Ladder Capital Stock: Quality Has Its Price (NYSE:LADR)

Ladder Capital Corporation (NYSE:LADR) managed to cover its dividend with distributable earnings in the second quarter and the commercial real estate investment trust maintained a stable book value on a YoY basis.

Ladder Capital’s book value stability is particularly impressive given that the office commercial real estate market is suffering economic pressure which just forced a dividend cut on Blackstone Mortgage Trust Inc. (BXMT).

Ladder Capital’s 8% yield also offers passive income investors a high margin of safety which implies that the dividend should be sustainable.

Furthermore, the market recognizes Ladder Capital’s robust portfolio quality by applying only a 2% discount to book value.

In times of growing commercial real estate distress, I think passive income investors would want to overweight those CRE companies that offer the safest dividends.

My Rating History

Declining credit provisions as well as robust portfolio quality were two justifications for my Buy stock classification for Ladder Capital three months ago. The commercial real estate company maintained strong asset quality in the second quarter and continued to maintain high excess dividend coverage. I consider Ladder Capital to offer one of the best (safest) dividends in the CRE market right now.

Portfolio Review

Ladder Capital is a commercial real estate investment trust that is mainly invested in Balance Sheet First Mortgage Loans. These loans pay recurring interest income for the trust which passes the income through to shareholders as dividend.

First Mortgage Loans accounted for the majority of Ladder Capital’s assets (68%) in the second quarter. Other assets included in the trust’s portfolio are net-leased commercial real estate assets, commercial real estate securities and cash.

As opposed to Blackstone Mortgage Trust, Ladder Capital didn’t suffer a deterioration in its credit quality in the second quarter. Ladder Capital produced $34.3 million in net interest income in 2Q24, down $2.8 million QoQ, but the commercial real estate investment trust also benefited from lower credit provisions.

In 2Q24, the trust added only $5.1 million to its loan loss reserves, which was $0.7 million less than in the prior quarter and the lowest level of net additions to the reserve in a year.

Most importantly, Ladder Capital managed to report a small increase in its book value and comfortably covered its dividend with distributable earnings.

Dividend Should Be Safe

Ladder Capital once again covered its $0.23 per share per quarter dividend with distributable earnings in 2Q24: In the second quarter, the commercial real estate company earned $0.31 per share in distributable earnings which translated into a dividend pay-out ratio of 74% compared to a 72% dividend pay-out ratio in the last twelve months.

Taking into account the considerable degree of excess dividend coverage, I think that Ladder Capital presently offers the safest dividend in the CRE sector.

Blackstone Mortgage Trust just slashed its dividend by 24% due to insufficient distributable earnings as it suffered a severe decline in its loan quality in the second quarter.

Quality Has Its Price

Blackstone Mortgage Trust was just forced to cut its dividend as its distributable earnings proved to be insufficient to cover its pay-out. This decline was driven by higher reserves for credit losses in the office portfolio which also impaired the trust’s book value in the second quarter.

Commercial real estate, particularly the office category, is under considerable duress as landlords have trouble filling vacancies, leading to an underutilization of office space.

With that said, though, Ladder Capital did quite well in the second quarter against this backdrop, both in terms of dividend coverage as well as book value growth. Ladder Capital’s book value as of June 30, 2024 was $13.71 per share, compared to a book value of $13.72 per share in the year ago period. This means that the trust’s book value remained fairly steady over the course of the last twelve months, which improves the risk/reward relationship quite considerably, in my view.

Blackstone Mortgage Trust was not as fortunate, as its credit problems caused the trust’s book value to fall 4% in the last quarter. Ladder Capital’s book value increased 0.2% QoQ and the trust has substantially better dividend coverage as well: while Ladder Capital paid out only 72% of its distributable earnings in the last year, Blackstone Mortgage Trust paid out 93% of its distributable earnings in the last twelve months.

Starwood Property Trust Inc. (STWD) paid out 89% of its distributable earnings in the last four quarters.

Presently, Ladder Capital is selling for 0.97x book value which is the same multiple that Starwood Property Trust is getting. Blackstone Mortgage Trust, which I see as a riskier choice than either Ladder Capital or Starwood Property Trust, is selling for 0.76x book value.

Potential Risks For Passive Income Investors

Ladder Capital has sufficient excess dividend coverage to suggest that the dividend is not headed for the chopping block. But things might change if the trust, which still has a large portion of its assets (17%) invested in U.S. offices, were to see a deterioration of its office loan quality. Higher credit provisions would be the surest indication that the dividend could be headed for trouble.

This, as of right now, does not seem to be a major issue for the commercial real estate company, passive income investors should follow the dividend pay-out trend as well as the credit provisions trajectory in order to spot risks early.

My Conclusion

Ladder Capital is the best CRE investment in the commercial real estate market right now as far as the safety of the dividend goes. The commercial real estate investment trust covered its dividend comfortably with distributable earnings in the second quarter and credit provisions fell QoQ, indicating stable asset quality. This is supported by the fact that Ladder Capital reported a stable 2Q24 book value, which contrasts specifically to Blackstone Mortgage Trust’s book value drop and dividend cut.

Since Ladder Capital has a lower dividend pay-out ratio than either Starwood Property Trust or Blackstone Mortgage Trust, I think Ladder Capital’s 8% yield is presently the best yield that passive income investors can buy in the commercial real estate sector.