Monday, May 14, 2018

A current AIM Program Small Cap Equity Holding: Apollo Commercial Real Estate Finance, Inc. (ARI) by: Gregory Anderson. "Apollo 18', Struggling to Take Off"

Apollo Commercial Real Estate Finance, Inc. (ARI, $17.77): “Apollo 18’, Struggling to Take Off?”

By: Gregory Anderson, AIM student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) is a commercial mortgage real estate investment trust (REIT) that invests and lends commercial-first mortgages, financing, and commercial-backed securities. Apollo offers both fixed and floating interest rate loans to institutions over a wide range of commercial assets types, including multifamily, office, industrial, and retail for a wide range of institutions. Apollo’s operates in the United States and is headquartered in New York City, New York.  

• 2017 marked over $2 billion of transactions. 

• Real estate development is at an all-time high, placing ARI in a favorable spot to provide loans.

• Apollo could see more risk averse borrowers in light of the steady rise in short-term interest rates, as borrowing becomes more expensive.

• Existing loans are nearing an end, leaving Apollo with running room to provide financing and recapitalization.

Key points:

The past couple of years have resulted in a period of decline for Apollo Commercial Real Estate Finance. Since the 12-month period ending December 31, 2017, Apollo saw a 3.2% decrease in stock price and dividends totaling $1.84, resulting in a 9.9% dividend yield. Additionally, ARI’s stock price has seen a 7.9% decrease over the past year (4/25/17 – 4/25/18). Inversely, ARI also saw a growth in core EBITDA figures; EBITDA was $258.59 million, comprising 89.7% of sales in 2017, compared to 2016, which saw a EBITDA margin of 83.8%. This could be a result of the raise in the origination of capital and a $264 million commitment to fund future loans. While 2017 and 2018 haven’t shown positive results, growth through EBITDA figures and dividend yields, as well as a commitment to fund a sizable loan in 2018, is a positive sign.

The macroeconomic climate is not indicative of Apollo Commercial Real Estate Finance’s lackluster results. The real estate market as a whole has experienced significant growth, which is especially prevalent in the transition from metropolitan to suburban areas. Commercial (multifamily and offices) and residential assets are all experiencing tremendous growth and near all-time highs. In light of the positive signs of the real estate market, many of Apollo’s longstanding board members sold a majority of their shares in the beginning of 2018; insider trading as a result has wreaked havoc on the performance of the stock.

The largest risks facing Apollo Commercial Real Estate Finance are both the rise in interest rates and credit risk. With a general rise in interest rates, many of Apollo’s client may have more trouble meeting interest and mortgage payments. As a result, clients may be less willing to take out mortgage-backed loans to finance transactions. Additionally, Apollo faces credit risk if borrowers are unable to make required payments on loans; this would severely impact Apollo’s top line, and as a result, have an immense impact on investor returns.

What has the stock done lately?

Since March 1, 2018, the stock has dropped ~2.4% and is currently trading at $17.82. This is in part largely due to the decrease in EPS over the last quarter; EPS last quarter dropped 46.6%, compared to the average growth over the previous three quarters of 12.15%.

Past Year Performance:

As mentioned above, Apollo’s stock has dropped ~3.2% in 2018 and 7.9% over the past year. Dividends in 2017 totaled $1.84, resulting in a dividend yield of 9.9%, beating out ARI’s three main competitors: Eastgroup Properties, Impac Mortgage, and National Health Investors. Even with stagnant results in 2018, management has portrayed optimism moving forward.

Source: FactSet

My Takeaway

Will Apollo be able to take off in 2018? With lackluster results in 2017 and 2018, there may be a good bunch of investors who would shy away from keeping the stock, however, I believe there are some indicators to prove that ARI can recover. First up, since the end of the credit crisis and recession in 2008, the real estate market has noticed tremendous growth. We are currently experiencing extreme highs in the commercial real estate market, both in the stock market and in development. Additionally, many of the existing loans that were implemented after the crash are about to expire; this places Apollo in an advantageous position, they just have to capitalize on the opportunity. With this in mind, a buy is still recommended for ARI; I will note as a caveat, however, that this stock requires close monitoring if the downtrend continues.