On Friday, BTIG assumed coverage on Ares Commercial (NYSE:ACRE) Real Estate Corporation (NYSE:ACRE) stock, issuing a Neutral rating. The commercial mortgage Real Estate Investment Trust (REIT), which is managed by Ares Management Corporation (NYSE:NYSE:ARES), is recognized for its solid leverage and liquidity, with approximately $100 million in cash and around $650 million available on warehouse lines.
Ares Commercial Real Estate faces significant obstacles, despite its favorable leverage of 2.3x net debt-to-equity. The company's Current Expected Credit Loss (CECL) stands at 23.3% of equity, almost 500 basis points higher than any other commercial mortgage REIT covered by BTIG. This is partly attributed to Ares Commercial's substantial 38% exposure to the office sector, the highest in BTIG's coverage.
The REIT did not report any new non-accrual loans in the first quarter of 2024 and saw a $33 million decrease in the overall balance from the fourth quarter of 2023. Nevertheless, an additional asset was added to the watchlist.
BTIG suggests that Ares Commercial will need to make more substantial progress in addressing non-accruals and its growing real estate owned (REO) portfolio before it can shift focus to originating new loans.
The first quarter of 2024 also saw Ares Commercial cut its dividend, which provided some relief in terms of coverage levels. However, it is noted that the company did not cover its dividend in the last quarter, indicating potential financial strain. The cut in dividend and the challenges highlighted by BTIG suggest cautiousness regarding the company's near-term prospects.
In other recent news, Ares Commercial Real Estate Corporation (ACRE) has been the subject of several significant developments. The company has made substantial progress in resolving non-performing loans, reducing the outstanding principal balance of these loans by $133 million in the first quarter of 2024.
Additionally, Ares has decreased its exposure to the commercial office property sector by $70 million. Despite these positive strides, Ares Commercial posted a GAAP net loss of $12.3 million and a distributable earnings loss of $33.5 million for the quarter.
In light of these results, Keefe, Bruyette & Woods revised their price target on Ares Commercial shares, lowering it from $7.50 to $7.00. The firm projects a $9 million, or $0.17 per share, realized loss for Ares in the second quarter of 2024, based on a smaller portfolio size and lower origination volumes. Despite this, the firm's analysis suggests that excluding credit impacts, earnings per share could average $0.18 per quarter.
These recent developments underscore the evolving financial landscape for Ares Commercial as it navigates its way through loan resolutions and market fluctuations. As the company continues to focus on originating loans and managing a portfolio of loans backed by commercial real estate properties, investors will be watching closely to see how these strategies play out.
InvestingPro Insights
As Ares Commercial Real Estate Corporation (NYSE:ACRE) navigates the challenges outlined by BTIG, InvestingPro data and tips offer additional insights into the company's financial health and performance. With a market capitalization of $415.75 million and a high dividend yield of 13.11%, ACRE presents a significant income opportunity for shareholders. This is supported by the fact that ACRE has maintained dividend payments for 13 consecutive years, underscoring its commitment to returning value to investors.
However, it's important to note that the company's P/E ratio based on the last twelve months as of Q1 2024 is unusually high at 78.83, suggesting that the stock may be overvalued relative to its earnings. The company's revenue has declined by 12.18% during the same period, aligning with analysts' anticipation of a sales decline in the current year. On a positive note, ACRE's liquid assets exceed short-term obligations, indicating a solid liquidity position that may help the company manage its high CECL and exposure to the office sector.
For investors seeking deeper analysis and additional InvestingPro Tips on ACRE, including an assessment of the company's profitability and its return over the last three months, you can find a comprehensive list of tips at Investing.com/pro/ACRE. Use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and gain access to exclusive insights that could inform your investment decisions.
With 8 additional InvestingPro Tips available, investors can gain a more nuanced understanding of ACRE's financial trajectory and make more informed decisions based on real-time data and expert analysis.
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