Apollo Commercial

Stock: ARI

Rating: Buy

Author: Waleed M. Tariq

Summary

  • Apollo invests in U.S. and U.K. floating-rate CRE mortgages.
  • Apollo benefits from rising interest rates, unlike traditional mREITs.
  • The trust’s over 11% dividend is projected to fall as its stock price rises.

Bullish

  • Apollo benefits from a macroeconomic climate with growing interest rates.
  • In Q1, the trust generated $530 m in UK first mortgage loans and intends to generate $1 billion in Q2.
  • Rising interest rates, dividends, capital appreciation possibilities, and high yield fuel bullishness.

Bearish

  • With a recession looming, the stock must be watched.

Rising rates and ARI

  • 98% of its mortgages are floating-rate, benefiting from rising rates. Q1 2022 floating-rate mortgages totaled $1.8 billion.
  • Rising interest rates were analyzed in the company’s Q1 earnings presentation.
ARI Investor Presentation
  • During past interest rate hikes, from December 2015 to July 2019, ARI achieved price returns of over 15% and total returns of almost 50%, surpassing the S&P 500’s 45.5%.
effective federal funds rate and apollo commercial real estate finance total return level
Data by YCharts

Distributions

  • ARI’s stock yields over 11% but will fall as the mREIT market recovers and its price rises.
ARI dividend yield
Data by YCharts

Valuation

  • The trust’s NAV per share is $15.19 and Book Value is $16.02. The stock’s average and median appear fair.
ARI price to book value, PE ratio, PS ratio, and price to CFO per share
Data by YCharts

Conclusion

  • Strong footing in an escalating interest rate environment, steady payouts, and capital appreciation potential justified my buy rating.