Apollo Commercial Real Estate Finance: Time To Buy This 9.8%-Yielding CRE Finance REIT

Apollo Commercial Real Estate Finance: Time To Buy This 9.8%-Yielding CRE Finance REIT


Apollo Commercial Real Estate Finance, Inc. (ARI) remains an interesting high-yield dividend stock for investors that desire high, recurring dividend income. The commercial real estate finance company has a large, floating-rate investment portfolio that can be expected to throw off more cash as interest rates rise. Apollo Commercial Real Estate Finance could further see an improvement in its dividend coverage stats as interest rates climb, thanks to its large variable-rate investment portfolio. Shares are reasonably valued and afford income investors with an 8.9 percent dividend yield.

Apollo Commercial Real Estate Finance – Portfolio Overview

Apollo Commercial Real Estate Finance invests into first mortgage and subordinate commercial real estate loans. At the end of the June quarter, the CRE company’s loan portfolio included 77 percent relatively secure first mortgages and 23 percent subordinate loans.

Source: Apollo Commercial Real Estate Finance Investor Presentation

Apollo Commercial Real Estate Finance’s investment portfolio was valued at $4.9 billion at the end of the June quarter, and consisted of 70 major loans. The weighed-average remaining loan term was 2.8 years.

Source: Apollo Commercial Real Estate Finance

Apollo Commercial Real Estate Finance is moderately diversified in terms of geography and property types.

Source: Apollo Commercial Real Estate Finance

Importantly, Apollo Commercial Real Estate Finance has allocated a large amount of money to variable-rate assets, which will serve the company well as long as interest rates go up.

At the end of the June quarter, 91 percent of the REIT’s loan portfolio was linked to floating rates.

Source: Apollo Commercial Real Estate Finance

Thanks to the REIT’s investments in floating-rate assets, Apollo Commercial Real Estate Finance is poised to see higher net interest income as long as the Fed moves along the interest rate curve. The higher interest rates climb, the bigger the NII tailwinds for the CRE finance company.

Source: Apollo Commercial Real Estate Finance

Capitalization

About 50 percent of the REIT’s capitalization is made up of common and preferred stock. The remainder is made up of credit facilities totaling $1.98 billion and convertible debt securities valued at $600 million.

Source: Apollo Commercial Real Estate Finance

Dividend Stats

Apollo Commercial Real Estate Finance has not the best dividend coverage stats in the sector, but its coverage ratios could improve as interest rates rise and its net interest income goes up.

Here are Apollo Commercial Real Estate Finance’s main dividend coverage stats over the last seven quarters.

Source: Achilles Research

Valuation

Apollo Commercial Real Estate Finance’s shares sell for ~10.6x Q2-2018 run-rate operating earnings. As a matter of fact, I consider Starwood Property Trust a much better alternative to ARI at this point: Starwood Property Trust sells for ~10.0x Q2-2018 run-rate operating earnings and has much better dividend coverage stats and a higher margin of dividend safety compared to Apollo Commercial Real Estate Finance.

Read also: “Starwood Property Trust: Sleep-Well-At Night REIT Yields 8.6%, Still Has Upside

Your Takeaway

Apollo Commercial Real Estate Finance is a promising investment for income investors with a higher-than-average risk tolerance. However, the investment thesis hinges on a continued strong performance in the U.S. commercial real estate market and rising interest rates. If the market cools off and/or interest rates decline, ARI’s dividend coverage stats are likely to deteriorate, which in turn could precipitate a dividend cut. If you want to buy ARI, limit position size to not more than 1 percent of total portfolio assets.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click “follow.” I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

Disclosure: I am/we are long ARI, STWD, LADR, BXMT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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