Tiered capital (NYSE:LADR) is a leading mortgage REIT that provides capital to the commercial real estate industry. The REIT invests primarily in senior secured loans, secured by commercial real estate, which provide Ladder Capital with regular funding. Interest income. Ladder Capital as well as the commercial real estate industry as a whole could see headwinds ease in 2024 as the Federal Reserve moves to cut interest rates, but I don’t expect that REIT increases dividend next year. Given that the shares are now trading near book value, 0.96XP/B, I believe the risk profile is not attractive enough to maintain a Buy recommendation at this point!
I worked on Ladder Capital two and a half years ago, in 2021, and recommended stocks to investors focused on generating income: Yield and potential of 7.0% For a revaluation. Ladder Capital had a chance, I argued at the time, to close the gap that existed at the time between share price and book value. Given that Ladder Capital shares are now trading at 0.96x BV, compared to 0.8X BV in May 2021, I am lowering my rating to hold.
Ladder Capital is a leading provider of CRE capital focused on commercial lending
Ladder Capital provides liquidity and capital to the commercial mortgage market and has approximately $5.5 billion in assets. The main base of the REIT’s portfolio is senior secured loans which were valued at $3.4 billion at the end of the September quarter. In addition to lending to the commercial real estate sector, Ladder Capital invests in commercial real estate debt securities as well as net equity. But by far the most important segment for Ladder Capital is lending.
Ladder Capital had $4.0 billion in loans on its balance sheet at the end of September 2022, meaning the mortgage REIT’s loan portfolio decreased by $600 million over the past year. The reason for this reduced balance sheet size is that the REIT has reduced its lending to the commercial real estate sector due to rising interest costs associated with the new CRE debt as well as concerns over the performance of the CRE loans at a time when interest rates were at record highs.
If we look at Ladder Capital’s loan sector breakdown, we can see that the mortgage REIT made 27% of its total loan investments in the office sector… which is a relatively large percentage. In terms of the total balance sheet, 16% of investments concerned offices. For comparison, Starwood Property Trust had 13% of its total investments in office space (3% outside the US).
Ladder Capital’s CRE equity investments include 156 net lease commercial properties that are leased to tenants in exchange for recurring rental income. The segment had $888 million in total assets and generated approximately $55 million in net operating income on an annual basis. In this segment, 22% of investments are office-related, meaning Ladder Capital could face headwinds if the U.S. office sector underperforms in 2024. As I said earlier, the proposed The Federal Reserve to cut interest rates next year could have the effect of easing pressure on the US office real estate market.
Finally, Ladder Capital’s investments include a $477 million securities portfolio, which also generates income for the mortgage REIT. The securities portfolio consists largely of investment grade commercial real estate securities with a weighted average duration of 2.1 years.
Solid trajectory of distributable profits
Ladder Capital provides a reasonably safe dividend at the moment, and I don’t see any major risks that could jeopardize the REIT’s ability to pay its quarterly dividend of $0.23 per share. During the first nine months of fiscal 2023, Ladder Capital achieved dividend coverage of 1.48 times (1.35 times in Q3 2023), so the dividend is expected to be maintained during the fiscal year 2024. I don’t see major dividend growth for the REIT, however, as operating conditions in the office market will likely remain weak in the near term as hybrid working conditions and pressure on occupancy rates persist.
Valued at book value
In 2021, when commercial REITs were still reeling from the COVID-19 pandemic and a large-scale shutdown of commercial real estate across the country, I recommended Ladder Capital as a buy. Since then, the situation has improved to the point where Ladder Capital shares are now trading close to book value. This is generally true for other mortgage REITs, including Starwood Property Trust (STWD)… which I prefer over Ladder Capital given that the REIT has a stronger dividend history and is more diversified in its real estate portfolio: A solid 10% yield awaits dividend investors.
Ladder Capital shares are now also trading above their 3-year average P/B ratio of 0.92X. In 2021, I expected Ladder Capital to be able to close the gap that existed at the time between share price and book value. With a P/B ratio of 0.96X, I see limited upside potential. Ladder Capital’s book value for the third quarter of 2023 was $12.13, which I consider the fair value of the REIT.
Risks with Ladder Capital
The Federal Reserve announced a major change in December, which is good news for the commercial real estate market in general. Lenders are concerned about the impact of rising interest rates and have put more capital aside to cushion the blow. Until interest rates correct downward, Ladder Capital continues to face the risk of higher defaults.
Ladder Capital is not a buy at the moment, in my opinion, but a hold. While the commercial REIT was a speculative buyout in 2021, during the last major crisis in the commercial real estate market, the situation today is very different. Ladder Capital offers a well-sustained dividend, but with the shares now trading at around their reported book value for Q3 2023, I think the risk profile at the current valuation level is not attractive. However, I also believe the quarterly dividend is sustainable at its current rate of $0.23 per share, but I would not expect much growth from the REIT in terms of dividend growth in fiscal 2024!