Ignore The Chatter, It's Time To Own Ladder

Ladder Capital (LADR) is a diversified commercial real estate company that was formed in 2008 and went public in 2014 (as a C-Corp). The company's primary business strategy is to originate and securitize first mortgage loans on stabilized, income-producing commercial real estate properties.

Summary

  • I intend to add all of 5 of the commercial mortgage REITs to the Intelligent REIT Lab and that will increase my overall coverage universe from 7 companies to 12.
  • Ladder shares have pulled back by over 15% since September, creating a buying opportunity.
  • I am upgrading the company from a BUY to a STRONG BUY.

Prior to the last recession, commercial mortgage REITs provided loans for a slice of the capital stack between the senior debt (which would go as high as 85% loan-to-value) and equity. The higher in the capital stack, the more risky the investment.

However, with the collapse of the banking industry (and hundreds of bank failures), many first mortgage lenders now don’t want to go above 60% LTV. To fill that void, commercial mortgage REITs have become a more attractive course of capital as they now lend 60 to 75% (loan-to-value).

Beyond lower, today’s commercial mortgage REITs are also more transparent than the legacy REITs. Most of the companies now provide more detailed information on the investments being made.

A growing number of REITs are joining other institutional investment players in providing financing to CRE (commercial real estate) borrowers by originating mortgage loans as an alternative investment choice.

The trend is most evident in the public REIT arena, where several new companies focused on commercial real estate financing have held IPOs this year, including the three largest: KKR Real Estate Finance Trust Inc. (KREF) raising $242 million, Granite Point Mortgage Trust Inc. (GPMT) raising $224 million, and TPG RE Finance Trust (TRTX) raising $212 million.

In all, commercial financing REITs have raised more than $2 billion from investors in the public markets this year through IPOs and secondary debt and equity offerings, according to data from NAREIT.

Recently, Tremont Mortgage Trust, an RMR Group-managed mortgage REIT focused on middle market and transitional commercial real estate debt, filedwith the SEC to raise up to $100 million in an IPO. The Newton, MA-based company was formed in 2017 and plans to list on the Nasdaq under the symbol TRMT. The company is expected to price on Wednesday, September 13, 2017.

Also, more recently, Colony NorthStar (CLNS) announced plans to roll up a portfolio of investments together with those of affiliates NorthStar Real Estate Income Trust and NorthStar Real Estate Income II, a pair of public, non-traded REITs, to form a new commercial real estate finance REIT.

Colony NorthStar Credit Real Estate will have approximately $5.5 billion in assets and $3.4 billion in equity value. Senior and mezzanine loans will make up 52% of those assets with another 30% consisting of triple net leased real estate investments. According to CoStar,

“more than $1 trillion of CRE loans are projected to mature over the next three years and traditional lenders such as banks and CMBS issuers facing increased regulatory scrutiny and tighter credit standards, more so-called alternative lenders are rushing in to fill any financing 'gap' that may result.”

I intend to add all of 5 of the commercial mortgage REITs to the Intelligent REIT Lab and that will increase my overall coverage universe from 7 companies to 12.

Ladder Capital: A Uniquely-Positioned REIT

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