More Chatter Around Ladder: The Dividend Is Fatter
Summary
- Ladder shares were down by more than 23% last week.
- Its dividend yield is now 8.9%, but well covered by core earnings.
- The company’s multi-cylinder platform gives it optionality to deploy capital across its risk-adjusted pillars.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
Last week was a bad one for most all equities, and real estate investment trusts (REITs) were no exception.
As Hoya Capital Real Estate pointed out" “The S&P 500 finished the week lower by 11.3%.” And “REITs finished lower by 12.5%, a steeper one-week decline than that seen during any single week during the financial crisis.”
While many investors chose to run for cover during the debacle, we believe in staying diligent. Always. And so we kept our eyes trained, looking for opportunity.
As earnings season wound down on Friday, one of our favorite commercial mortgage REITs kept moving lower, possibly indicating a wider margin of safety. At one point, shares of Ladder Capital (NYSE:LADR) were down by more than 23% for the week.
They recovered a bit before the bell, recovering to a mere -16% instead – which still makes for an intriguing buy.
Source: Yahoo Finance
Over the years, we’ve done extremely well with our stake in Ladder. It’s returned an average 15.7% annually since February 2016, when we first entered it:
Source: Sharesight
Ladder already represents 3.2% of the Durable Income Portfolio, which also is this author’s primary investment portfolio. But now might be the time to increase that amount.
Despite its recent price drop – which makes its dividend yield 8.9% – it’s core earnings are solid, making that payout more than sustainable.
Let’s take a closer look at Ladder, including more about its payout ratio. Because of all of this chatter, the dividend is fatter!
And we want to take a closer look.
Ladder’s Business Model
As viewed below, Ladder has three main business lines:
- Lending
- Investment-grade rated securities
- Real estate equity (in mostly net leases).
Together, those focuses add up to more than $6.7 billion of assets.
Also together, it offers an inherently safer system than a mono-line approach. It’s better positioned to produce profits through cycles and a wide range of market conditions – which we can’t help but appreciate.
Source: LADR Investor Presentation
Ladder’s senior secured balance sheet business represents a majority of its revenue. In that, it’s similar to Blackstone Mortgage Trust (BXMT) and Starwood Property Trust (STWD). At the end of 2019, Ladder owned $3.25 billion of balance sheet loans that consists of 96% senior secured loans and 4% mezz loans.
Source: LADR Presentation
Ladder originated $466 million of balance sheet loans during Q4-19 – almost all of which had floating rates – with an average size of $23 million. Their weighted average spread was 385 basis points (bps) over LIBOR, and their weighted average loan-to-value (LTV) was 68%.
The company also received $454 million of payoffs, primarily comprised of floating-rate loans with a weighted average spread of 537 bps over LIBOR. That results in $12.3 million of net-balance-sheet loan originations.
For the full-year 2019, Ladder originated $1.5 billion of predominantly floating-rate balance sheet loans. Their average loan size was $21 million. Their weighted average spread was 403 bps over LIBOR, and their weighted average LTV was 69%.
Ladder expects its balance sheet lending business to be its primary source of core earnings in 2020. But it also expects securitization activities to supplement quarterly earnings.
During Q4-19, it acquired $446 million of highly-rated securities and a total of $1.6 billion for the full year. As of Q4-19, Ladder’s securities portfolio totaled $1.7 billion, up from $1.4 billion year over year.
Source: LADR Presentation
Another Business Segment Analyzed
Ladder’s conduit business contributed $15 million to Q4-19 earnings. That was from the securitization of $421 million of loans and a private sale of $34 million of conduit loans.
For the full year, the segment contributed $39 million in core earnings from the sale of $1 billion of loans.
Then, in Q1-20, Ladder sold $186 million worth of loans ($134 million into securitization) and an additional $52 million through private sales. Both transactions closed in February and generated $6.2 million of core gains.
Source: LADR Presentation
Ladder’s equity platform is often misunderstood, and this is where I believe there’s substantial value to unlock.
It has around $1 billion of brick-and-mortar assets, with two-thirds of that invested in net lease properties. The balance is through binary risk opportunities.
Source: LADR Presentation
For its part, the real estate business had $1.3 billion of investments on an undepreciated basis comprised primarily of net lease properties with credit tenants.
Along those lines, Ladder completed the sale of its last remaining condominium unit at Veer towers in Las Vegas in Q4-19. The $119 million investment in Veer Towers resulted in a net profit of $52 million and generated a 23.5% internal rate of return to date.
Source: LADR Presentation
Many traditional commercial mortgage REITs have focused exclusively on lending, which can be problematic. We consider Ladder’s real estate platform to be a source of untapped value, especially the net lease exposure.
And Ladder could easily ramp up its exposure from here to get closer to 35% concentration in real estate.
The Balance Sheet
As of Q4-19 Ladder’s adjusted leverage ratio was 3x, or 1.9x excluding investment grade-rated securities portfolio. The company has more than $2.5 billion of undrawn committed financing capacity.
Source: LADR Presentation
During 2019, it made meaningful progress on its path to become investment grade. And this January, it closed on $750 million in unsecured seven-year corporate bond offerings at a coupon rate of 4.25%.
