Ladder Capital: 8.1% Yield, 133% Dividend Coverage, Discount To BV

Ladder Capital Corporation (NYSE:LADR) is a well-managed commercial real estate investment trust with a large portion of its assets invested in first mortgages, which provide the company with a consistent stream of net interest income.

Ladder Capital’s dividend coverage in 2022 exceeded 133%, making the current quarterly dividend of $0.23 per share very secure.

Ladder Capital, in my opinion, is an excellent investment for passive income investors, and because the trust’s stock is currently trading at a discount to book value, I believe LADR stock could achieve a premium valuation in the future.

A Large, Floating Rate Loan Portfolio Is At The Heart Of Ladder Capital’s Business

Ladder Capital primarily invests in first mortgage loans, which are held on the trust’s balance sheet. Ladder Capital’s loan portfolio was valued at $3.82 billion at the end of the December quarter, representing 11% YoY growth.

Ladder Capital originated $1.23 billion in new loans during the fiscal year 2022. Total originations in the fourth quarter were only $38 million, indicating that commercial real estate deal activity is slowing. Origination volumes began to fall in the second half of 2022, owing to sluggish demand for higher-interest loans in a rising-rate environment.

So far, the portfolio’s quality appears to be good, with credit loss allowances averaging $22 million per quarter through 2022. For obvious reasons, an increase in loan losses would be cause for concern.

The trust’s floating rate loan portfolio is one of the best reasons to invest in Ladder Capital. A rise in interest rates is expected to provide Ladder Capital with net interest income tailwinds in 2023, potentially improving the dividend coverage ratio (not that this would be required, however).

Because approximately 90% of Ladder Capital’s first mortgage loans are linked to floating rates, the central bank’s policy toward rate hikes in 2023 could drive an upward surge in portfolio income and, possibly, help close the gap between Ladder Capital’s book value and stock price. According to Ladder Capital’s most recent interest sensitivity table, a 100-basis-point increase in interest rates increases net interest income by $0.22 per share per year.

Dividend Coverage Above 130%

In the fourth quarter, Ladder Capital’s investment portfolio generated $0.31 per share in distributable earnings, and the trust paid out $0.23 per share in dividends, resulting in a dividend coverage ratio of 135%.

Ladder Capital earned $1.17 per share in distributable earnings and paid $0.88 per share in dividends over the last twelve months, implying a dividend coverage ratio of 133%.

The dividend based on distributable earnings appears to be extremely safe, and a hawkish central bank could point to higher distributable earnings growth and an even higher dividend coverage ratio in 2023.

Valuation Comparison Ladder Capital And Peers

Ladder Capital is currently trading at a 6% discount to book value. The trust is not the only commercial real estate investment trust that is currently trading at a discount, implying that not only Ladder Capital is undervalued. Both Starwood Property Trust Inc. (STWD) and Blackstone Mortgage Trust Inc. (BXMT) trade at a discount to book value, which could indicate that investors anticipate lower origination growth in the future or a recession.

Considering Ladder Capital’s very strong dividend coverage ratio, I believe LADR deserves to trade at a 10-15% premium to book value.

Why Ladder Capital Could See A Lower Valuation

Ladder Capital is trading at a discount to book value, but it is a small one so far. This could change if the commercial real estate market absorbs a drop in new mortgage loan originations.

Negative origination growth would most likely limit Ladder Capital’s ability to grow distributable earnings and result in an even more egregious discount valuation.

A less hawkish central bank could undermine my argument about Ladder Capital’s floating rate exposure.

My Conclusion

Ladder Capital is a well-managed commercial REIT with a strong first mortgage loan portfolio and a dividend coverage ratio above 130% for passive income investors.

Even though Ladder Capital is seeing a decline in demand for new loan originations, the trust is still doing well. Furthermore, I believe that floating-rate exposure is an important asset for trust in a rising-rate environment.

Considering that Ladder Capital’s stock pays a decent and covered 8.1% dividend yield and has upside potential, I believe passive income investors should consider purchasing LADR.