High-Yield Stock Pays 8%, Robust Dividend Coverage, Just Raised Cash Dividend 9%

| About: Ladder Capital (LADR)
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Summary

Ladder Capital makes a strong value proposition as an income vehicle.

Excess dividend coverage implies future dividend growth.

Ladder Capital's shares are selling for less than 10 times run-rate Q3-16 Core EPS, only a slight premium to book value.

An investment in LADR yields 7.86%.

Ladder Capital Corp. (NYSE:LADR) pulls in robust core earnings from its multiple, complementary businesses, has core earnings upside related to an interest hike, and just increased its recurring cash dividend by 9 percent.

With interest rates still way too low, investors have to turn elsewhere for income and yield. Fortunately, commercial real estate finance REITs like Ladder Capital offer income investors an attractive entry dividend yield, strong dividend coverage, and attractive prospects for dividend growth.

Ladder Capital serves the entire commercial real estate finance spectrum: The REIT originates and invests in first mortgage loans whose values are underpinned by cash flow-producing commercial real estate across the United States. Ladder Capital also invests in commercial mortgage-backed securities and in direct real estate.

The result is a highly diversified, highly secure commercial real estate investment portfolio that produces recurring interest income.

Source: Ladder Capital

As opposed to fixed-rate conduit loans (loans that are put into CMBS pools, securitized, and then sold to sophisticated investors like pension funds, hedge funds, insurance companies etc.), balance sheet first mortgage loans typically are floating-rate, providing Ladder Capital with a kicker for higher net interest income as short-term interest rates rise.

Source: Ladder Capital

Net Interest Income Upside

Ladder Capital has ~$1.4 billion in floating-rate assets sitting on its balance sheet, which will produce more income as short-term interest rates rise.

The real estate finance company anticipates a $2.4 million boost in yearly net interest income, assuming a 100 bps increase in LIBOR.

Source: Ladder Capital

Ladder Capital Has Consistently Been Profitable

Commercial real estate is not a steady business. The CRE market is volatile and can create wide swings in core earnings from one quarter to the next. That being said, though, Ladder Capital has been consistently profitable since inception, and the REIT does not have any problems at all covering its dividend with core earnings.

Source: Ladder Capital

Significant Potential For Dividend Growth

If you buy Ladder Capital today, you can lock in a 7.86 percent yield, which is not bad for starters.

Last week Ladder Capital announced a dividend raise of 9.1 percent (!) thanks to its strong core earnings trajectory. The new quarterly cash dividend is therefore rising from $0.275/share to $0.30/share. I don't know of many REITs, whether in the commercial real estate finance business or elsewhere, that have the wiggle room to finance such a big raise. In any case, the dividend hike makes Ladder Capital a compelling income vehicle for a DGI portfolio.

Ladder Capital has cushy dividend coverage, too, which bodes well for future dividend raises. The company pulled in $0.39/share in core earnings in the last five quarters, handsomely covering its dividend payout in every single quarter.

Source: Achilles Research

Reasonably Cheap Given Ladder Capital's Excess Dividend Coverage

Ladder Capital sells for ~9.5x run-rate Q3-16 core EPS. From a book value perspective, income investors pay a ~12.4 premium to the last reported Q3-16 GAAP book value of $13.59/share.

Your Takeaway

Commercial real estate finance vehicles are compelling income vehicles, largely because they have invested heavily in floating-rate loans that they keep on their balance sheets. Therefore, the combination of net interest income upside related to a rise in short term interest rates, and strong dividend coverage on a core EPS basis support the bull case. Ladder Capital has just hiked its dividend by a whopping 9 percent. Buy for income.

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