Seeking Investment-Grade Ratings Will Reduce Funding Costs, But Real Estate Market Challenges May Impact Net Margins

Key Takeaways

• Strategic liquidity deployment into higher-yield investments and bridge loans can enhance net interest margins and expand revenue opportunities.
  
• Potential credit rating upgrades could reduce funding costs, improve market positioning, and positively impact net margins.
  
• Ladder Capital faces potential earnings impact due to strategic shifts to safer investments amid challenging real estate markets and economic uncertainties.

Catalysts

Operates as an internally-managed real estate investment trust in the United States.

• Ladder Capital has significantly increased its credit capacity, extending and upsizing its unsecured revolving credit facility from $324 million to $850 million, with potential to increase it to $1.25 billion at reduced costs, thereby improving its balance sheet and positioning for investment-grade ratings to attract more investors and reduce financing costs, impacting earnings positively.
  
• The company's high liquidity position, with $2.2 billion in liquidity and a significant portion in cash and cash equivalents, allows Ladder Capital to capitalize on new market opportunities as transaction volumes rebound and commercial real estate markets stabilize, likely enhancing revenue as they deploy this liquidity into higher-yielding investments.
  
• Ladder anticipates enhancing its credit ratings with potential for investment-grade ratings from agencies, which should lower funding costs, improve market position, and access to investment-grade capital markets, positively impacting its net margins and earnings.
  
• Ladder intends to shift its capital from short-term T-bills and AAA-rated securities into higher-yielding balance sheet loans and new bridge loan originations in 2025, which could improve their net interest margin and earnings over the year.
  
• The proactive management of its loan portfolio and an expected increase in originations, outpacing payoffs, alongside favorable conditions for deploying liquidity into higher interest rate environments, positions Ladder to grow its loan book and enhance returns, positively impacting net margins and overall financial performance.

Ladder Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ladder Capital's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.9% today to 34.4% in 3 years time.
• Analysts expect earnings to reach $110.3 million (and earnings per share of $0.87) by about March 2028, up from $108.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 13.7x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Ladder Capital Future Earnings Per Share Growth

Risks

• The commercial real estate market remains challenging, with ongoing macroeconomic shifts, which may pose risks to Ladder's loan portfolio and overall revenue generation from interest income.
  
• Ladder has a high cash balance but the reduction in its loan book from $3.9 billion to $1.6 billion could impact its earnings potential unless replaced by higher-yielding opportunities.
  
• The CECL reserve remains at $52 million due to potential economic uncertainties, highlighting the risk of unforeseen losses in the loan portfolio, which could affect net margins.
  
• Ladder's strategy involves a significant shift to AAA-rated securities and other forms of finance such as T-bills, which may yield lower returns compared to direct lending, potentially impacting overall earnings.
  
• The company faces competition in the credit market, and varying interest rates may increase the cost of gaining the target yields on new loan originations, potentially affecting net margins.

Valuation

• The analysts have a consensus price target of $13.25 for Ladder Capital based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $320.6 million, earnings will come to $110.3 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 6.9%.
• Given the current share price of $11.65, the analyst price target of $13.25 is 12.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.