In Search of the Perfect Investment

A nice plug for Ladder Capital, one of my bigger holdings. The plug was written by Chris Mayer of Agora Financial. Mayer describes the company:

Ladder is set up to originate and securitize CRE loans (CMBS). Ladder is one of the largest CMBS players. It’s in the top 10, and the top 10 probably make up 90% of the volume. Ladder also invests in CMBS. And finally, it invests in real estate directly to hold for its own account. As the name implies, Ladder has the freedom to move up and down the market and go where the best opportunities are.

First, let’s look at how creating CMBS works. It’s a “wash, rinse and repeat” process. And Ladder earns a 50% return on its capital. Take a look at this flow chart:

Mayer’s conclusion:

Let’s see how Ladder meets the standards of our CODE.

Cheap? Ladder ought to earn $1.50-1.60 per share this year. At $18, the stock goes for 12 times earnings on the low end. And remember, these earnings are net of heavy taxes. A shift into a more efficient tax structure could bolster earnings to around $1.90.

I also focus on book value per share. Stated book value per share is $14.43. But that book understates the value of Ladder’s real estate assets. The Veer Towers alone chip in another 65-90 cents per share, when adjusted. True book value is probably at least $15 per share. I say at least because there are other real estate assets which, if adjusted for their true market, would boost book value even more. As is, let’s call it $15 per share. At $18, Ladder trades for just 1.2 times book.

This is a cheap price to pay for a high-quality asset base. I think 1.5 times, or $22.5 per share, is a reasonable 12-18-month target. That’s a 25% return from here. And there is room for more, as the company has plenty of room to grow. Plus, there is a potential catalyst should the company convert to a more tax-efficient structure.

Owner-operators? Directors and insiders own 12.9% of the stock. Brian Harris’ stake alone is worth nearly $100 million. Ladder is an owner-operated company.

Disclosures? I find Ladder’s disclosures are good, and it should be an easy company to follow.

Excellent financial condition? Ladder maintains a conservative balance sheet. Total debt to equity is 1.4 times, which is lower than that of banks or specialty finance lenders. Ladder has access to diverse funding sources and ought to be able to grow without tapping the market.

All in all, I think Ladder is an attractive package. The downside risk is low, given the low price-to-book multiple and sturdy business model. I also like how Ladder is a company that can profit from market turbulence and distress.

You can learn more at Agora’s web site. Click here.

Apple’s big developer conference opens today. We’ll hear something about its “product strategy” to wire up the house and our bodies with even more gadgetry. Apple’s present (confused) “business strategy” is to buy as many talented, creative people as it can, hoping that new revolutionary products will emerge from the melange of new hires. The new products won’t emerge. This is classic example of too many talented cooks spoiling the broth. Further, none of them have any incentive. They all have hundreds of millions of nice new dollars in their bank accounts. And Tim Cook, the ultimate arbiter of what gets done has never introduced a successful new product in his entire life. He’s an operational whiz, but an entrepreneurial fizz.

None of this denies that Apple is getting buzz with all its happenings, like spending (wasting?) $3 billion on Beats. (Why didn’t Apple ever itself make high-end earphones? Why just those cheap, white nasties?) The buzz encourages investors that something good is happening at Apple.

I have a small holding. Apple is not an easy stock to play. For now, it’s done well.

Things I learned over the weekend

+ Never install a new piece of equipment (like a printer) with the software CD it came with. The software will be out of date. It won’t work with your new “upgraded” operating system, etc. Throw the CD out. Go to the manufacturer’s web site and get the latest version.

+ Don’t do unusual (and stupid). Like chipping ice outside your house. Your body is good at what it does and what you’ve trained it to do. You’re no longer a spring chicken. Don’t run down stairs.

+ Don’t go in the sun without a hat and heavy sunscreen. Everyone is getting skin cancer from their idiocies when they were young. Don’t make things worse. The sun is not your friend.

+ If it works, don’t mess with it. You won’t make it better, but you will screw it up. Meantime, if things do screw up — often all by themselves — you need to fix them. I’m furious at Verizon, who supplies our landlines. A week or two ago, they simply decided — their own dumb idea — that their own voice mail made more sense than my answering machine. Since they forgot to tell me what they did, I lost about 20 messages. My views on dumb telecom carriers and Internet service providers cannot be summed up in words alone. Suffice, they screw up and you need to check on them constantly.

+ Restaurants are in the business of selling you food. That means drinks (see cartoon below) and three courses.  One appetizer is more than enough. Half of the main course is plenty. Portion control is key. Always eat half their portion. Take the rest home for lunch the next day.

 Favorite recent New Yorker cartoons.

Harry Newton who beat an 18-year old heavy hitter on Sunday morning. Maybe watching all that French Open Tennis (The Tennis Channel and NBC) can actually teach you something? I know it helped me. The key: hit out and always expect the ball to come back.