Can Apollo Residential Mortgage Inc Return to Growth?

Source: Company

Apollo Residential Mortgage Inc  is an interesting off-the-radar mortgage REIT that has experienced more than its fair share of volatility over the course of last year.

With an improved risk profile and deep-cutting dividend adjustments to reflect lower profitability, the company has done everything to return back to growth.

As a result, Apollo Residential Mortgage does not deserves to trade at a 30% discount to book value: it has made great progress in accomplishing its goal of deleveraging and actually presented investors with a sequentially increasing book value in the first quarter of 2014 -- a sign that Apollo Residential Mortgage's strategic approach to a shifting portfolio composition is paying off.

Apollo Residential Mortgage is a mortgage REIT investing in mortgage-backed securities, residential mortgage loans and other residential mortgage assets.

Throughout the course of 2013, Apollo Residential Mortgage has shifted more assets into non-agency residential mortgage-backed securities (RMBS). At the end of 2013, those non-agency RMBS accounted for 47% of the REIT's investment portfolio compared to just 25% at the beginning of the year.

During the same time period, Apollo Residential Mortgage dialed back its risk exposure by reducing its leverage ratio from 5.1:1 to 4.1:1.Given the uncertainty and volatility in the fixed income markets in 2013, reducing leverage and risk have been the right moves for the mortgage REIT in order to alleviate investors' fears about a too heavily levered investment portfolio.

Book value
A key metric for mortgage REITs remains its book value and can be understood as a net asset value underpinning the value of their investment portfolio values.

Mortgage REITs have done badly for investors in 2013 as evidenced by a sectorwide decline in book values. And Apollo Residential Mortgage was no exception.

In fact, Apollo Residential Mortgage has lost about 14% of its reported book value since the beginning of 2013, even though its most recent rebound in book value is raising hopes, that the REIT will continue to grow its net asset value in the coming quarters.

Investors are always chasing yield. And Apollo Residential Mortgage offers a reasonably high one: Approximately 10% are on offer.

Two things are worth mentioning when its comes to Apollo Residential Mortgage's dividend record:

1. Its dividend history is relatively short as the mortgage REIT started to pay dividends only in 2012.

2. Apollo Residential Mortgage's dividends have proven to be quite volatile over the last two years and have been cut drastically from $0.70 per share per quarter at the beginning of 2013 to $0.40 per share at the beginning of 2014 as the fixed income market experienced higher interest rate volatility in the second half of 2013.

Apollo Residential Mortgage has just hiked its quarterly dividend by 5% to $0.42 per share and the new dividend will be paid on July 31, 2014.

The chart below further highlights, that Apollo Residential Mortgage has realigned its dividend payouts with its underlying operating earnings profitability and there is a good chance, that dividends indeed have bottomed out in the $0.40 per share region.

Oftentimes, high-yielding stocks have sort of a build-in downside protection: The dividend yield. How does this work?

As long as the market assumes, that a REIT will not cut its dividend payout, a high dividend yield limits downside risk, because investors will purchase more of high-yielding stock when the price goes down. Lower share prices immediately translate into higher initial dividend yields with investors often buying the dips in high-yielding stocks in order to boost their average yield.

Apollo Residential Mortgage offers investors a 10% dividend yield and, more importantly, the REIT is still cheap.

Apollo Residential Mortgage currently trades at only 0.69x book value -- a sizable 30% discount from book value and an indicator, that investors are way too pessimistic about the mortgage REIT.

For instance, Hatteras Financial Corporation trades at only a 10% discount to book value and industry champion American Capital AgencyCorporation trades at only a 5% discount to book value.

Though Apollo Residential Mortgage has dialed back the risk barometer and realigned its dividends with its lower operating profitability, the mortgage REIT continues to get hammered in the market in terms of book valuation.

If the REIT can prove in the next quarter or two, that it indeed has returned to sustainable book value growth, shares of Apollo Residential Mortgage could quickly reverse course and trade closer to underlying book value.


The article Can Apollo Residential Mortgage Inc Return to Growth? originally appeared on

Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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