Ares Commercial Stock: Kick Back & Watch Dividends Roll In (NYSE:ACRE)

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Income investments have held up rather well in face of global uncertainty and inflation. This is especially true when it comes to well-managed quality players that have strong institutional backing. This brings me to Ares Commercial Estate (NYSE:ACRE), whose share price has remained relatively stable over the past 6 months, all while delivering a high dividend. This article highlights the merits of investing in ACRE at present, so let’s get started.

ACRE: Kick Back And Watch The Dividends Roll In

ACRE is a leading real estate investment trust (REIT) that is engaged in originating, investing in, and managing commercial real estate loans and properties. It’s externally managed by its “big brother” Ares Management, a well-known asset manager that also happens to manage the largest BDC by asset size, Ares Capital (ARCC). Notably, ARES has $41B in real estate assets under management, thereby giving ACRE industry visibility and deal sourcing opportunities that it would not otherwise have.

ACRE focuses on middle-market lending across the US, with an emphasis on first mortgage loans. ACRE’s loan portfolio consists of primarily floating-rate loans which makes it relatively immune to rising interest rates.

It has a well-diversified loan portfolio with loans secured by properties in various sectors including office, retail, industrial, hotel, and multifamily. ACRE’s focus on middle-market lending enables it to avoid the competitive pressures that larger players face in the CRE lending space. This, combined with the company’s strong underwriting standards, has resulted in ACRE delivering consistent and strong financial results.

This is reflected by its strong results in the latest reported quarter, with distributable EPS of $0.41, amply covering its regular $0.33 quarterly dividend rate with a safe 80% payout ratio. This also enabled ACRE to deliver a supplemental dividend of $0.02 thus far this year, continuing its track record of $0.02 per quarter since the start of last year.

These results were backed by a strong demand environment, in which ACRE closed a record $1.4 billion of new loan commitments in 2021. Moreover, 75% of ACRE’s recent loan commitments were secured by multi-family and self-storage properties, both of which are seeing strong secular rental trends. Also encouraging the remaining 25% are secured by industrial properties, which is experiencing strong demand on its own, driven by e-commerce.

Looking forward, ACRE is well positioned to continue its strong performance, given its focus on the resilient middle-market segment and its ability to generate high investment yields. This is reflected by continued opportunistic growth areas, as highlighted by management during the recent conference call:

We continue to see robust activity in our target markets of the South and Mid-Atlantic, where we see strong demographic growth drivers. The returns on the new loans were consistent with our target levels commensurate with the risk profile of each asset class.

The portfolio continues to be well-positioned for potential increases in interest rates with approximately 98% invested in floating rate loans. Our portfolio is largely comprised of what we believe are more stable property types, with our most recent originations focused on multi-family, industrial and self-storage assets.

Risks to ACRE include its external management structure, which may result in conflicts of interest. Additionally, ACRE could see demand wane should the economy enter a recession. Lastly, as with all commercial mortgage REITs, ACRE’s employs leverage to increase its yield. ACRE’s debt-to-equity ratio excluding CECL reserve sits at 2.7x, which is below the 3.5x level that I prefer to see.

I see value in ACRE at the current price with a price-to-book ratio of 1.08x. I believe this premium is deserved considering ACRE’s track record of paying a growing dividend over the past decade. Moreover, this enables ACRE to raise equity capital in an accretive manner. Sell ​​side analysts have a consensus Buy rating with an average price target of $16.17, translating to a potential 13% one-year total return including dividends.

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ACRE Valuation (Seeking Alpha)

Investor Takeaway

ACRE is a high-quality commercial mortgage REIT that has delivered strong and consistent results over the past decade. The company is well positioned to continue its strong performance given its focus on the resilient middle-market segment and its ability to generate high investment yields. While the stock does trade at a premium to book value, I believe this is justified by the company’s strong track record and favorable outlook. I see value in ACRE at present for high income.

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