origins for Head of Capital Corporation (NYSE:LADR) remained strong in the second quarter and the mortgage fund again covered its dividend with distributable earnings.
Ladder Capital benefited from strong commercial real estate market conditions and robust demand for new emergences.
The stock is an attractive addition to an income-focused investment portfolio, as its 7.6% yield is backed by distributable earnings and it continues to trade at a small discount to book value.
Strong portfolio, strong originations
Ladder Capital’s commercial loan portfolio is focused on multi-family homes and offices, which account for 32% and 25%, respectively, of the trust’s total real estate investments.
As of June 30, 2022, multi-family and office properties accounted for 57% of Ladder Capital’s real estate exposure, with the remaining 43% allocated to mixed-use properties, hotels, retail, industrial and manufactured homes.
At the end of Q2 22, Ladder Capital’s on-balance sheet first mortgage portfolio was valued at $4.0 billion compared to $3.9 billion in the prior quarter. Ladder Capital’s loan portfolio increased in value due to new originations.
In 2022, Ladder Capital startups are still going strong. Ladder Capital originated $371 million in new loans in Q2 2022 after originating 22 new mortgage loans in Q1 for $732 million.
Ladder Capital originated an additional $38 million in new loans in Q3 22 . Demand for new lending shows that the commercial real estate market is in good shape.
Ladder Capital’s profits have rebounded on the back of the post-Covid-19 real estate market recovery. In 2Q-22, the Trust’s loan assets produced $0.34 per share in distributable income, an increase of 240% year-on-year. Ladder Capital’s distributable EPS rose for the fourth straight quarter in the second quarter.
Ladder Capital’s Q2 2022 distributable earnings per share of $0.34 per share compares to a dividend payout of $0.20 per share. The dividend has since increased 10% to $0.22 per share. For the trailing 12 months, the Trust earned $0.94 per share in distributable income and paid out $0.80 per share, an 85% payout ratio.
A key attribute of Ladder Capital’s earnings growth: Exposure to adjustable rate loans
Ladder Capital’s loan portfolio is made up of 90% adjustable rate loans, which will generate higher interest income if the central bank continues to raise interest rates.
The central bank has already made two consecutive 75 basis point rate hikes in June and July and further hikes are expected to boost Ladder Capital’s net interest income. According to Ladder Capital’s interest rate sensitivity table, a 100 basis point increase in interest rates is expected to result in additional annual earnings of $0.21 per share.
Still trade at a discount
Not only does Ladder Capital offer a 7.6% yield that’s fully backed by distributable earnings, but its shares trade at a discount to book value.
The current price-to-book ratio is 0.96x, which is a 4% discount to book value. The colleagues from Ladder Capital, Starwood Property Trust (STWD) and Blackstone Mortgage Trust (BXMT)both trade at a premium to book, and I believe Ladder Capital could do the same given its strong origination position and well-performing portfolio.
Why Ladder Capital could see a lower share price
Ladder Capital’s success as a mortgage origination platform is related to the state of the commercial real estate market in the United States. As commercial real estate investors scale back their investments in the commercial real estate market and vacancy rates begin to rise, origination demand is likely to slow.
Because Ladder Capital has a sizeable credit allocation to the cyclical office sector, a downturn in the office real estate market could impact the Trust’s issuance volume and distributable earnings growth.
Ladder Capital is currently in good shape and performing well. In the second quarter, the issuance business was not as strong as in the first quarter, but a cyclical decline in issuance is not yet an issue.
Additionally, Ladder Capital’s dividend continues to be covered by distributable earnings, and the stock trades at a discount to book value.
With a 7.6% covered dividend yield and solid fundamentals, I think Ladder Capital stock is a good buy for income investors.