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Jonathan Poland
Jonathan Poland
Articles (437)  | Author's Website |

Apollo Commercial Is a Buy

The company pays a high dividend and is priced for explosive capital appreciation

February 14, 2018 | About:

Apollo Commercial Real Estate Finance Inc. (NYSE:ARI) is a splendid company generating a ton of profit from its commercial real estate debt portfolio.

In other words, it loans money out for an interest payment. As of this past September, its loan portfolio was $3.6 billion with 62% first mortgage and 38% subordinate loans. The majority of the loans (42%) were in the hot and continuously growing Manhattan-Brooklyn markets, property types mainly focused on residential, hotel and retail redevelopment.

The commercial real estate market in the United States remains in decent shape with sales north of $400 billion a year, which is good for growth. As such, Apollo will continue to earn steady interest payments for years to come.

The company largely invests in secure first mortgages and subordinate loans. It has benefited greatly from traditional banks scaling back lending activity and reducing their real estate exposure after the 2008 housing bubble. For instance, the company made $857 million worth of first mortgage and $272 million worth of subordinate loans (most funded in the quarter) during the final three months of 2017.

In addition, Apollo has invested in floating-rate loans, which are set for upward growth, giving the company the ability to increase sales and profit without issuing any new loans. The higher interest rates climb, the better.

I do not think we will see a rapid increase in interest rates, but that is OK. If rates get to 5% to 6% in the next 10 years, Apollo will still make a killing. The real estate investment trust is managed by an indirect subsidiary of Apollo Global Management, so they have a private equity mindset of high-yield returns and expert financial engineering.

There are two reasons to own the stock now: dividend income and long-term capital appreciation.

First, the stock provides a solid 10.25% dividend and is priced at just 8.8 times next year's earnings. Second, it is priced at just 8.8 times 2018 earnings. In the worst case, the price is revalued upward to its average 11.3 times earnings. The best-case scenario is it moves to 15 times earnings or greater.

In either case, if the company continues to book larger and larger profits, the stock will follow. If it earns $2.29 a share in 2018, the stock could trade between $25 and $30 per share, a 38% rise from today’s price, plus the 10% dividend.

Since real estate is nowhere near the bubble stage of its life cycle, Apollo will be able to continue loaning capital at a profit for some time. If 2018 is like 2017, then 2019 will see another increase in revenue and profit.

Disclosure: I have no position in ARI.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and investment analyst who helped investors produce market beating results for over 15 years. Today, I run a private membership for business leaders and continue to document my journey through life, business, and the capital markets.

Visit Jonathan Poland's Website

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