Ares Commercial Real Estate: A War God's Office Loans (NYSE:ACRE) (2023)

Ares Commercial Real Estate: A War God's Office Loans (NYSE:ACRE) (1)

Continuing along my run of reviewing REITs lately, today we’re looking at another commercial mREIT: Ares Commercial Real Estate Corporation (NYSE:ACRE). There’s been a fallout in stock prices with commercial mREITs as fears from the banking crisis have investors looking for other areas of concern.

One of those is commercial real estate with office properties particularly in the cross hairs lately. The work-from-home trend catalyzed by the COVID-19 pandemic has radically changed the office environment from just a few years ago. Today we are looking at national office vacancy rates of 16.5% according to Commercial Edge’s data with that number climbing steadily over the last three years. Axios data pins vacancy rates at 18.8% which are the highest levels since the savings and loan crisis in the 1980s.

Which brings us back to ACRE. Their loan portfolio has an outstanding balance of $2.3 billion and 37% of that is wrapped up in office. It represents around $851 million of their assets.

Ares Commercial Real Estate: A War God's Office Loans (NYSE:ACRE) (3)

The stock of ACRE has paid the price for this allocation lately along with a number of other mREITs.

Ares Commercial Real Estate: A War God's Office Loans (NYSE:ACRE) (4)

Morningstar has ACRE’s five-year average P/B at 0.94x. Currently the stock trades at a P/B of 0.66x which is the lowest it’s been since 2020 and it’s rarely touched over the last ten years.

Ares Commercial Real Estate: A War God's Office Loans (NYSE:ACRE) (5)

So, on the one hand, we have fear of office catastrophe hanging over the price of ACRE’s stock. On the other, we have historically low P/B valuation and a 14.52% annual dividend yield being offered currently. The dividend should have just paid out and it included a small ($0.02) supplemental dividend as well suggesting management is comfortable with their coverage. It’s part of a larger trend where the company has paid a supplemental six out of the last seven dividends.

Let’s look a little more closely at the company’s office exposure and current situation to gauge this opportunity.

ACRE’s Office Loans

The company maintains a total of 60 different loans – 14 of these are office loans (23%). Eight of these loans are maturing this year which have a total carrying value of $527.8 million. For reference total equity value is around $748 million and the market cap of ACRE sits at $496 million.

From the onset we can acknowledge that in the last earnings call management provided the data point that 99% of their contractual interest was collected in the quarter. They announced that one office loan was downgraded from a 3 to a 4 risk rating “due to our outlook on their respective business plans and our macroeconomic view of their respective submarkets.

According to their 10-k a 4 risk rating is defined as “High Risk/Potential for Loss: Asset performance is trailing underwritten expectations. Loan at risk of impairment without material improvement to performance.

Management revealed during the call that subsequent to the quarter’s end they’ve seen three maturity defaults. Only one of these was an office property; the other two were mixed-use properties. The office loan is #11 on the list above in Illinois which had a maturity date in January. Their 10-k noted that the unpaid principal balance on this loan is $27.2 million.

Loan 2 also had a maturity date in January 2023 so should be represented in the next quarterly updated as either resolved or not. This loan represents $117 million. Three more loans were expected to mature in March 2023: loans 1, 4, and 10. These loans total to $254 million in carrying value.

Analyst Stephen Laws asked management about some of these loans with upcoming maturities to which management gave very little information in response. But if we go back to their q3’22 call CFO Tae-Sik Yoon gave a bit more color about upcoming maturities in the office space.

“So I think we absolutely deal with each situation differently. I think if you look at our historical practice, we have been very working, again very closely with each borrower to make sure we give them every opportunity to continue to meet their business plans. I'd say most often, we have asked for some level of concessions in order to provide an extension of their loans, right? Whether that is some sort of fee? Whether that's an increase in the interest rate? And probably most often some material contribution of additional equity capital to show their continued sponsorship in the deal.

But again, our goal is to continue to work with each of our borrowers to give them every opportunity for success. We want them committed, both from an effort perspective, as well as capital perspective. At this point, I would say there are situations where, again, it's ongoing discussions. I don't think we have situations where we have borrowers ready to throw us the key, if you want to call it that way. But certainly, borrowers do behave as an economic animal, and we do understand the situations in which they may be motivated to do so. And so again, we evaluate each of these situations very uniquely, individually. It depends on the borrower, it depends on the building, it depends on the submarket, it depends on so many different situations that it's hard to give a generic response. But again, I do think we do work very closely with each borrower to make sure that we have the best solution for us and for them.”

I don’t think management would have mentioned seeing keys returned if it wasn’t a real possibility. That said I think it is likely that there will be some haircuts across these loans.

Kevin Fagan, head of commercial real estate economic analysis at Moody’s Analytics, estimates that another 20 percent price correction needs to happen in office. We can apply this 20% correction estimate to the troubled loans above for how this might come through the balance sheet. Carrying value for all five loans (1, 2, 4, 10, and 11) equals $398 million. Twenty percent of that would represent a $79.6 million haircut.

We should consider the other two mixed-use properties as well which saw maturity default. These loans have a total outstanding principal balance of $111 million. And for the sake of simplicity, we’ll apply a 20% haircut on these loans as well which is $22.2 million.

That brings our estimate to a total of $101.8 million that may be written down on these loans. Total equity value of $748 million means that this theoretical haircut represents 13.6% of book value.

