Ladder Capital: Improving Credit Trends Make This 8.4% Yielding Trust A Buy

seekingalpha05-01

Ladder Capital Corp offers a compelling value proposition for passive income investors with a well-diversified commercial real estate loan portfolio and solid dividend coverage.The trust's 8.4% yield ...

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Ladder Capital makes a compelling value proposition for passive income investors due to its well-diversified commercial real estate loan portfolio, its relatively low exposure to the U.S. office market, and solid dividend coverage, particularly after other mortgage originators have seen a rise in impaired loans lately. I think that Ladder Capital provides very good value for passive income investors and the trust's 8.4% yield has been well-covered by distributable earnings in the last quarter too. My Rating History Ladder Capital deserved a Buy stock classification in February as the mortgage lender profited from a decline in the revision for credit losses. Ladder Capital released 1Q24 earnings on April 25, 2024, which showed the second consecutive quarter of declining credit provisions. The trust also maintained very good dividend coverage that drastically lowered the risk of a dividend adjustment in 2024. I think that the trust's 1Q24 earnings as well as improved dividend coverage QoQ reaffirm my Buy thesis. Portfolio Review And Reserve Trend Ladder Capital is a mortgage real estate investment trust with a balanced investment portfolio. The trust's portfolio included primarily multifamily, office and other CRE loans, net lease commercial real estate equity, commercial real estate securities and a boatload of cash that can be deployed into new investment opportunities should the market provide an opportunity. Ladder Capital's portfolio had a total of $5.5 billion in investment assets as of March 31, 2024, with commercial real estate loans accounting for 52% of all investments. The office category, which is experiencing some distress due to the presence of higher interest rates as well as hybrid work arrangements that have put the screw on office landlords, represents 16% of investment assets. The majority of CRE loans are highly collateralized and therefore provide protection in case a borrower experiences financial stress and falls behind in making interest payments on time. Blackstone Mortgage Trust, Inc. (BXMT), which had 36% office loan exposure in the first quarter, just had to report a substantial increase in its credit loss reserve which pushed the dividend coverage ratio, on an adjusted level, to just 105%. Portfolio Overview (Ladder Capital Corp) Ladder Capital had to add to its credit loss reserves in the first quarter, a trend that is not new to the mortgage trust. Ladder Capital added $5.8 million to its loan loss reserves in the first quarter which brought the cumulative reserve total to $43 million. The trust, in 1Q24, had its second consecutive quarter of lower provisions for credit losses, a detail that stood out with Ladder Capital's earnings release, and that suggests that the trust maintains a high loan quality. Ladder Capital earned $37.1 million in net interest income in 1Q24, reflecting a decline of 14% YoY. Provision for loan loss reserves and dividend coverage are the two most important metrics for passive income investors at this point. Moving forward, I think Ladder Capital could try to scale back its exposure to the office market by either investing repayments into other sectors (like multifamily or CRE securities) or divesting office loans in order to remove the credit risk from its portfolio. Income Statement By Quarter (Ladder Capital Corp) Dividend Coverage Improved QoQ Ladder Capital earned $0.33 per share in distributable earnings in the first quarter, reflecting a $0.01 per share increase QoQ. Importantly, Ladder Capital has very robust dividend coverage which makes a dividend adjustment to the downside at this time extremely improbable, unless the trust were to see a severe decline in its underlying loan quality. As I mentioned above, Blackstone Mortgage Trust's dividend coverage ratio in 1Q24 fell to just 105%, so Ladder Capital offers a much higher safety margin as far as the dividend is concerned. Ladder Capital had a dividend payout ratio of 143.5% in the first quarter, reflecting a QoQ improvement of 4.4 percentage points. On a rolling basis, Ladder Capital's dividend pay-out ratio stood at a remarkable 140.2% which strongly suggests that the commercial mortgage real estate investment trust will continue paying shareholders a $0.23 per share per quarter dividend in 2024. Dividend (Author Created Table Using Trust Information) Ladder Capital Is Still Cheap Ladder Capital's book value remained fairly steady QoQ and was reported, as of March 31, 2024, at $11.93, reflecting a decline of only $0.15 per share. My intrinsic value benchmark for Ladder Capital is the GAAP book value of $11.93. With Ladder Capital's stock now selling for $11.00 per share, the valuation reflects an 8% discount to book value. Ladder Capital is not the cheapest CRE stock in its peer group, however, and this is a good thing because it is the trust's high dividend quality that keeps its stock price close to book value. Blackstone Mortgage Trust is selling for a 25% discount to book value. The larger BV discount is due to the fact that BXMT has softer dividend coverage and higher office loan exposure than Ladder Capital. Starwood Property Trust, Inc. (STWD) is selling for a 2% discount, thanks to its quality reputation as a reliable dividend payer and well-diversified investment portfolio. Data by YCharts Potential Risks For Passive Income Investors If Ladder Capital were to see a severe uptick in credit loss provisions, this would probably foreshadow problems with the dividend. If Ladder Capital sees loan defaults in its multifamily and office portfolio, then the mortgage real estate investment trust could be primed for a deterioration in its dividend coverage ratio which may threaten the dividend. My Conclusion Ladder Capital's first quarter was convincing in a number of respects: Loan loss provisions declined for the second straight quarter, suggesting high underlying loan and cash flow quality. Furthermore, Ladder Capital has relatively little exposure to the U.S. office market, at least when compared against Blackstone Mortgage Trust. Lastly, Ladder Capital continued to healthily out-earn its dividend with distributable earnings leading to a dividend coverage ratio in excess of 140%. The stock is also still selling for a discount valuation, potentially allowing passive income investors to earn capital appreciation on top of a well-covered 8.4% dividend yield.  The risk/reward relationship still looks promising to me and I think that passive income investors can do very little wrong with Ladder Capital in 2024.","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/2432589017"}