always caution readers to pay close attention to the payout ratio because they (payout ratios) will always tell us something about the safety of the dividend. 2023 Payout Ratio  CHMI: 103% NREF: 190% AGNC: 66% GPMT: 300% NLY: 99%.  Now, today, I’m going to provide you with one of my favorite picks in the mortgage REIT sector. Ladder Capital: The Basics Ladder Capital Corp (NYSE:LADR) is an internally managed mortgage REIT with $5.3 billion of assets as of 03/31/24. The primary business is originating senior first mortgage fixed and floating rate loans collateralized by commercial real estate (\"CRE\") with flexible loan structures. LADR also owns real estate, including net leased properties, and also invests in investment grade securities secured by first mortgage loans on commercial real estate.   LADR IR In February, LADR celebrated its 10th anniversary as a public company.   Yahoo Finance During COVID-19, I purchased shares in LADR at around $4.00 per share. In April 2020, I explained that: “I see the substantial upside with LADR and we have included it in our \"Cash is King\" portfolio, remembering that we’re living in unprecedented times.”   Seeking Alpha Although I sold most of my shares in LADR at ~$12.00, I still maintain exposure, and I’m adding more within my high-yield investment portfolio. I’ll explain why… Let’s move on to the business lines… The Loan Portfolio LADR’s loan portfolio totaled $2.8 billion as of Q1-24 across 100 balance sheet loans, representing 52% of total assets. Although the company did not record any specific impairments in Q1-24, it did increase its CECL (current expected credit loss) reserve by $5.8 million, bringing the general reserve to $49 million. In Q1-24, there were 2 multifamily loans totaling $72.8 million placed on non-accrual:  $60.8 million loan secured by a portfolio of recently constructed apartments in Manhattan. $12 million loan collateralized by a 56-unit multifamily portfolio in the San Fernando Valley of CA.  One of the things I like about LADR’s loan portfolio is that the loan sizes are smaller bite-sized transactions, much smaller than loan sizes at Blackstone Mortgage (BXMT) or KKR Real Estate (KREF): Average Loan Size  BXMT: $124 million KREF: $120 million LADR: $40 million.    LADR IR In addition, LADR’s Senior Management Team and Board collectively own over 11% of the company, effectively making these insiders the largest shareholder. As Pamela McCormack, President of LADR discussed on the earnings call, “In full alignment with our stakeholders, our goal is to protect our investments by promptly addressing default and seeking the best long-term value for the company. With robust capitalization and extensive real estate experience, we remain well positioned to navigate challenges such as market downturns or assets depreciation, while executing the necessary business plans to optimize the properties values.”   LADR IR The Securities Portfolio LADR’s securities portfolios ended Q1-24 with a $467 million in loans, primarily consisting of AAA securities earning an unlevered yield of 6.84%.   LADR IR The Real Estate Portfolio LADR’s real estate portfolio is around $963 million, mainly composed of net leased properties (1.4 million sf) with long-term leases to investment-grade credits (like Dollar General and Walgreens), and contributed $14.4 million in net rental income in Q1-24.   LADR IR The Balance Sheet The strength of LADR’s balance sheet is reflected in credit ratings from all 3 rating agencies, with 2 of the agencies rating LADR just one notch below investment-grade. LADR’s two longer dated unsecured bond issuances (totaled $1.24 billion) comprise approximately 1/3 of total debt outstanding, with an average remaining tenor of 4 years and a weighted average coupon of 4.5%. LADR’s adjusted leverage ratio is 1.5x, and it has continued to trend down as the company has de-levered the balance sheet, producing steady earnings, strong dividend coverage (see below), and an attractive double-digit ROE. Unsecured corporate bonds anchor the capital structure with $1.6 billion outstanding (43% of our total debt) at a weighted average remaining maturity of nearly 4 years, and a fixed rate coupon of 4.7%. The unencumbered asset pool stood at $3.0 billion (57% of balance sheet) and 81% of this unencumbered asset pool is composed of first mortgage loans, securities, and unrestricted cash and cash equivalents.   