Apollo Commercial: Near Fair Value With A High Yield, Key Technical Level In Play

Mortgage REITs are on the rise – both on an absolute basis and relative to the broad market. No doubt lower interest rates recently have helped, but valuations on this high-yield niche of the equity market perhaps attracted investors to buy the dip in October too.

One domestic stock in the VanEck Vectors Mortgage REIT Income ETF (MORT) reports Q4 results later this month, and its origination business actually grew in 2022. Are there more gains ahead for Apollo Commercial Real Estate? Let’s hone in on this one.

Mortgage Meltup: MORT ETF Rallied Vs SPY

According to Bank of America Global Research, Apollo Commercial Real Estate (NYSE:ARI) is a REIT that focuses on commercial mortgage investments. It is externally managed by an indirect subsidiary of Apollo Global Management. ARI completed an IPO in September 2009, raising aggregate proceeds of $210M. ARI’s objective is to acquire target assets to provide attractive risk-adjusted returns to shareholders through dividends and capital appreciation

The New York-based Mortgage Real Estate Investment Trust (REITs) industry company within the financial sector trades at a low 6.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 11.5% dividend yield, according to The Wall StreetJournal.

On valuation, analysts at BofA see earnings making a steady clip in 2022, and that pace is expected to continue through 2024. Dividends, meanwhile, should hold steady at $1.40 over the coming quarters – back on December 13, ARI declared another $0.35 quarterly dividends. Just recently, the firm announced that it originated in $3.7 billion in mortgages last year which was a jump from $3.2 billion in 2021 – that came during a particularly weak housing market and troubling interest rate environment.

With steady EPS growth ahead, the REIT’s operating and GAAP earnings multiples are seen as holding in the high single digits while its yield remains very high. With longer-term profitability trends being decent and steady book value per share, I think the dividend will hang there. Other commercial mortgage REITs generally trade near 0.8x book value, so at 0.71 price/book per Seeking Alpha, it’s not far from a fair price.

Apollo Commercial: Earnings, Valuation, Dividend Yield Forecasts

Looking ahead, corporate event data from Wall Street Horizon shows a confirmed Q4 2022 earnings date of Wednesday, February 8 after the closing bell. You can listen live here. There are no other event catalysts on the calendar.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) shows a consensus EPS forecast of $0.35 which would be a more than 9% increase of $0.32 of per-share profits earned in the same period a year ago. While the company has topped estimates in the last three reports, the previous trio were misses. The stock surged after the Q3 earnings event, but other releases featured moves of between -5% and +5%.

Options traders have priced in just a 3% earnings-related stock price swing later this month using the at-the-money straddle expiring soonest after the earnings report. Those are cheap options if you can buy them at that volatility level. Long the straddle is a good risk/reward play.

ARI: Unusually Low Implied Volatility and Straddle Price

The Technical Take

With a decent valuation, big yield, and cheap options ahead of earnings, what does the chart say? Notice in the graph below that shares are at a critical juncture. I see a bullish rounded bottom in the works, but ARI has not quite broken out above a downtrend resistance line. Also, the late 2022 highs are in play in the mid-$12s.

I would like to see shares rally above $13 to confirm a new bullish uptrend. Also, keep your eye on volume trends – there has been declining volume in recent weeks, but if indeed we see a breakout with a volume spike, that’d support the sanguine technical outlook. Resistance is near $14 to $14.50 and $17 while support is in the $10 to $10.50 range.

Apollo Commercial: Downtrend In Jeopardy

The Bottom Line

I am a hold on Apollo right now. The yield appears safe to me based on the profit outlook, but the valuation is only barely on the cheap side while the technical chart is on the verge of a breakout. I hope to revisit this one later this year to see how its book value looks as well as what the technical picture paints.