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Mortgage real estate investment trusts (mREITs) tend to have some of the highest yields in the REIT space, often making them attractive to investors. However, they are also volatile, and a high dividend today can be gone tomorrow. One mREIT, Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI), just announced a 29% cut to its dividend, causing many investors to wonder what is behind the cut and if it can rebound.
Apollo Commercial Real Estate Finance focuses on originating, investing in, and managing commercial first mortgage loans and subordinate financings in the U.S. and Europe. As part of the broader Apollo Global Management family, ARI benefits from a well-established platform with a strong presence in real estate finance.
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As a REIT, ARI must distribute at least 90% of its taxable income to shareholders, resulting in generous dividend payouts. In recent years, ARI has consistently offered yields significantly above the market average, making it an attractive option for those seeking regular income from their investments. It had a dividend yield of 13.7% with a quarterly dividend payout of $0.35, which has now been cut to $0.25.
In a press release, the company said the Board of Directors’ decision to cut the dividend was due to an impact on operating earnings from ARI’s focus loans and anticipated declines in floating interest rate benchmarks. While the latter situation is likely ongoing, the company projects the focus loan situation will diminish over time. “As ARI’s focus loans are resolved, the Company should benefit from Apollo’s active pipeline of new floating rate loan opportunities and the ability to redeploy capital into investments with increased operating earnings potential,” said Stuart Rothstein, Chief Executive Officer and President of ARI.
The term “focus loans” refers to loans that are in trouble. Part of the issue at hand relates to the bankruptcy of Steward Health Care, which also affects Medical Properties Trust (NYSE:MPW), which recently announced a dividend cut. In March 2022, ARI and other Apollo-managed entities co-originated a 55% loan-to-cost first mortgage loan secured by eight hospitals in Massachusetts. The loan was made in connection with capitalizing a joint venture between two parties to own the hospitals. That joint venture leased the properties to Steward Health Care, which is selling off its assets.
At the end of the second quarter, ARI had a total loan portfolio of $8.3 billion across 50 loans with an unleveled all-in yield of 8.9%. Most were first mortgages with a floating rate, primarily in the hotel, retail, office, and residential categories. Most of the loans originated in 2021 and 2022, and as of the second quarter, 9% were non-performing loans.
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The company has committed $505 million to new loans year-to-date and had $759 million in loan repayments, including $583 million in Q2. After the quarter ended, ARI reported it received $464 million of loan proceeds, including $421 million from full repayments across three first mortgages and one subordinate loan.
When Might The Clouds Part?
On the most recent analyst call, Rothstein was frank about the issues facing ARI, saying that it may take some time to deal with the loans that are in trouble. “It’s really a matter of getting to resolution on the things that are on our focus list, while at the same time, making sure we’re doing a good job of getting capital that comes back to us redeployed into transactions is what we are excited about.”
Losing a large chunk of a dividend is never easy for fixed-income investors. The stock’s market performance has also been disappointing in recent years. It’s down nearly 20% year-to-date and has lost half its value over the past five years. Analysts have ranked it a consensus “Sell,” reflecting concerns about ARI’s ability to generate value in the short term. Analyst BTIG, which recently initiated coverage on the stock, sent out a note saying that the new dividend is considered reasonable to be covered by ARI.
If ARI can right the ship and address issues with its non-performing loans, there is potential for the dividend to come back up. Given the level of distress, that could take several years. Investors who are risk-averse or prefer more stable income streams might want to consider other investment options that are less exposed to the commercial real estate cycle and fluctuations in interest rates.
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This article This Mortgage REIT’s Dividend Just Had A 29% Haircut, Can It Come Back? originally appeared on Benzinga.com
