Co-authored by Treading Softly
I’ve never been able to visualize the future but have always excelled at pragmatic analysis. My wife, on the other hand, dreams of our retirement together and all we want to do. We complement each other well. She dreams, and I figure out how to make that happen financially.
Retirement planning often seems nebulous. People are often told to save a static $2 million, treating retirement as a one-time payment rather than an ongoing expense.
Most people approach retirement using the commonly recommended 4% annual deduction from their portfolio’s value. An income investor, however, can achieve this more effectively with a smaller amount of capital, allowing for reinvestment or financial flexibility using the Income Method.
Today, I present two exceptional picks to help you actively work towards that goal.
Explore Pick #1: ARI – Yield 11.9%
The mortgage REIT sector has been attracting substantial attention, and Apollo Commercial Real Estate Finance (ARI), with a yield of 11.9%, invests in floating-rate commercial mortgages.
ARI’s mortgage portfolio includes hotels, office, retail, and residential properties. Notably, its mortgages tend to be relatively short-term, with an average remaining term of 2.4 years. Moreover, 95% of the mortgages are first lien, and whenever there is a subordinated mortgage, ARI typically owns the senior mortgage as well. This European activity represents 48% of its portfolio, including 54% of its office portfolio.
Benefiting from rising interest rates, ARI’s distributable earnings have covered the dividend by 130% over the past year, exceeding the typical payout ratio for distributable earnings in this sector, which is usually around 90-100%.
In recent quarters, ARI has adopted a more defensive stance. By Q3 2023, the company had 49 loans with a carrying value of $8.0 billion, yielding 8.9%, down from 67 loans with a carrying value of $8.9 billion at the end of Q3 2022. With increasing liquidity and declining debt-to-equity ratio, ARI is poised to navigate evolving market conditions.
Despite fluctuating market expectations, ARI’s current trading at a notable discount to book value suggests investor concerns about potential book value losses as a result of increasing defaults. However, ARI’s prudent leverage and strong liquidity provide it with the flexibility to manage defaulted properties without precipitous, value-eroding sales.
We have been staunch supporters of ARI throughout 2023, and today’s 20%+ discount to book value presents an attractive opportunity for potential investors.
Discover Pick #2: NEP – Yield 13.3%
NEP, with a yield of 13.3%, offers investors another compelling opportunity in the income space. The renewable energy company has been a consistent performer, demonstrating resilience and strong potential for income-oriented investors.
