On Thursday, BTIG maintained a Neutral rating on Apollo Commercial Real Estate Finance (NYSE:ARI), following the company's announcement of a reduced quarterly dividend. Apollo Commercial declared a dividend of $0.25 per share for the third quarter of 2024, a 28.6% decrease from the previous quarter's dividend of $0.35 per share. This reduction marks the first dividend cut for the company since the second quarter of 2020, during the early stages of the pandemic.
The company's recent press release did not provide detailed reasons for the dividend reduction but indicated it was due to the impact on operating earnings from its focus loans and potential declines in floating interest rate benchmarks. BTIG analysts believe the cut is more reflective of challenges with the company's loans, particularly the $341.9 million Massachusetts hospital portfolio loan, rather than changes in interest rate expectations.
On Monday, BTIG had released a note detailing the bankruptcy proceedings of the hospital operator Steward and suggested that a dividend cut by Apollo Commercial was likely. The magnitude of the third-quarter cut surpasses the approximately 13% reductions made during the pandemic, although the new dividend level is considered reasonable by the firm. BTIG's estimates, excluding realized losses, predict the company could achieve full dividend coverage through the end of 2025, albeit with tight coverage in the second half of that year.
BTIG plans to engage in upcoming discussions with Apollo Commercial's management to seek further details about the reasoning behind the dividend cut, the company's confidence in maintaining dividend coverage levels, and the conditions required for a potential increase in dividends to previous or higher levels. The firm's estimates for Apollo Commercial Real Estate Finance are currently under review following this announcement.
In other recent news, Apollo Commercial Real Estate Finance (ARI) reported in its earnings call that it anticipates a CECL allowance of around $90 million due to the Chapter 11 bankruptcy filing by Steward Health Care, a significant tenant. Despite this, ARI highlighted a strong second quarter with healthy loan repayments and capital redeployment into new transactions. The company's distributable earnings were $0.35 per share, and it reported a GAAP net income of $33 million.
In addition to these developments, ARI's portfolio now includes 50 loans totaling $8.3 billion, with several sales completed at the 111 West 57 Street property. The company has also increased its secured credit facility and repurchased common stock. Despite the downgrade of the risk rating of a loan secured by eight hospitals, CEO Stuart Rothstein expressed optimism about the potential for new equity in commercial real estate by 2025.
In line with these recent developments, ARI has entered the multifamily space, financing two new projects in California and D.C. The company also highlighted positive office trends in London and other European markets, benefiting its largest office exposure. ARI is focused on resolving outstanding issues and redeploying capital into new, robust transactions, expecting a strong year in deployment.
InvestingPro Insights
Amidst the backdrop of Apollo Commercial Real Estate Finance's (NYSE:ARI) recent dividend cut, insights from InvestingPro data and tips provide a broader financial context. The company's market capitalization stands at approximately $1.41 billion, and it is trading at a high earnings multiple with a P/E ratio of 183.46 as of the last twelve months leading up to Q2 2024. Despite the challenges reflected in the dividend reduction, the company's gross profit margin remains robust at 54.19%, illustrating a strong profitability on the revenue it generates.
InvestingPro Tips highlight that Apollo Commercial is expected to experience net income growth this year, and it continues to pay a significant dividend to shareholders, with a current yield of 13.74%. This yield is particularly notable for income-focused investors, even as analysts anticipate a sales decline in the current year. Additionally, the company has demonstrated a commitment to returning value to shareholders, maintaining dividend payments for 15 consecutive years. For those considering the stock's future, there are 8 additional InvestingPro Tips available, which could provide further insights into Apollo Commercial's investment potential.
Overall, while the dividend cut reflects certain operational challenges, the company's ability to sustain dividend payments and the forecasted profitability for the year may offer some reassurance to investors. The InvestingPro platform, which includes a fair value estimate of $14.13 for Apollo Commercial, could serve as a valuable resource for those seeking a deeper analysis of the company's financial health and future prospects.
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