On Friday, September 14, Apollo Residential Mortgage (AMTG) announced that it was boosting its quarterly dividend 13%, from $.75/share to $.85 per share. Apollo is one of the few mREITs that has boosted its per share dividend distributions recently and it now yields 15.5%. We have been invested in the mREIT sector since 2008 and we are aware of the risks with agency-issued MBS securities and non-agency MBS securities. We can see that Apollo is a hybrid mREIT in that it invests in agency MBS (88%) and non-agency MBS securities (12%). We like the fact that Apollo Residential has seen rapid growth in its assets from its July 27, 2011 inception and it now has $3B as of H1 2012. We like the high dividend yield from Apollo and the fact that it was one of the few mREITs to increase its per share dividend to shareholders.
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Source: Morningstar Direct
When analyzing any company, and especially mREITs, we believe it is of the utmost importance to compare our focus company against blue chip competition, as well as similarly sized competitive peers. We can see that the company has enjoyed rapid growth since 2011, as the company's assets have grown from $733M in Q3 2011 to $3.315B in Q2 2012.
The above represents a 352% cumulative growth rate over the last three quarters and has enabled the company to generate increased scale to compete against the industry's big boys like Annaly Capital Management, Inc. (NLY) and American Capital Agency (AGNC), as well as ARMOUR Residential REIT, Inc. (ARR), which has also seen rapid growth in its mortgage book and is only a couple of years older than AMTG.
Apollo has a hybrid MBS book in that 88% of the value of its MBS portfolio is in Agency MBS securities and 12% is in Non-Agency MBS securities. One caveat about Apollo's Non-Agency MBS sleeve is that 76% of its Non-Agency portfolio is in seasoned, sub-prime assets with significant credit enhancement - 17% is in Alt-A loans and 7% in Pay-option ARMs.
Source: Morningstar Direct
Apollo's portfolio is 88% in Agency MBS Securities and 12% Non-Agency Securities, while American Capital Agency, Annaly and Armour Residential are 100% pure-play Agency mREITs. While the fact that 35.8% of its Non-Agency portfolio is suffering from delinquencies exceeding 60 days, we have taken note that 27.8% of its mortgage loan collateral currently benefits from various forms of credit enhancement. The weighted average loan age of the non-agency portfolio is 84 months, the original weighted average loan-to-value was 79.3 and the original weighted average FICO Score was 641.
Apollo's metrics are comparable to Annaly, American Capital Agency and Armour Residential. We can see that AMTG's CPR in Q2 2012 was ~3.7%, which was lower than ARR's 9.1%, AGNC's 10% and Annaly's 19%. AMTGE's estimated premium to book value of 11% is lower than AGNC's 16.44% but higher than the premium to book values of Annaly and Armour, which have premiums to book value of less than 4%.
In conclusion, Apollo is an interesting company in the mREIT industry. We were especially interested in the company because it recently increased its per share dividend distributions to shareholders. While we are not expecting much by way of future dividend increases, we like that the company sports a 15.5% dividend yield.
The one concern that we have had so far is that 35.8% of its Non-Agency MBS sleeve is suffering from delinquencies exceeding 60 days. We also noted that the company has credit enhancement on 27.8% of its Non-Agency collateral though. We like the fact that Apollo has a lower premium to book value than the mREIT MVP American Capital Agency and that it has lower CPR rates than any of the mREITs that we have analyzed and evaluated.
Disclosure: I am long MTGE.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.