Apollo Commercial Real Estate REIT's 16.9% Yield May Be a Warning
Apollo Commercial Real Estate Finance (ARI) REIT now sports a 16.9% dividend yield, based on its $1.40 annual payout. At $8.30 on Sept. 30, the stock's annual yield is almost 17%. But this may be the market's signal that a dividend cut is coming. As a result, investors should be cautious.
The risk is that the company's earnings and cash flow may not be able to cover the high dividend payments over the next year. The real estate investment trust (REIT) that focuses on commercial property finance has paid out 35 cents quarterly for the past two and half years. Last quarter it made 35 cents and this coming quarter it is expected to make the same.
On the other hand, analysts now forecast earnings of $1.41 for 2023, despite the possibility of a severe recession. That would be enough to cover the $1.40 annual payout.
However, for the past three quarters, the company's cash flow from operations (CFFO) has not covered the dividends, including the preferred stock dividends. This effectively meant the REIT had to borrow small amounts to cover the payments.
Book Value is Still High
The market seems to be concerned that a major recession, given the Fed's severe tightening profile, could reduce commercial real estate values and activity. However, the REIT now sports a very high tangible book value of $16.25 per share. That is 96% higher than the stock price at $8.30. Another way to look at this is that the price-to-book-value ratio (P/BV) is 0.51x.
Often a stock with a high dividend yield and a very low P/BV metric signals the market's expectation of a major downgrade in the company's finances. It could mean that the market is concerned about a drop in its financial health, including a dividend cut.
Unusual Put Option Activity
This view was recently underscored by unusual options activity in ARI stock. Barchart's Unusual Stock Options Activity Report for Sept. 30 shows that some large investors just bought over 10,000 puts in ARI stock. The table below shows that this was for an expiration period of just 48 days from Sept. 30.
The investor paid 45 cents for ARI puts at the $7.50 strike price for 10,071 put contracts. That effectively means the investor expects the stock to fall below $7.05 by Nov. 18. This represents a breakeven point that is 15% below today's price (i.e., $7.05/$8.30-1).
In effect, the investor who bought the puts paid $453K for the puts (i.e., 10,071 x $0.45 x 100). The investor expects to see the stock take a hit, possibly from more Fed tightening moves, or from a dividend cut or drop in the REIT's book value.
So investors might want to wait until the Q3 earnings report comes out before taking advantage of the high yield. That way, even though the yield might be lower, there can be more confidence that Apollo Commercial Real Estate Finance REIT is on solid footing.
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