Best REITs in Business: Apollo Residential Mortgage Inc (AMTG) and More

American Capital Agency, however, has a modest 10% CPR, which is close to the industry average. But its high PEG of 3x suggests that its shares are overvalued when compared to its growth prospects. Moreover, its high payout ratio of 144% with a debt/equity ratio of 700% suggests that dividend cuts might be around the corner.

But there’s a hidden gem: Apollo Residential Mortgage. Its low CPR of 5.4% for agency backed securities is perhaps the lowest in the industry. Moreover its high yield of 12.39% appears sustainable due to its modest payout ratio of 40% (according to Finviz). As on Sept. 30, its portfolio largely consists of agency backed securities (63%), while only 22% were non-agency MBS, and the remaining 15% was accounted by liquid positions. Non-agency backed securities have lower CPRs, but carry higher risk. But Apollo’s portfolio allocation spreads its risks and rewards, and allows it to enjoy the best of both worlds. Moreover, its 15% cash allows the company to further leverage itself and boost its portfolio size.

Short conclusion

It’s not hard to conclude that Annaly Capital is a value play here. By repurchasing shares, it would not just support the price, but would also retain more of its earnings. But commercial paper is riskier, and investors looking to avoid this risk should invest in Apollo Residential Mortgage. Its low conditional prepayment risk makes it a safer bet and I think both companies are worth a Buy rating.

The article Best REITs in Business originally appeared on Fool.com and is written by Piyush Arora.

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