Ares Commercial Real Estate: 12% Yield And High Margin Of Safety

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Ares Commercial Real Estate Corporation (NYSE:ACRE) is simply a well-managed commercialized existent property finance spot that presently pays a 12% dividend output that is covered by distributable net to passive income investors.

Furthermore, nan trust's portfolio performed very good successful nan 4th quarter, pinch a 99% liking postulation rate, which could lead to a dividend summation aliases nan continuation of nan $0.02 per stock per 4th supplemental dividend.

Since my last article covering Ares Commercial Real Estate, I person updated nan dividend sum metrics to see nan 4Q-22.

Given that nan trust's banal is still trading astatine a 15% discount to book value, I judge that passive income investors are getting a awesome woody here.

Top Performing, Senior Loan-Focused Investment Portfolio

At nan extremity of nan December quarter, Ares Commercial Real Estate's elder indebtedness portfolio was worthy $2.3 cardinal and consisted of 60 loans. During 4Q-22, nan portfolio worth decreased by astir $200 cardinal owed to repayments of $319 cardinal and originations of $56 million. The 4th fourth saw nary important changes successful portfolio composition, pinch Ares Commercial Real Estate continuing to favour agency existent property (37% of indebtedness portfolio), multi-family existent property (22%), and business accommodation (11%).

Loan Portfolio Overview (Ares Commercial Real Estate Corp)

What is notable astir Ares Commercial Real Estate's elder indebtedness portfolio is that nan institution has positioned itself to profit from an summation successful liking rates, a taxable that has resurfaced pursuing nan latest ostentation report.

According to Ares Commercial Real Estate, 99% of elder loans were floating complaint astatine nan extremity of nan December quarter, implying that indebtedness rates will reset to nan upside if nan cardinal slope continues to raise liking rates. Given that inflation roseate 0.5% period connected period successful January, I judge this is precisely what nan cardinal slope will do successful 2023.

If you judge nan cardinal slope will proceed to raise liking rates successful 2023 to combat inflation, an finance successful Ares Commercial Real Estate could salary off.

According to Ares Commercial Real Estate's astir caller sensitivity table, a 100-basis-point summation successful cardinal liking rates will summation nan trust's distributable net by $0.18 per stock annually, capable to money nan trust's $0.02 per stock per 4th supplemental dividend.

Interest Rate Sensitivity (Ares Commercial Real Estate Corp)

Dividend Coverage Improved In 4Q-22

According to ACRE's 4Q-22 net telephone transcript, Ares Commercial Real Estate covered its dividend pinch distributable net successful nan 4th quarter, and nan dividend pay-out ratio improved 10 percent points compared to nan September quarter, owing to beardown portfolio capacity and an liking postulation complaint of 99%.

Ares Commercial Real Estate earned $0.44 per stock successful distributable net successful 4Q-22, exceeding nan $0.35 per stock dividend payout. In 4Q-22, nan pay-out ratio was 80%.

Ares Commercial Real presently pays a quarterly dividend of $0.33 per share, positive a supplemental dividend of $0.02 per share. Assuming ACRE continues to salary a $0.02 per stock per 4th supplemental dividend successful 2023, passive income investors tin expect a full distribution of $1.40 per share, implying a dividend output of 12%.

Dividend (Author Created Table Using Trust Information)

ACRE’s Valuation Reflects High Margin Of Safety

The marketplace values Ares Commercial Real Estate's banal is trading arsenic if nan United States has already entered a recession, which it has not. As a result, fixed nan trust's underlying elder indebtedness portfolio's value and coagulated dividend coverage, I judge nan valuation makes very small consciousness correct now, and nan banal should not beryllium trading astatine a 15% discount to book value.

ACRE has sold for arsenic overmuch arsenic a 17% premium to book worth successful nan past year.

Price To Book Value (YCharts)

Why ACRE Might See A Lower/Higher Valuation

Ares Commercial Real Estate sees nan cardinal bank's liking argumentation arsenic some a consequence and an opportunity.

Higher liking rates arsenic a consequence of nan cardinal bank's complaint hikes whitethorn construe into higher distributable net owed to nan trust's floating complaint positioning.

A complaint hike to nan upside, connected nan different hand, whitethorn consequence successful an summation successful indebtedness defaults arsenic borrowers struggle to support up pinch higher liking payments.

My Conclusion

Ares Commercial Real Estate has a debased capable dividend pay-out ratio to propose that nan commercialized existent property finance spot tin proceed to salary $0.35 per stock per 4th successful 2023 if nan elder indebtedness portfolio continues to execute well.

Ares Commercial Real Estate's portfolio value appears to beryllium stable, arsenic nan commercialized owe spot collected 99% of its scheduled liking payments successful nan 4th quarter.

The champion point astir ACRE banal astatine nan infinitesimal is that passive income investors tin still acquisition nan spot astatine a discount to book value, expanding their separator of information and full return potential.

A financial interrogator and avid investor pinch a keen oculus for invention and disruption, arsenic good arsenic maturation buy-outs and worth stocks. Keeping an oculus connected nan gait of precocious tech and early maturation companies, I constitute astir existent events and nan biggest news surrounding nan industry, and strive to supply readers pinch ample investigation and finance opportunities.