LADR IR The Latest Earnings In Q1-24, LADR generated distributable earnings of $42.3 million, or $0.33 per share, resulting in a 10.8% return on equity. LADR’s dividend is $.23 per share, which represents a payout ratio of 70%. There’s plenty of cushion for the dividend, as LADR’s CEO, Brian Harris, explained, “…the amount of inside ownership that we have, we have every incentive to raise the dividend if we think it's helpful. Right now, we believe and we have demonstrated that we can drive earnings at levels well in excess of our dividend, and that should be a formula for a rising stock price. So because of the volatility in the marketplace that exists, there's always opportunities that pop-up suddenly and you don't really get a warning, they just sort of get there.” We suspect LADR will increase the dividend again in June, as it did in 2023:   LADR IR (Peer payout ratio shown below in our Data Duel section.) Risks Notable risks for LAR include loan defaults, office exposure, and Dollar General exposure. Loan Defaults On the Q1-24 earnings call, LADR’s CEO explained “…I think that the overriding issue that probably would make us all feel better is if I could turn on the TV one morning and not hear about real estate. The amount of time and ink dedicated by the media to commercial real estate, saying the same thing over and over and over. We're at a point where it almost feels like the bottom, because I was taught a long time ago when you can't hear another thing about something that makes you feel worse, you're probably at the bottom. I kind of feel like we’re there at this point.” LADR’s president also explained, “…borrowers are beginning to accept that rates will simply be higher for a while and they will need to plan accordingly as the era of free money seems to have come to an end. Armed with strong liquidity and a disciplined credit model, we look forward to the rest of 2024.” Office Exposure LADR has 31% office exposure and 34% multifamily exposure. The office exposure represents 16% of total assets, and 78% of this exposure is for post-COVID loans. In addition, the office portfolio has a weighted average LTV (loan to value) of 65%. Also, as noted previously, the loan portfolio is smaller and more diversified than most mREIT peers. Dollar General In 2023, Family Dollar closed 100 stores, Dollar General closed 74 stores, and Dollar Tree (owns Family Dollar) closed 59 stores. Here’s what LADR’s CEO said about Dollar General,  “The Dollar store model originally, I think coming out of Family Dollar, it’s like a single employee and sometimes a tough part of town. And there was a certain amount of slippage theft, if you will, that was accepted. However, in our Dollar General portfolio, that is a curated portfolio largely in rural areas around lakes and fishing areas, where there is wide geography and not tons of supermarkets around. So we see a lot of sales of tobacco products and beer and very little theft. And when we bought our Dollar Generals, we tended to buy about two out of every 10 we looked at. And so we think that that selection criteria will protect us through this. We do worry about some inner city retail. There's clearly a few problems in the drugstore chain area, but they're big companies that can probably make adjustments and figure out a way to get through it.”  Valuation I find LADR attractively priced, as shown below (using FAST Graphs)   FAST Graphs Before COVID-19, LADR traded at 9.3x:   FAST Graphs The dividend yield is 8.4%, lower than the peers (see data duel below) but that also comes with a low payout ratio of just 73%. That being said, if LADR paid out all of its earnings – in the form of dividends – the yield would be sitting at around 12%. Analysts forecast LADR to grow by 9% in 2025 and 6% in 2026 and using this consensus data, we believe that LADR could conservatively return 15% over the next 12 months. In other words, an 8.4% dividend yield plus 7% price appreciation.   FAST Graphs To reiterate, LADR has solid inside ownership, and this makes a big difference in terms of managing credit within the portfolio. I’ve spoken with the C-suite on many occasions, and I consider their experience a key differentiator in my decision-making process. As always, thank you for reading, and I look forward to your comments below. Data Duel (I hope you're enjoying our new \"data duel\" feature. Let us know your feedback, please. Thank you)   iREIT®    iREIT®  iREIT®  iREIT®","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431231417"}