Apollo Commercial Real Estate Finance? If not now...When?

Ever since the onset of the financial crisis, it has been in the back of my mind that there will come a time when it will make sense to put some money in commercial real estate finance in order to earn a healthy current yield with the potential for long term appreciation. As anybody who has access to any business channel knows, the commercial real estate market reached a tremendous bubble a couple of years ago that continues to burst. The ability to refinance these properties is extremely difficult at this time and this represents an opportunity in my opinion. With short term interest rates at near 0% and long term bond rates at levels too low to compensate for the risk of rising interest rates, I believe that now may be the time to take the plunge into the secured commercial real estate market.

The vehicle I have chosen to use to make this investment is Apollo Commercial Real Estate Finance (ARI $17.60), a REIT that IPO'd at $20 on 9/23/09 . I've built up a position in the $17.25-$17.50 range. Why did I chose this vehicle to gain exposure? There are a few reasons:

1. Apollo is a large well respected money manager with seasoned professionals that will invest in senior secured commercial real estate loans, etc.
2. ARI currently trades at a healthy discount to net asset value. ARI IPO'd at $20 per share. Knock off $.50 to pay the underwriters and essentially what you have here is $19.50 in cold hard cash that can be purchased for below $18 per share. Nice discount that effectively boosts your yield to above the actual yield of the portfolio once it is constructed.
3. Since this is an IPO, there is no concern as to the valuation of assets already on the balance sheet. No concerns about buying mismarked assets.
4. When I listened to the road show a few months ago, I recall the expected yield of the portfolio of commercial mortgages and CMBS investments was expected to be in excess of 12%. Not bad for a secured medium term investment as commercial real estate loans typically have 5 year effective terms.

In my opinion, now is the time to take the plunge although this is not an investment that one should expect a quick pop. . Since there has been no information released by the company, to date, and the dividend yield is still unknown the NAV has drifted to a substantial discount that will not likely last long. Read the IPO and do your own DD. Conference call at 11:20 AM today (sorry for the short notice) might get the shares moving.