Apollo Residential Mortgage, Inc. (AMTG) is a hybrid mortgage REIT subsidiary of Apollo Global Management, a contrarian value-oriented investment firm founded in 1990 with $105 billion under management. AMTG invests in, finances and manages residential mortgage-backed securities, residential mortgage loans, and other residential mortgage assets throughout the United States, with the stated objective to provide attractive risk-adjusted returns to its stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. Recent news demonstrates AMTG management is actively working to accomplish these objectives.
In what became a joy-filled week for AMTG shareholders, the company announced two events bound to increase yield and share price. On September 13, 2012 the company announced it would issue 6.9 million shares of 8% Series A cumulative preferred stock at $25 per share. The issue closed September 20, 2012 with $166.6 million net capital raised. Ahead of the announcement AMTG common shares closed at $21.10, and traded up to $23.22 on Friday September 21. While this was happening, on September 14, 2012 the company declared its third quarter dividend of $0.85, up $0.10 from the previous quarter, payable to shareholders of record on September 28, 2012. The ex-dividend date is Wednesday September 26.
As of June 30, AMTG capital consisted of 24,182,847 shares of common stock and total shareholders equity was $475.1 million. The preferred issue provided the company with $166.6 million, comprising 25% of total combined capital, at a fixed annual cost of 8%. AMTG earns net yield spread of 2.7% on capital that is leveraged 5.5 times resulting in net leveraged asset yield of 18.7%. Preferred shareholders will receive the first 8% in yield spread income earned on the new capital; all earnings in excess of preferred dividends will flow to common shareholders. We project that over the next twelve months, yield spread income earned on the preferred capital will increase income per common share by 12.2%.
|Projected Effect of AMTG Preferred Capital, Annualized|
|September 24, 2012|
|Preferred shares issued and outstanding||6,900,000|
|Net preferred share capital raised||$166,600,000|
|Leveraged asset yield*||18.70%|
|Yield spread income on leveraged preferred capital||$31,154,200|
|Less, preferred dividends:||13,800,000|
|Yield spread income available to common shareholders||$17,354,200|
|Per common share||$0.72|
|EPS as of June 30 2012, annualized||$5.88|
|EPS increase due to preferred capital||12.2%|
Current dividend yield, $0.85 per quarter, share price $23.22
|Expected twelve month dividend payout: EPS $6.60 x 90%||$5.94|
|Anticipated twelve month share price at 14.6% yield||$40.68|
*Apollo Residential Mortgage Second Quarter 2012 Investor Fact Sheet
But wait - there's more!
For the six-months ended June 30, 2012 AMTG earned $2.94 per share and paid $1.50 per share in dividends. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, within a window of opportunity of approximately twelve months. Considering the increased earnings that will result from investment of the newly raised capital, we do not believe the $0.85 quarterly dividend announced September 14 will be sufficient to distribute 90% of earned income in compliance with IRS rules. We therefore expect during the next year that AMTG will substantially increase its regular quarterly dividend, or declare a special distribution (Happy Holidays!), or both. As AMTG shareholders are rewarded with increasing dividends the share price will rise, providing secondary rewards to shareholders in the form of capital gains. I would not be surprised to see AMTG trading well above $30 during the next twelve months.
At a time when several prominent mortgage REITs have reported weak financial results and reduced dividends, AMTG is indeed providing attractive risk-adjusted returns to its stockholders. This interesting opportunity is worthy of timely consideration by all income investors.