This 8.3%-Yielding CRE Finance REIT Just Raised Its Dividend And Retains Upside Potential

Ladder Capital Corp. (LADR) is a promising commercial real estate finance REIT in the high-yield sector. The real estate investment trust raised its dividend payout by 3 percent for its class A common stock at the end of May, and still has a high margin of dividend safety thanks to its low core earnings payout ratio. Ladder Capital Corp.’s shares are still reasonably valued, offering income investors an entry into the stock. An investment in Ladder Capital Corp. yields 8.3 percent.

There are a couple of reasons, in my view, why high-yield investors may want to take a closer look at Ladder Capital Corp. The internally-managed CRE finance REIT has a large floating-rate debt investment portfolio, positive interest rate sensitivity, very good dividend coverage stats, and an appealing valuation.

The single biggest reason to buy Ladder Capital Corp. for a high-yield income portfolio, however, relates to the company’s interest rate upside.

In recent years, Ladder Capital Corp. invested aggressively into balance sheet loans, which are typically floating-rate and held for investment. Hence, higher interest rates will produce higher net interest income from Ladder Capital Corp.’s floating-rate debt investment portfolio.

Source: Ladder Capital Corp. Investor Relations

Balance sheet first mortgage loans now make up the majority of Ladder Capital Corp.’s debt investment portfolio.

Source: Ladder Capital Corp.

Ladder Capital Corp. estimates that a 100 basis point increase in LIBOR will produce $0.15/share higher net interest income annually going forward. The higher interest rates climb, the better for Ladder Capital Corp.

Source: Ladder Capital Corp.

The Dividend Still Has Room To Grow

Ladder Capital Corp. said at the end of May that it was raising its class A common stock dividend from $0.315/share to $0.325/share, reflecting an increase of ~3 percent.

Despite the increase, Ladder Capital Corp. retains considerable potential to increase its dividend further, as long as the U.S. economy remains in good shape (and by extension the commercial real estate market) and interest rates keep rising.

Ladder Capital Corp. has consistently over-earned its dividend with core earnings in the last eleven quarters. As a matter of fact, the degree of excess dividend coverage actually increased in the last three quarters.

Source: Achilles Research

Ladder Capital Corp.’s core earnings payout ratio averaged just 74 percent in the last eleven quarters, which is exceptionally good for a high-yield stock with an eight percent dividend yield.

Source: Achilles Research

Ladder Capital Corp. Is Still Affordable

The real estate investment trust is not yet overvalued, in my opinion. Investors seeking access to Ladder Capital Corp.’s eight percent covered dividend are required to pay ~7.1x Q1-2018 run-rate core earnings.

Your Takeaway

Ladder Capital Corp. just handed shareholders a ~3 percent dividend raise, but the CRE finance REIT retains a lot of potential to raise its dividend payout further thanks to its exceptionally good dividend coverage stats. The investment thesis, however, hinges on a continued strong performance of U.S. commercial real estate, and higher interest rates going forward. Higher interest rates are poised to improve Ladder Capital Corp.’s dividend coverage stats even further, which in turn could yield more dividend hikes. Shares are still affordable. Buy for income and capital appreciation.

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Disclosure: I am/we are long LADR.

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.

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