Complementing that was Moody’s bumping its corporate rating to Ba1 and Fitch to BB+. This also triggered a 25-bps stepdown in its interest rate on the unsecured corporate revolving credit facility.
According to an S&P report:
- Ladder's assets have a lower-risk profile than its peers.
- A significant amount of its leverage is in its investment-grade securities investments.
- Its funding has shifted significantly in the past couple years away from repurchase facilities and toward more stable, longer-term, collateralized loan obligations and unsecured funding.
- Ladder manages margin-call risk by holding significant amounts of cash and unencumbered assets… and by maintaining significant unused capacity on its financing line.
Source: LADR Presentation
Meanwhile, Moody’s says that Ladder's “moderate leverage, high-quality assets, history of profitability since inception, and increasing funding diversification” factor into its upgrade.
It also believes Ladder's earnings performance is more stable these days and has “demonstrated strong credit results”:
“… Having recorded minimal credit losses in its loan portfolio since inception, (thereby) reflecting the company's strong risk management culture, as well as (its) highly experienced and well-regarded management team.”
Source: LADR Presentation
And Fitch notes that Ladder’s ratings “reflect their platform as a CRE investor, conservative underwriting culture, granular portfolio and internal management structure.” It’s also impressed by Ladder’s continuing commitment to originate loans on transitional properties. Those, Fitch says, provide for more stable bases of net interest and income.
The ratings company sees Ladder as having a solid management team with significant experience and a strong track record.
Then, last but not least along these lines, the company extended the maturity dates on all of its secured funding facilities and its $266 million corporate revolving credit facility. It now has an average remaining term of over four years on its secured loan purchases.
Source: LADR Presentation
A Few Credit Risks
On the recent earnings call, Ladder did describe a few credit risks. For instance, it recorded a $2.25 million gain on foreclosure on a $5.7 million mezzanine loan secured by a San Diego hotel.
This appeared to be a technical default that Ladder should easily recover. Still, I’m glad the company’s reducing its lodging sector exposure, now to around 11%.
Ladder has about $450 million in hotels: $385 million worth of loans and $60 million owned. Its average LTV is 70%, with 0% exposure to New York hotels.
The company also recorded a $2 million loss provision on a $23.6 million land loan that defaulted during the quarter.
Then there’s the loan for what was once 3M’s headquarters in Austin, Texas. According to Statesman.com, the property is now in foreclosure. It’s currently controlled by Austin real estate investor Nate Paul and includes a 1 million square foot facility on 156 acres.
On the recent earnings call, CEO Brian Harris explained that it's a unique case:
“The sponsor has a legal problem. And he's got several entities in bankruptcy because he owns many properties. And until his legal situation gets clarified, which has not been yet – we are in Texas, and Texas does move through things a little bit faster – but I think our exposure on the loan at $60 million is about $70 a square foot. And, near as I can tell in that area… is traveling at a price higher than that.”
As such, the company is very confident:
“The loan is currently accruing at a default rate of almost 14%. And so that can become difficult to pay after a few years, but – and when I say accruing, I don't mean accruing at Ladder Capital's Financials. We've got it on non-accrual status. But when it comes to foreclosure, if he wants to avoid it, and he wants to pay us… that will be a pretty big windfall if we collect all that interest.”
It appears these loan defaults are manageable with a minimal risk of loss. Besides, Ladder is well positioned to be a loan-to-own player if needed.
The Earnings Results
In Q4-19, Ladder’s core earnings were $48.6 million and core earnings per share were $0.40. For the full year, those figures were $190.6 million and $1.60, respectively.
Here’s a snapshot of its history and 2020 forecast:
Source: iREIT
As you can see, Ladder’s EPS fell by around 17% from 2018 to 2019. That’s directly related to it not being an active seller last year. That’s why its after-tax core return on average equity was 11.6%.
Source: LADR Presentation
In Q4-19, it declared a cash dividend of $0.34/share – representing an 85% cash dividend/core EPS payout ratio, the same amount as for the full year.
Here’s a snapshot of Ladder’s dividend history:
Management Matters
As illustrated below, Ladder has been relentless in its efforts to focus on credit risk management. It’s originated over 1,000 loans since inception, with only one principal loss.
Source: LADR Presentation
Ladder’s management team has an average of nine years’ tenure and 20 years’ industry experience. The company also is internally managed with high insider ownership at 11.3%.
We remain attracted to its best-in-class payout ratio and how it’s grown its dividend for five years in a row. Peers BXMT and STWD, however, have flat-lined their dividends.
Given the recent pullback, we consider Ladder to be at a good entry position.
In summary, we’re increasing exposure to Ladder in various portfolios.
Its multi-cylinder platform gives it attractive optionality to deploy capital across its risk-adjusted pillars. And we believe management has ample experience to navigate credit risks during this real estate cycle.
Our forecasting model below targets annual returns of 18.5% annually. That includes 8.9% dividends and around 10% price appreciation.
Source: FAST Graphs
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.
Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn moreAnalyst’s Disclosure: I am/we are long LADR, BXMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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