Ares Commercial Real Estate: Dividends Maintained, Undervaluation Persists

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Introduction

Ares Commercial Real Estate Corporation (NYSE:ACRE) announced its Q4 2022 and FY 2022 net earlier this week. With nan markets closed connected Monday, I person taken immoderate clip to digest nan net study and earnings call. As always, I reevaluate nan institution based connected nan caller accusation disposable to find if it remains an charismatic buy.

Q4 Earnings

I wrote astir nan institution not excessively agelong ago, truthful I won't delve into nan inheritance of nan company. Suffice to say, it is an externally managed commercialized owe REIT.

Historically, nan institution has ever performed amended successful Q4, and I was expecting nan institution to do nan aforesaid for this quarter. What I did not expect, however, was really awesome a 4th it was.

Historically, nan institution has performed good successful Q4, signaling distributable net of $0.41/share successful some Q4 2020 and Q4 2021, truthful it should astatine slightest spot net of astatine slightest $1.50/share for 2022. As highlighted above, this ensures that nan institution will beryllium capable to support its quarterly dividend of $0.35/share

The institution recorded $0.44/share successful distributable net for nan quarter, comfortably beating estimates of $0.37/share. This was 1 of nan highest quarters connected grounds and meant nan institution recorded net of $1.55/share for 2022. This was besides a grounds fig for nan company, matching nan fig group successful 2021.

ACRE Q4 2022 & FY 2022 Earnings Presentation

A ample portion of nan company's capacity was attributable to nan creation of its indebtedness portfolio, pinch 99% of its loans being floating complaint loans and conscionable 68% of its indebtedness being floating rate. This intends nan institution was capable to use from nan existent rising liking complaint situation and is reflected successful its accrued nett liking separator twelvemonth connected year.

ACRE 2022 Form 10-K

Loan Portfolio

As astatine nan extremity of 2022, nan company's portfolio stood astatine $2.3 billion, a simplification from nan $2.5 cardinal successful Q3 2022. This alteration was owed to nan institution signaling complete $300 cardinal successful repayments and conscionable $56 cardinal successful originations, a nett alteration of astir $250 million. However, it was mentioned during nan net telephone by CEO Bryan Donohoe that this was a consequence of nan institution being opportunistic pinch its rate connected manus alternatively than a conscious determination to shrink its portfolio.

The company's portfolio is good diversified, some geographically and successful position of plus class. The second is particularly important owed to nan pandemic, pinch nan agency class experiencing weaker leasing and occupancy trends, and nan institution has acknowledged arsenic much.

ACRE Q4 2022 & FY 2022 Earnings Presentation

Going forward, nan institution is looking towards nan multifamily, industrial, and self-storage markets for caller loans. That being said, it does not mean nan institution is not unfastened to different spot types arsenic well. In fact, nan only indebtedness originated successful Q4 2022 was for an agency property, which guidance felt provided an charismatic risk/reward ratio. Put simply, guidance will beryllium perpetually connected nan lookout for opportunistic investments while maintaining capable liquidity.

ACRE February 2023 Investor Presentation

Dividends

The institution maintained its dividend of $0.33/share, on pinch a supplemental dividend of $0.02/share for Q1 2023. This marks nan 9th consecutive 4th that guidance has maintained its dividends. Crucially, its dividends are wholly covered for by its distributable net (1.1x), ensuring that nan institution is not overreaching to salary retired its dividends.

However, it has to beryllium noted that it is improbable for nan institution to raise its dividends successful nan adjacent future. Management has said arsenic much, mentioning that nan institution will activity to support liquidity. Additionally, nan 1.1x sum does not supply overmuch room for dividend growth.

Of course, I would for illustration to authorities that I americium happy pinch nan existent dividend arsenic it is, pinch a output of astir 12% and I would not want to spot guidance summation its dividends for nan liking of doing so.

Risks

Looking up into 2023, location are immoderate challenges nan institution will face. While nan company's net person undoubtedly benefited from precocious liking rates pinch nan institution reporting grounds net for nan year, these liking rates person led to challenges arsenic well. The institution has observed spot owners becoming much cautious successful ray of nan rising rates.

In summation to nan above, nan institution has reported defaults successful 3 of its elder loans - 2 of which are backed by mixed-use properties and nan different by an agency property. That being said, nan institution is assured it will beryllium capable to negociate these challenges. For instance, nan institution took complete a spot successful 2019 erstwhile location was a default connected its loan, and was subsequently capable to waste it successful Q1 2022, starring to a affirmative return overall.

Conclusion

Subsequent to nan company's merchandise of its results, stock prices roseate initially earlier falling pinch nan remainder of nan market. Remarkably, nan stock value is moreover somewhat little than erstwhile I past wrote astir nan company, resulting successful a very charismatic dividend output of 12%.

While 2023 will decidedly beryllium to beryllium a challenging twelvemonth for nan institution (3 defaults successful nether 2 months doesn't bode well), I spot successful nan guidance squad to beryllium capable to successfully navigate these challenges. Additionally, nan institution continues to waste and acquisition astatine a discount to book value, and I judge that this, coupled pinch nan precocious dividend yield, provides maine pinch a capable separator of safety. I person been, and will proceed to adhd to my position successful ACRE banal astatine these prices.

My purpose is to build a financial portfolio which will alteration maine to go financially independent. While I person a keen liking successful nan financial markets, and americium perpetually seeking to study much astir various sectors, this intends I thin to gravitate towards dividend stocks arsenic they will supply maine pinch a dependable watercourse of income to execute my extremity of becoming financially independent.