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Ares Commercial Real Estate Corporation (
This well-managed trust invests in commercial real estate and pays a 12% dividend that is paid by passive income investors.
The portfolio of the trust performed well, too.
The fourth quarter was very successful with a 99% interest rate. This could lead to a dividend hike or continuation of the $0.02 per quarter supplemental dividend.
Covering Ares Commercial Real Estate, I have updated my dividend coverage metrics so that they include the 4Q-22.
Passive income investors can get a great deal by buying the trust's stock at a 15% discount on its book value.
Portfolio of top performing, senior loan-focused investments
Ares Commercial Real Estate's senior loans portfolio stood at $2.3 million at the end of December quarter
It consisted of 60 loans. The portfolio value fell by $200 million in 4Q-22 due to $56 million in originations and $319 million in repayments. Portfolio composition did not change in the fourth quarter. Ares Commercial Real Estate continued to favor office realty (37%), multi-family realty (22%), and industrial facilities (1%).
Loan Portfolio Overview
(Ares Commercial Real Estate Corp)
One thing that is noteworthy about Ares Commercial Real Estate’s senior loan portfolio, is the fact that it has been positioned to profit from an increased interest rate. This theme has returned after the recent inflation report.
Ares Commercial Real Estate reported that 99% of senior loans had a floating rate at December's end. This means that if the central banks continues raising interest rates, loan rates could reset to the upside. This is a significant indicator of the fact that loan rates will reset to the upside if central bank interest rates continue to rise.
Inflation rose 0.5%
Month on month, January is a good example of what I believe the central bank will do for 2023.
Ares Commercial Real Estate is a good investment if you think the central bank will keep raising interest rates in 2023 in order to combat inflation.
According to Ares Commercial Real Estate, an increase of 100 basis points in key interest rates would increase the trust’s distributable earnings by $0.18 per year. This will allow the trust to pay its $0.02 per quarter supplemental dividend.
Sensitivity to Interest Rates
(Ares Commercial Real Estate Corp)
Dividend Coverage Improved In 4Q-22
ACRE's 4Q-22 earnings calls
Ares Commercial Real Estate paid its dividend with distributable earnings during the fourth quarter. The dividend payout ratio increased 10 percentage points over the September quarter due to strong portfolio performance, as well as a 99% interest collection rate.
Ares Commercial Real Estate made $0.44 per share in distributable earnings during 4Q-22. This was more than the $0.35 per share dividend payout. The 4Q-22 pay-out ratio was 81%.
Ares Commercial Real pays a $0.33 quarterly dividend and a $0.02 supplemental dividend. Passive income investors can expect to receive $1.40 per share if ACRE continues to pay $0.02 per quarter supplemental dividend, which would imply a dividend yield in excess of 12%.
(Author Created table using Trust Information)
ACRE's Value Reflects High Safety Margin
Ares Commercial Real Estate's stock trades at a discount to book value as though the United States is in a recession. It has not. Given the trust's senior loan portfolio's quality, solid dividend coverage, I think the current valuation is very poor and the stock shouldn't be trading at a 15% discount from its book value.
ACRE sold at a premium of 17% to its book value over the past year.
Price to Book Value
ACRE might see a lower/higher value
Ares Commercial Real Estate views the central bank's interest policies as both a threat and an opportunity.
Higher interest rates due to rate hikes by the central bank may result in higher distributable earnings because of the trust's floating rate position.
On the other hand, a rate increase to the upside could lead to an increase in loan defaults, as borrowers struggle with higher interest payments.
Ares Commercial Real Estate's dividend payout ratio is low enough to suggest that the trust for commercial real estate investments can continue to pay $0.35 per quarter in 2023, if the senior loans portfolio performs well.
Ares Commercial Real Estate's portfolio appears to be stable as it collected 99% of its scheduled interest payment in the fourth quarter.
ACRE stock is currently at its best because passive income investors can still buy the trust at a discounted price to book value. This increases their safety margin and maximizes their potential return potential.