ACRE Stock: 16%-Yielding mREIT May Offer 35% Upside Potential
February 17, 2025
Outlook for ACRE Stock Bullish on Industry Tailwinds
At Income Investors, we love ultra-high-yielding dividend stocks, but only those with compelling stories and industry tailwinds. It’s easy to find high-yielding dividend stocks that are actually a trap. It’s a lot harder to find income stocks that provide reliable dividends and a great opportunity for capital appreciation, but Ares Commercial Real Estate Corp (NYSE:ACRE) fits the bill.
As a mortgage real estate investment trust (mREIT), Ares Commercial Real Estate has two things going for it: a lower interest rate environment and a strong real estate market.
Higher interest rates are bad for REITs. That’s because they borrow a lot of money to build their portfolios, and higher interest rates make it more expensive to borrow, which cuts into earnings and profitability.
While interest rates have come down marginally over the last number of months, the 30-year fixed rate is still hovering above seven percent, while 15-year mortgages are near 6.5%. In fact, mortgage rates are higher today than they were five months ago when the Federal Reserve began to cut its key lending rate. (Source: “Mortgage rates dip, remain above 7%,” Bankrate, February 5, 2025.)
Then there’s the U.S. housing market. The average U.S. home value is up 2.6% on an annual basis at $356,585, with homes going to “pending” in less than a month. Over the last nine years, the average value of a U.S. home has risen 73%. (Source: “United States Housing Market,” Zillow, last accessed February 7, 2025.)
These tailwinds should help juice undervalued ACRE stock and its dividends over the coming quarters.
About Ares Commercial Real Estate Corp
Ares Commercial Real Estate Corp is a specialty finance company that originates and invests in commercial real estate (CRE) loan and related investments here in the U.S. (Source: “Portfolio,” Ares Commercial Real Estate Corporation, last accessed February 7, 2025.)
The mREIT originates senior mortgage loans (97% of portfolio), subordinate debt and preferred equity products, mezzanine loans, and other CRE investments, including commercial mortgage-backed securities (MBS).
As of September 30, 2024, Ares Commercial Real Estate had total originated commitments of $2.0 billion across 40 loans.
By property type, the office component is the biggest, at 36%, followed by multifamily (24%), industrial (13%), residential/condominium (10%), hotel (6%), mixed-use (6%), and self-storage (4%).
Ares Commercial Real Estate is also diversified geographically, with 36% of its portfolio located in the Mid-Atlantic/Northeast, followed by the Southeast (23%), Midwest (21%), West (13%), and Southwest (7%).
Further Strengthens Balance Sheet in Q3
For the third quarter ended September 30, 2023, Ares Commercial Real Estate reported a third-quarter loss of $5.9 million, or a loss of $0.11 per share, down from third-quarter 2023 net income of $9.1 million, or $0.17 per share. (Source: “Ares Commercial Real Estate Corporation Reports Third Quarter 2024 Results,” Ares Commercial Real Estate Corp, November 7, 2024.)
Ares’ distributable earnings, which a company looks at for its dividends, came in at $3.7 million, or $0.07 per share. The mREIT ended the quarter with cash and cash equivalents of $68.8 million.
Commenting on the third-quarter results, Bryan Donohoe, Ares Commercial Real Estate’s chief executive officer, said, “During the third quarter, we continued to make progress on our objective of further strengthening our balance sheet position and resolving our risk rated 4 and 5 loans, which declined by 33%.
“Together with our financial flexibility and the capabilities provided by our Ares Real Estate Group, we believe we are well positioned to resolve our remaining underperforming assets, which will ultimately position the company for higher levels of portfolio growth and earnings in the future.”
Fourth-Quarter Dividend of $0.25/Share
As an mREIT, Ares Commercial Real Estate has to legally distribute at least 90% of its taxable income to shareholders in the form of dividends. This is why REITs are home to some of the biggest, most reliable dividends on Wall Street.
At the same time, because dividends are tied to distributable earnings, which is impacted by mortgage rates and loans, etc., they can fluctuate.
For the fourth quarter, Ares Commercial Real Estate declared a dividend of $0.25 per share, or $1.00 on an annual basis, for a forward yield of 16.72%.
ACRE Stock: 35% Upside Potential?
For the most part, Ares has a big forward dividend yield because its stock hasn’t really done much over the last year. As of February 7, ACRE stock is up 1.2% year to date, but it’s down 21% on an annual basis.
Thanks to positive industry dynamics though, the outlook for ACRE is a lot more bullish, with Wall Street analysts providing a 12-month share price average of $6.80 and high estimate of $8.00. This points to potential gains in the range of approximately 14.7% to 35% with ACRE stock.
Chart courtesy of StockCharts.com
The Lowdown on ACRE Stock
Ares Commercial Real Estate Corp is an mREIT with a diversified portfolio across asset classes and geography. During the third quarter, the company further strengthened its balance sheet, which includes reducing its debt by an additional eight percent, while maintaining strong levels of liquidity.
The mREIT also working to resolve risk-rated 4 and 5 loans. Those are higher-risk loans. During the third quarter, those loans declined by 33%.
While some common shareholders may be scared off by ACRE stock’s recent price performance, 175 institutions are confident that the company is heading in the right direction. And they’re happy to collect a reliable dividend along the way.
Of the 175 institutional holders accounting for 48.11% of outstanding ACRE shares, the top three are BlackRock Inc, Vanguard Group Inc, and Invesco Ltd.
