NEW YORK (TheStreet) -- Investments tied to the housing industry could be in for a choppy ride as mortgage rates rise -- and that's not even considering what might happen when the Federal Reserve increases interest rates. Mortgage real estate investment trusts particularly are investments to consider carefully before investing. But not every mortgage REIT is a sell.
Mortgage REITs are different than other REIT investments because the vehicles invest in mortgages or mortgage securities tied to commercial or residential properties whereas other REITs generate income from rent or the sale of the properties themselves.
In general, investors like REITs for their strong dividend income, among other factors, as REITs are required to pay out at least 90% of their income in the form of dividends to investors each year.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Research and ratings are as of June 7, 2015. Year-to-date returns are based on June 11, 2015 closing prices.ARI data by YCharts
1. Apollo Commercial Real Estate Finance Inc. (ARI)
Market Cap: $999 million
Annual Dividend Yield: 10.25%
Year-to-date return: 4.5%
Rating: Buy, B
Apollo Commercial Real Estate Finance, Inc. operates as a real estate investment trust that primarily originates, acquires, invests in, and manages commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities, and other commercial real estate-related debt investments in the United States.
The company is qualified as a real estate investment trust (REIT) under the Internal Revenue Code. As a REIT, it would not be subject to federal income taxes, if it distributes at least 90% of its REIT taxable income to its stockholders. Apollo Commercial Real Estate Finance, Inc. was founded in 2009 and is headquartered in New York, New York.
TheStreet said: "We rate APOLLO COMMERCIAL RE FIN INC (ARI) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share, compelling growth in net income, attractive valuation levels and expanding profit margins. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- ARI's very impressive revenue growth greatly exceeded the industry average of 8.5%. Since the same quarter one year prior, revenues leaped by 89.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- APOLLO COMMERCIAL RE FIN INC has improved earnings per share by 11.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, APOLLO COMMERCIAL RE FIN INC increased its bottom line by earning $1.73 versus $1.26 in the prior year. This year, the market expects an improvement in earnings ($1.85 versus $1.73).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 45.1% when compared to the same quarter one year prior, rising from $17.58 million to $25.51 million.
- The gross profit margin for APOLLO COMMERCIAL RE FIN INC is currently very high, coming in at 85.78%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 63.70% significantly outperformed against the industry average.
- You can view the full analysis from the report here: ARI Ratings Report