Apollo Residential Mortgage Is In A Sweet Spot At 3.4% Discount To Book

| About: Apollo Residential (AMTG)

Apollo Residential Mortgage (NYSE:AMTG) went ex-dividend today (26 March) and will pay its $0.70 dividend on the 30th of April. The stock is trading at $21.74 while its reported book value as of Jan. 1, 2013, is $22.49. That is a 3.4% discount to its book value. Compared to similar mortgage REITS that is a sale worthy of note, especially for a solid performer like AMTG.

Last year, AMTG had a cumulative stock return of 56%. It paid out $3.40 in dividends and its book value increased from $19.92 on Dec. 31, 2011, to $22.49 on Dec. 31, 2012. That's a 13% increase in book value in one year. The stock price increased from $15.26 to $20.19 in 2012 for a 32% gain. AMTG currently offers a 12.9% yield.

Below is a chart comparing some of the numbers on AMTG vs similar mortgage REITs [American Capital Mortgage Investment (NASDAQ:MTGE), AG Mortgage Investment Trust (NYSE:MITT) and Invesco Mortgage Capital (NYSE:IVR)].

Price/BV Yield BV increase in 2012 CPR Leverage Spread % Agency
AMTG .966 12.9 13% 5.6 5.1 2.7 59%
MTGE .984 14.2 23% 6.3 6.7 2.06 90%
MITT 1.074 12.7 14% 7.8 5.26 2.15 78%
IVR 1.068 11.7 21% 14.6 6.1 1.62 75%

AMTG has strong numbers in the hybrid mREIT space with its high spread and low CPR. The non-agency sector has been doing well this year and AMTG has a 25% exposure there.

AMTG had a public offering on the 8th of March of 6,800,000 shares. It will likely be a while before they do that again (they only did it once in 2012 on the 17th of April). This is another reason that now is a good time to buy, you don't have to worry about a price drop from a secondary for a while.

AMTG has mostly been trading sideways this year and is underperforming Annaly (NLY) (which is trading at a 1.6% premium to book) and a fairly comprehensive mREIT ETF MORT.
(Click to enlarge)

Perhaps some of the reasons for this underperformance is the regular dividend lowering to .70 in December which continued in March this year when it was .85 in September of 2012. The secondary offering in March also impacted stock price.

The 30 year mortgage rate has increased from 3.4 to 3.7 this year. That should increase the spreads for AMTG and improve its earnings for Q1. It had 16% in cash at the end of 2012 and combined with its recent secondary, it can deploy that cash in an environment with a higher spread and an improving housing market that will likely have lower CPR rates. It seems that AMTG is flying under the radar at the moment but is poised for further book value and stock price increases. That's a sweet spot for a buy.

Disclosure: I am long AMTG, MTGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.