Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Will the Retail Apocalypse Kill Ladder Capital?

Ladder Capital (NYSE: LADR) could be the strangest victim of America’s escalating retail apocalypse.

Ladder (LADR) is an investment bank that specializes in commercial real estate financing. Intercept writers Ryan Grim and John Schwarz and real estate analyst John Flynn allege they base some Ladder loans on inflated financial numbers.

 Specifically, the three and John W. Griffin claim Ladder bankers used inflated income and cash-flow numbers when they wrote commercial mortgages forDollar General (NYSE: DG) discount stores. Ladder and other banks packaged the loans into derivatives they call commercial mortgage-backed securities (CMBS), Grim and Schwarz allege.

Ladder’s exposure to Commercial Real Estate

Griffin and Alex Priest found similar problems when they when they examined 40,000 CMBS loans for a 2020 academic paper. Griffin is a finance professor at the University of Texas’s McCombs School of Business. Priest is a PhD candidate at McCombs.

“Overall actual net operating income falls short of underwritten income by 5% or more in 28% of loans,” Griffin and Priest claim. The two also claim found a few banks “having more than 35% of their loans exhibiting 5% or greater income overstatement.”

Grim and Schwarz focus on Dollar General (DG) because of a statement Ladder Capital President Pamela McCormack made in a 2020 earnings call. McCormack reputedly said, “our three largest tenants are Dollar General, BJ’s, and Walgreens (NASDAQ: WBA).”

The Growing Retail Apocalypse

The retail apocalypse could destroy Ladder Capital (LADR) because of its of its focus on commercial real estate.

The COVID-19 depression is speeding up the retail apocalypse. For example, 40% of America’s department stores closed between 2016 and 2020, The Washington Post claims. Furthermore, The Post predicts half of the country’s remaining department stores will close by 2025.

The Post estimates that almost 200 department stores died in 2020 and another 800 department stores could die by 2025. On the bright side, Ladder concentrates its investment in discount stores.

To explain, Walgreen’s (WBA) is a drugstore, Dollar General (DG) is a dollar store, and BJ’s Wholesale Club is a privately held club store similar to Costco (COST). Thus, Ladder Capital has some protection from the retail apocalypse and the rise of Amazon (AMZN).

How Amazon Threatens Ladder Capital

To explain, people are less apt to order stuff they could buy from BJ’s, Dollar General, and Walgreen’s.

Unfortunately, many of the products Walgreen’s, Dollar General, and BJ’s sell are online retail’s new markets. For instance, Insider Intelligence estimates that 55% of Americans could order groceries online by 2024, if the pandemic ends. However, if COVID-19 lingers, 66% of Americans could order groceries online by 2024.

In addition, online sales will account for 21.5% of the US grocery market by 2025, eGrocery estimates. If that prediction is accurate, US brick-and-mortar grocery sales could drop by 21.5% by 2025. That could held hurt Ladder Capital because Dollar General, BJ’s, and Walgreens sell groceries.

eGrocery estimates that the US online grocery market will be worth $250.26 billion in 2025. The entire US online grocery market will be worth $1.6 trillion in 2025.

Frighteningly for Ladder, online grocery sales can increase dramatically fast. For example, eGrcoery estimates online grocery sales grew by over 60% during the coronavirus pandemic. Notably retail sales fell in recent months. The Washington Post estimates US retail sales fell by 3% in February 2021. Economists predicted a 0.5% drop.

Therefore, Amazon (NASDAQ: AMZN), Instacart, Walmart (WMT), and other online grocers could destroy Ladder’s three top tenants fast.

Does Ladder Capital Make Money?

Currently, Ladder Capital Corp (LADR) loses money. For instance, Ladder reported a negative quarterly gross profit of -$71 million, and a quarterly operating loss of -$17.50 million on 31 December 2020.

In 2020, Ladder’s quarterly gross profit fell from $26.86 million and the quarterly operating income fell from $14.42 million on 31 December 2019. Additionally, Ladder’s quarterly revenues fell from $135.38 million on 31 December 2019 to $77.89 million on 31 December 2020.

Incredibly, Stockrow estimates Ladder’s revenue growth fell by -42.46% in the quarter ending on 31 December 2020. Interestingly, Stockrow estimate Ladder’s revenue growth rate fell from 244.43% in the quarter ending on 30 September 2020.  

Predictably, Ladder’s quarterly free cash flow fell from $118.96 million in December 2019 to $23.9 million in December 2020. Similarly, Ladder’s quarterly cash from operations fell from $183.21 million on 31 December 2019 to $111.94 million on 31 December 2020.

Ladder Loses Value

Thus, Ladder’s revenues, gross profit, income, free cash flow, cash from operations, and revenue growth rate collapsed in 2020. I conclude that COVID-19 did enormous damage to Ladder Capital.

Interestingly, some financial numbers improved at Ladder Capital in 2020. For instance, the total debt fell from $4.86 billion in December 2019 to $4.210 billion in December 2020. In addition, the cash and short-term investments rose from $58 million on 31 December 2019 to $1.254 billion on 31 December 2020.

Yet, Ladder’s total assets shrank from $6.669 billion on 31 December 2019 to $5.881 billion on 31 December 2020. Thus, Ladder’s portfolio of loans lost value during the pandemic.

Ladder is a Junk Stock

I do not think Mr. Market has read Ladder Capital’s (LADR) financial numbers.

To explain, Mr. Market paid $6.90 for LADR on 24 April 2020 and $11.80 for Ladder on 26 April 2021. Ladder’s stock price rose as the company lost money and value.

Ladder paid a 20₵ quarterly dividend on 30 March 2021. However, the dividend fell from 34₵ on 9 March 2020. Thus, Ladder’s dividend shrank over the past year.

In the final analysis, I think Ladder (LADR) is a junk stock that will collapse completely. Hence, I advise investors to stay far away from Ladder.

There is one moral aspect to Ladder, however, I do not think this company has enough money to create a major collapse. Thus, Ryan Grim and John Schwarz’s claims a commercial mortgage-backed securities (CMBS) could trigger a 2007-2008 type crash is unrealistic.

I think the only way a CMBS meltdown could damage the market is if larger institutions such as Goldman Sachs (NYSE: GS) own large numbers of CBMSes. A CMBS crash at Ladder will destroy this stock, but it will not trigger a financial crisis.

My conclusion is investors need to avoid Ladder because it is junk.