Thomas Barwick
With stocks recently declining, I have increased my purchases of a few select names that offer strong dividend coverage, well-managed investment portfolios of either real estate or mortgage loans, and promise to deliver strong returns in the future, whether a recession occurs in 2023 or not.
Last week, I added more Ladder Capital Corporation (NYSE:LADR) to my portfolio because I believe it provides passive income investors with stability, prospects for net interest income growth, and a very good yield.
Because the stock is also trading at a higher book value discount than it was at the start of December, I believe investors should seize the opportunity and add this quality 9% yielder to their portfolios.
Undeserved Pullback
Ladder Capital’s stock has recently experienced a pullback, which, in my opinion, represents a compelling buying opportunity for two main reasons.
One, the pullback is unjustified. Second, Ladder Capital provides passive income investors with a high-quality dividend that grows more appealing as stock prices fall.
LADR Share Price (Stockcharts.com)
Dividend Backed By Quality Portfolio Of Real Estate Assets
Ladder Capital owns a sizable portfolio (primarily of first-mortgage loans) valued at $4.0 billion at the end of the third quarter. The trust primarily invests in multifamily, mixed-use, and office real estate and has the ability to make loans in excess of $100 million.
The primary focus of the company is on first-mortgage loans, which are highly secured real estate loans. A first mortgage gives the lender the right to repossess a property if the borrower fails to meet its obligations. As a result, first mortgages provide real estate investors with a way to protect their principal, making them relatively secure investment objects for professional real estate investors such as Ladder Capital.
Portfolio Overview (Ladder Capital Corp)
During the Covid-19 pandemic, Ladder Capital made significant changes to its loan structure, arguably adjusting (lowering) its portfolio risk. In particular, the mortgage trust increased its investments in multifamily loans while decreasing its exposure to more volatile industries such as hotels and retail real estate. The resulting post-Covid portfolio structure is more durable and less vulnerable to cyclical sectors.
Loan Portfolio Summary By Property Type (Ladder Capital Corp)
The One Key Feature That Passive Income Investors Should Care About
What makes Ladder Capital particularly appealing to passive income investors, in my opinion, is that the portfolio is geared toward floating rate mortgages, which provide the trust and its shareholders with the potential for higher net interest income.
The central bank is clearly of great assistance here: It raised interest rates by another 50 basis points in December and is expected to do so again in 2023 to combat inflation.
Ladder Capital’s loan portfolio contains 89% floating rate loans, implying that the company’s loan pool will generate higher net interest income, per share and overall, in a rising-rate environment.
The central bank is very likely to continue raising its key interest rates in 2023, implying that the trust has attractive incremental income potential. A 150-basis-point increase in interest rates would increase Ladder Capital’s net interest income by $0.33 per share, enough to fund either a dividend increase or a special dividend.
Ladder Capital’s dividend pay-out ratio in the last twelve months was less than 80%, indicating that the trust can afford to raise its dividend.
Estimated Annual Increase In NII By Share (Ladder Capital Corp)
Discount To Book Value
Ladder Capital’s stock trades at a 13% discount to book value, which I believe undervalues both the trust’s potential net interest income and the company’s improved loan portfolio structure.
Ladder Capital traded nearly at book value in November, but the recent pullback has caused the book value discount to widen once more, signaling a buying opportunity in my opinion.
Price To Book Value (YCharts)
Why Ladder Capital Has Downside Risk
A significant portion of the investment thesis is based on Ladder Capital’s ability to increase net interest income in a rising-rate environment. A sharp drop in inflation and a weakening labor market would provide the central bank with two compelling reasons to hold off on raising interest rates. If this occurs, Ladder Capital may be unable to fully realize its NII potential.
A decline in mortgage originations could also contribute to slower net interest income growth in the future.
My Conclusion
In my opinion, Ladder Capital is a steal. After the pandemic, the mortgage trust’s loan portfolio structure has improved, and a key asset I look for in any passive income stock I buy.
Ladder Capital has a large floating rate asset base, which could reasonably translate into higher net interest income, which could result in either a higher regular dividend or a special dividend.
Ladder Capital’s dividend is well covered by distributable earnings, and the stock is now trading at a larger book value discount than it was at the start of the month.
