{"id":65028,"date":"2023-09-25T01:55:42","date_gmt":"2023-09-25T05:55:42","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/ares-commercial-real-estate-enticing-12-6-yield-but-no-longer-a-buy-nyseacre\/"},"modified":"2023-09-25T01:55:47","modified_gmt":"2023-09-25T05:55:47","slug":"ares-commercial-real-estate-enticing-12-6-yield-but-no-longer-a-buy-nyseacre","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=65028","title":{"rendered":"Ares Commercial Real Estate: Enticing 12.6% Yield, But No Longer A Buy (NYSE:ACRE)"},"content":{"rendered":"
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<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Ares Commercial Real Estate Corporation (NYSE:ACRE<\/span>)<\/strong> is a commercial real estate investment trust with a large portfolio of senior commercial mortgage loans.<\/p>\n

Though the trust has seen a QoQ improvement in its dividend coverage\/payout ratio in the second quarter, I think risks have increased for Ares Commercial Real Estate due to the fact that the company paid out all of its distributable earnings in 2Q-23, and the gap between stock price and book value has narrowed considerably since my last write-up in May.<\/span><\/p>\n

Ares Commercial Real Estate also stopped paying the $0.02 per share supplemental dividend it has paid since 2022. As a consequence, I am becoming a bit more risk-averse and lowering my stock classification to Hold.<\/p>\n

My Rating History<\/strong><\/h2>\n

Even though Ares Commercial Real Estate’s dividend payout ratio deteriorated in the first quarter due to a non-recurring loss on a senior loan sale, I slapped a <\/span>buy rating on the trust. This happened primarily because of the excessive discount to book value of 30% that was present in the market at the time.<\/span><\/p>\n

Before that, I justified my Buy rating with the company’s strong dividend coverage. Taking into account that Ares Commercial Real Estate paid out 100% of its distributable earnings and that the dividend risk has gone up, I think a Hold classification is more appropriate now.<\/p>\n

Loan Portfolio And CECL Reserve<\/strong><\/h2>\n

Ares Commercial Real Estate invests in senior commercial mortgage loans that are backed by various kinds of real estate. Commercial real estate has taken a hit lately due to rising interest rates which resulted in a sharp uptick in distressed commercial real estate assets as well as slowing demand for mortgage loans, which tend to be of a short-term nature and floating rate.<\/p>\n

At the end of the second quarter, Ares Commercial Real Estate’s investment portfolio included $2.3 billion worth of loans, which were made primarily to the office and multi-family sectors. Thus, Ares Commercial Real Estate remains dependent on the overall health of the CRE market.<\/p>\n

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\"Loan<\/span><\/picture>
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Loan Portfolio Positioning (Ares Commercial Real Estate Corporation)<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Given the headwinds in the U.S. commercial real estate market, Ares Commercial Real Estate is at risk of seeing some of its borrowers default on their financial obligations.<\/p>\n

Ares Commercial Real Estate is estimating higher credit losses in the future, which is reflected in the Current Expected Credit Loss standard. As a consequence, the trust added another $20.1 million to its reserves in the second quarter. The majority (67%) of reserves relate to office properties.<\/p>\n

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\"Current<\/picture>
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Current Expected Credit Losses (Ares Commercial Real Estate)<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

No Margin Of Safety In The Payout Ratio<\/strong><\/h2>\n

Ares Commercial Real Estate’s dividend coverage improved in the second quarter, QoQ, but the dividend no longer has as high a margin of safety as it did in the second half of last year.<\/p>\n

Ares Commercial Real Estate earned $0.35 per share in distributable earnings in the second quarter, which matched the payout amount (regular dividend of $0.33 per share + a $0.02 per share supplemental dividend).<\/p>\n

The payout ratio in the last year was 97%, indicating that the dividend has become a lot more risky in 2023. Together with the distress signals sent by the commercial real estate market, the trust may have to slash its dividend moving forward.<\/p>\n

Ares Commercial Real Estate also no longer pays the $0.02 per share supplemental dividend that has spiced up passive income investors’ dividend returns in the last year.<\/p>\n

\n

\"Pay-Out<\/span><\/picture>
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Pay-Out Ratio (Author Created Table Using Trust Information)<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Much Smaller Discount To Book Value<\/strong><\/h2>\n

Ares Commercial Real Estate was a steal in May, but thanks to a major stock re-rating in the last couple of months, the trust’s valuation discount narrowed considerably.<\/p>\n

Presently, Ares Commercial Real Estate is selling for a 22% discount to book value, which is still large, but the company traded at a much wider discount of 30% when I last presented my write-up for the trust.<\/p>\n

Other mortgage trusts, like Starwood Property Trust Inc. (STWD)<\/strong>, Blackstone Mortgage Trust Inc. (BXMT),<\/strong> and Ladder Capital Corp. (LADR)<\/strong> manage to trade at much narrower discounts to book value (or none at all, as is the case with Starwood Property Trust).<\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Why ACRE May Trade At A Lower\/Higher Book Value Multiple<\/strong><\/h2>\n

The downtown in the commercial real estate market in the United States is obviously a major problem, not only for Ares Commercial Real Estate but also for all companies that originate loans for the real estate industry.<\/p>\n

An increase in loan defaults would be the clearest warning sign that the dividend could end up on the chopping block.<\/p>\n

My Conclusion<\/strong><\/h2>\n

Ares Commercial Real Estate’s dividend payout ratio has improved, QoQ, in the second quarter, and the trust only managed to cover its cumulative dividend payout (cumulative, meaning the $0.33 per share base dividend plus the $0.02 supplemental dividend) with distributable earnings.<\/p>\n

The state of the U.S. commercial real estate market is a concern, as is the increase in Ares Commercial Real Estate’s CECL reserve. Taking into consideration that the REIT’s discount to book value has also narrowed considerably since May, I think the dividend has become a lot more risky lately.<\/p>\n

I am not accumulating anymore, and my updated rating classification for ACRE is Hold.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Ares Commercial Real Estate Corporation (NYSE:ACRE) is a commercial real estate investment trust with a large portfolio of senior commercial mortgage loans. Though the trust has seen a QoQ improvement in its dividend coverage\/payout ratio in the second quarter, I think risks have increased for Ares Commercial Real Estate due to the fact that the […]<\/p>\n","protected":false},"author":1,"featured_media":65029,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-65028","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nAres Commercial Real Estate: Enticing 12.6% Yield, But No Longer A Buy (NYSE:ACRE) | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Ares Commercial Real Estate Corporation (NYSE:ACRE) is a commercial real estate investment trust with a large portfolio of senior commercial mortgage\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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