Rising Rates Could Submerge This 10.5% Yielder

When the pandemic started, it wasn’t a great time to be in the mortgage business.

People couldn’t go to work, but bills still needed to be paid…

Caught in the middle were mortgage real estate investment trusts (REITs). As mortgage valuations plummeted, it caused a chain reaction in the industry.

And it led many dividend-paying companies to cut their payouts.

One of those companies was Apollo Commercial Real Estate Finance (NYSE: ARI), which cut its dividend twice in the past two years.

We covered this REIT in July when it earned itself a failing “F.”

But the landscape is improving, if only slightly, so it’s worth revisiting Apollo to see how it sizes up in 2022…

Last time we rated Apollo, it had started paying shareholders a dividend of $0.35 per share, down from $0.40 in March 2020 and $0.46 in 2019.

Right now, it sports a yield of 10.5%.

But don’t be overly enticed by a juicy yield…

2020 was a tough year for Apollo. Net interest income (the measure of cash flow for mortgage REITs) declined to $278.7 million from $334.5 million in 2019.

2021, however, was much better. Only a little under 5 million households did not make their rent or mortgage payments in March 2021 – the lowest number since the pandemic began.

And just 4.9% of homeowners missed their monthly mortgage payment in March of last year thanks to an improving economy and labor market.

Apollo recorded $284.5 million in net interest income in 2021, which boosted the company in our book.

It’s not all smooth sailing, though.

Net interest income is expected to come in at $262.6 million in 2022, 7.7% less than where it was last year.

And the upcoming dip makes sense…

With interest rates rising from historic lows, the new debt Apollo uses to leverage its assets will be more expensive to take on, meaning the difference between the return on its assets and the cost of its debt is getting concerningly slim.

That’s not a good spot for this mortgage REIT to find itself in.

Apollo is predicted to pay out $216.6 million in 2022 – the same amount it paid in 2021.

Its income still covers the dividend, but the payout ratio is getting higher.

While we can give the company some credit for bettering its numbers in 2021, 2022 doesn’t seem so promising.

Apollo cut its dividend twice in 2020… and that’s when it was pulling in $278.7 million in net interest income.

Since Apollo is estimated to make even less than that this year, the $0.35 dividend is in serious danger of getting cut – so tread lightly.

Dividend Safety Rating: D

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