Ladder Capital Corp (LADR) is an internally-managed commercial real estate investment trust (REIT) that has weathered the storm of a tumultuous market environment over the past two years. Despite the headwinds, the company has maintained a disciplined approach to its lending and investment strategies, delivering consistent returns to shareholders.
Business Overview Ladder Capital was founded in October 2008 during the global financial crisis as an internally-managed REIT specializing in originating and investing in commercial real estate and real estate-related assets, with a focus on senior secured assets. In its early years, the company navigated the challenging post-crisis market by building out its in-house origination platform and developing a credit-centric underwriting approach. From inception through September 2024, Ladder originated $29.8 billion in commercial real estate loans, acquired $13.8 billion of predominantly investment grade-rated securities secured by first mortgage loans on commercial real estate, and purchased $2.1 billion of net leased and other real estate assets.
In February 2014, Ladder completed its initial public offering, using the proceeds to purchase newly-issued limited partnership units from its subsidiary, Ladder Capital Finance Holdings LLLP. This transaction allowed Ladder to become a holding corporation and the general partner of Ladder Capital Finance Holdings LLLP, giving it control over the business and affairs of the subsidiary. Over the following years, the company continued to grow its commercial real estate lending and investing activities while developing a diversified financing strategy that included unsecured corporate bonds, non-recourse collateralized loan obligation (CLO) debt, committed term financing, and other sources.
Financial Performance In 2024, Ladder reported distributable earnings of $153.9 million, or $1.21 per share, achieving a 9.9% return on average equity. The company's net interest margin remained healthy at 3.4%, while its credit performance was strong, with only two loans totaling $77 million on non-accrual status as of the end of 2024. Ladder's balance sheet also remained conservatively leveraged, with an adjusted leverage ratio of 1.4x and 65% of its debt comprised of unsecured corporate bonds.
For the most recent quarter (Q3 2024), Ladder reported revenue of $66,886,000 and net income of $31,384,000. However, the company experienced negative operating cash flow (OCF) and free cash flow (FCF) of -$60,121,000, primarily due to net paydowns on the loan portfolio.
Navigating Challenges Ladder's conservative approach has served it well during the challenging market environment of the past two years. In 2024, the company was able to navigate rising interest rates and economic uncertainty by focusing on loan paydowns, which totaled $1.7 billion for the full year. This represented the highest annual payoffs in Ladder's history and allowed the company to build a substantial liquidity position.
Positioning for the Future As the market environment begins to stabilize, Ladder is well-positioned to capitalize on new opportunities. The company's ample liquidity, low leverage, and strong credit profile allow it to be nimble and selectively deploy capital into new loan originations and securities investments. Ladder's management team has also taken steps to further strengthen the company's balance sheet, including the upsizing and extension of its revolving credit facility to $850 million, as well as the issuance of $500 million in unsecured corporate bonds.
Looking ahead to 2025, Ladder is optimistic about its ability to deploy its substantial liquidity of $2.2 billion prudently. The company's pipeline of loans under application currently stands at over $250 million and is growing rapidly. Ladder expects new loan originations to soon outpace loan payoffs and is targeting unlevered yields of around 8.5% on new loan originations in 2025. The company believes it can grow its loan portfolio by at least $1 billion in 2025 as it shifts capital from securities and T-bills into higher-yielding loans.
Risks and Uncertainties While Ladder's conservative approach has served it well, the company is not immune to the broader challenges facing the commercial real estate industry. Factors such as rising interest rates, economic slowdown, and changes in tenant demand could impact the performance of Ladder's loan and real estate portfolios. Additionally, the company's reliance on capital markets for financing introduces risks related to market volatility and access to funding.
Financials Ladder Capital's financial performance in 2024 demonstrated the company's resilience in a challenging market. The reported distributable earnings of $153.9 million, or $1.21 per share, reflect the company's ability to generate consistent returns for shareholders. The 9.9% return on average equity further underscores the efficiency of Ladder's capital allocation strategies. The healthy net interest margin of 3.4% indicates the company's ability to maintain profitability in its lending operations despite market pressures.
Ladder's real estate portfolio generated $56.3 million in net rental income for the full year 2024, contributing to the company's overall financial performance. As a small cap company, Ladder primarily operates in the United States, which is its main geographic market.
Liquidity Ladder Capital's strong liquidity position is a key strength in the current market environment. The company's total liquidity of $2.2 billion, including $1.3 billion in cash and cash equivalents, provides a significant buffer against potential market disruptions. This robust liquidity position also enables Ladder to capitalize on attractive investment opportunities as they arise, without being overly dependent on external financing sources.
As of the most recent quarter, Ladder reported cash of $1,610,000 and an available credit line of $911,480,000 under committed loan repurchase facilities. This substantial liquidity gives the company flexibility in its operations and investment strategies.
Segment Analysis
Loans Segment Ladder's loans segment includes balance sheet first mortgage loans, other commercial real estate-related loans, and conduit first mortgage loans.
Balance Sheet First Mortgage Loans: As of September 30, 2024, Ladder held a portfolio of 57 balance sheet first mortgage loans with an aggregate book value of $2.0 billion and a weighted average loan-to-value ratio of 66.4% based on the loan balances and the as-is third-party appraised values at origination.
Other Commercial Real Estate-Related Loans: As of September 30, 2024, Ladder held a portfolio of 5 mezzanine loans with an aggregate book value of $13.8 million and a weighted average loan-to-value ratio of 73.6% based on the loan balances and the as-is third-party appraised values at origination.
Conduit First Mortgage Loans: As of September 30, 2024, Ladder held one conduit loan with an aggregate carrying value of $27.5 million and a loan-to-value ratio of 59.4% based on the loan balance and the as-is third-party appraised value at origination.
Real Estate Segment Ladder's real estate segment includes net leased commercial real estate properties and diversified commercial real estate properties.
Net Leased Commercial Real Estate Properties: As of September 30, 2024, Ladder owned 155 single tenant net leased properties with an undepreciated book value of $637.3 million. These properties are fully leased on a net basis where the tenant is generally responsible for payment of real estate taxes, property and liability insurance, and maintenance expenses. The net leased properties comprise a total of 3.7 million square feet, 100% leased with an average age of 19.5 years and a weighted average remaining lease term of 7.9 years. During the three months ended September 30, 2024, Ladder collected 100% of rent on these properties.
Diversified Commercial Real Estate Properties: As of September 30, 2024, Ladder owned 54 diversified commercial real estate properties throughout the U.S. with an undepreciated book value of $308.3 million. During the three months ended September 30, 2024, Ladder collected 99% of rent on these properties.
Securities Segment As of September 30, 2024, the estimated fair value of Ladder's portfolio of CMBS investments totaled $843.4 million across 95 CUSIPs, with an average investment of $8.9 million per CUSIP. 98% of Ladder's securities investments were rated investment grade as of September 30, 2024. Ladder's CMBS investments had a weighted average duration of 2.4 years, and the commercial real estate collateral underlying the portfolio was distributed across the top 25 metropolitan statistical areas in the U.S., with the largest concentrations in the New York-Newark-Jersey City MSA.
Conclusion Ladder Capital has proven its resilience in the face of a challenging market environment. The company's disciplined approach to lending and investment, coupled with its strong balance sheet and liquidity position, have enabled it to navigate the recent headwinds and position itself for future growth. As the commercial real estate market continues to evolve, Ladder's conservative strategy and focus on risk management are likely to remain key strengths in the years ahead. With a diversified investment strategy across loans, real estate, and securities, Ladder is well-positioned to continue providing stable and attractive sources of net interest and rental income while maintaining a prudent approach to risk management.