The company and its business model
Apollo Residential commenced its operations as a mortgage REIT in 2011. The externally managed company has around $113 billion of assets under its management. It primarily invests in residential Agency and non-Agency mortgage backed securities. Besides, it has investments in residential mortgage loans and other residential mortgage assets including non-Agency RMBS comprised of interest-only, principal-only, floating rate inverse interest-only securities. The company invests in these securities using short-term financing (repurchase agreements) and earns a spread over what is pay as cost of funds and what it earns as yield on its interest earning assets. By regulation, Apollo Residential Mortgage Inc (NYSE:AMTG) is forced to payout 90% of its taxable REIT income as dividends to its shareholders.
The investment portfolio
The graphs above show the proportion of Agency residential mortgage backed securities to non-Agency RMBS Apollo Residential held as of December 31, 2012. It is evident from figure 1 that Apollo has a large concentration in Agency RMBS, which were 86% of the entire portfolio while the remainder was non-Agency RMBS. Figure 2 on left dissects the Agency holdings further. A large concentration in the 30-year fixed rate is visible. It comprises 87% of the Agency holdings, followed by 15-20 year fixed rate at 11% and 2% of Agency interest-only securities. Therefore, while Apollo Residential is a hybrid REIT, it has the largest concentration in the 30-year fixed rate RMBS.
In comparison, New York Mortgage Trust, Inc. (NASDAQ:NYMT) Capital too has a large concentration in Agency RMBS. Around 61% of its recent quarter end portfolio is composed of Agency RMBS while 13% is commercial mortgage backed securities.
Recent quarter’ performance
During the fourth quarter of the prior year, Apollo Residential Mortgage Inc (NYSE:AMTG) reported $33.6 million in . The interest income grew 27% over the prior quarter and over two-fold compared to the prior year. During the fourth quarter, the weighted average of 3.4% remained the same. Therefore, the increase in the interest yielding assets was attributed to be the reason for the sequential growth in interest income. It is worth noting that Apollo Residential was able to maintain its asset yields despite a flattening yield curve and compressing of spreads during the fourth quarter of 2012.
During the quarter, the company incurred of $6.1 million, up 42% from a quarter ago. The increase in interest expense is attributed to a 3 bps sequential surge in the effective to 1.03%, partially offset by 1.6% decline in the repurchase agreements.
As a result, the company earned a of 2.7% compared to 2.8% during the linked quarter. Also, the of $27.5 million plunged 24% over the linked quarter. Further, a 36% sequential decline in and a 29% increase in the compressed the 21% to $55.8 million. Other income remained behind the levels of the prior quarter on lower gain on sale of RMBS and lower unrealized gain on RMBS.
In conclusion, despite higher interest income, Apollo Residential Mortgage Inc (NYSE:AMTG) reported lower net income due to higher operating expenses, cost of funds and lower gain on sale of RMBS and lower unrealized gain on RMBS.
Comparing the results with New York Mortgage Trust, Inc. (NASDAQ:NYMT), it is worth noting that New York Mortgage reported six folds increase in its fourth quarter interest income and two folds increase in its net interest income overturning the third quarter’s $1.9 million loss to $9.4 million profit. AG Mortgage Investment Trust Inc (NYSE:MITT) reported 28% increase in its fourth quarter interest income, while its interest expense surged 54% sequential. However, this resulted in a 23% increase in the net interest spread for the quarter.
Dividends
The stock offers a dividend yield of 12.35% well above the yield offered by the 10-year Treasuries. Apollo Residential does not have a long track record of dividends, but since the dividend initiation, the company has increased its dividend distributions. Even during the prior year, when mREITs like Annaly Capital Management, Inc. (NYSE:NLY) and ARMOUR Residential REIT, Inc. (NYSE:ARR) were forced to cut their dividends.
Valuations
Apollo Residential reported 5% sequential increase in its book value to $22.49 per share. The stock is currently trading in line with its book value. Compared to this, New York Mortgage Capital and AG Mortgage Investment Trust are trading at 10% and 12% premiums to their respective book values. Therefore, it is clear that compared to the New York Mortgage Trust, Inc. (NASDAQ:NYMT) and AG Mortgage, Apollo Residential is trading at cheap multiples.
Conclusion
Apollo Residential is hybrid mortgage REIT and owns large chunks of Agency residential mortgage backed securities. Due to the presence of the high yielding non-Agency RMBS, Apollo Residential posted higher interest income for the fourth quarter of 2012. However, the net income plunged on higher cost of funds, higher operating expense and lower gain on sale of MBS. The stock offers handsome dividends and attractive valuations. Therefore, I believe it presents investors with an opportunity to enhance their regular income.
The article Enhance Your Regular Income By Adding This 12% Yielder originally appeared on Fool.com and is written by Adnan Khan.
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