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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.
Summary
•
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.