The company has a current expected credit loss reserve of $71.3 million which would cushion some of this. But readers can imagine what this might look like if we're not just talking about five office loans. If we apply this 20% haircut to their entire office allocation at $834 million carrying value the decline would be $167 million.

What concerns me as well is that management seems to have missed the credit risk on the two mixed-use properties which defaulted subsequent to the quarter end. Going back to the quarter prior neither of these loans were listed above a 3 risk rating – meaning they moved from being “Medium Risk” to defaulting in just one quarter. They only had $67 million in carrying value at a risk rating higher than 3 back in November 2022.

Turning around and announcing $149.1 million in defaults does not reflect well on their risk assessment. That makes me wonder if there’s not more to be concerned about.

Shrinkage in the Portfolio and in Earnings

Over the year, ACRE saw the carrying amount of their portfolio decline by 6.2%.

2022 Portfolio Carrying Amount


2021 Portfolio Carrying Amount


Only one new origination was made in the last quarter which was a $56 million loan. Guess what sector it’s in? Office. So management doesn’t seem too concerned about office that they aren’t willing to allocate more capital towards it.

That shrinkage is just what’s on the books so far and does not include the haircut implied by the $149 million in defaults they’ve already announced. Add on top of this the other four office loans which have passed their maturity date and I think you can see why I expect further declines in their portfolio carrying value.

Loans on non-accrual were $45 million as of their last report which did not include the $150 million that just defaulted. So that means around $195 million in loans could be thought of as not paying out anything this quarter. Weighted average yield on the portfolio is 8.9% so we can use that to estimate how much this might impact net income.

Annual yield on these loans would be around $17.4 million or $4.3 million a quarter. Distributable earnings in q4’22 came in at $23.9 million – which means that these loans being non-accrual represents about 18% of their earnings. Adjusting this downward we can estimate quarterly earnings of $19.6 million.

Even with this estimate of $19.6 million their other four office loans that have matured will likely cut into these earnings. Every quarter ACRE is paying out $0.33 per share as a dividend. If they only earn $19.6 million a quarter with 54.6 million shares outstanding then distributable earnings would be $0.36 per share. Dividend coverage at that level would be 109% which seems pretty thin especially in a climate of impending maturities, challenging originations, and credit tightening.

Moving forward management will need to both balance their maturing loans with originations to ensure the portfolio does not continue to shrink.

For A Comparative Analysis

Back in March I produced an article on ACRE’s peer Blackstone Mortgage Trust (BXMT) which faces some of the same perils with their high loan allocation towards office properties. I included a peer analysis table in that article which I’m updating here to include ACRE. The other two peers are BrightSpire Capital (BRSP) and TPG RE Finance Trust (TRTX). I’ve written separately about each here and here.

($ in millions except per share values)





Price as of 4/1/2023





Number of common shares





Market value of common shares










Total Capitalization





Total Equity





Book Value per Share










Distributable earnings





Distributable earnings per share 2022





Distributable earnings per share 2021





Distributable earnings per share 2020





Distributable earnings per share three-year average





Current dividend per share






Dividend yield





Dividend yield on book value





Distributable Earnings / Dividend





Price / Book





Price / 3-year distributable earnings





Distributable Earnings / Revenue





Return on Equity





Current Assets / Current Liabilities





Debt / Equity





What stands out to me is ACRE’s strength in profitability and relatively small debt profile. As we noted earlier, there may be pressure on earnings moving forward though which makes the above average dividend yield compared to book value suspect. Investors here would be wise to monitor this position closely as the year unfolds.

Investor Takeaways

Ares Commercial Real Estate has some turbulence ahead given their outsized allocation to office properties. A number of these loans face maturity this year which will require management to effectively navigate what are sure to be a number of hard negotiations. My expectation is a number of these loans will be written down.

Management thus far has failed to predict credit risk issues fully. This leads me to suspect greater risk moving forward than they've communicated. I would think their CECL reserve will need to increase as a result. And while damage is being done to the asset side of the equation, earnings are going to be at risk as well.

Their low debt-to-equity ratio compared to peers should help them somewhat navigate this cycle, but I expect there is more pain to come. With shares trading at a historically low valuation there’s a lot of this priced though we face a multitude of uncertainties these days. The dividend that was just paid out may give investors some comfort, but overall I’d remain cautious.


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Is Ares Commercial Real Estate a REIT? ›

Ares Commercial Real Estate Corporation (“ACRE”) (NYSE: ACRE) is a Real Estate Investment Trust managed by Ares Commercial Real Estate Management LLC (“ACREM”), a subsidiary of Ares Management Corporation (NYSE: ARES) (“Ares”) a leading global alternative investment manager with approximately $352 billion of assets ...

Is Ares Management a REIT? ›

Ares Industrial Real Estate Income Trust (Ares Industrial REIT or AIREIT) is a single-sector NAV REIT investing in institutional-quality 2 distribution warehouses in high barrier-to-entry markets with access to major distribution hubs and dense population centers.

Are commercial REITs a good investment? ›

Pros of investing in REIT stocks

The most reliable REITs have a track record of paying large and growing dividends for decades. High returns: As noted above, returns from REITs can outperform equity indexes, which is another reason they are an attractive option for portfolio diversification.

What is the largest commercial REIT? ›

The 3 Largest REITs As Measured By Market Capitalization
  • Prologis Inc. (NYSE: PLD) is the biggest of the big with a market capitalization of $112.16 billion. ...
  • American Tower Corp. (NYSE: AMT), based in Boston, provides wireless communications infrastructure in 25 countries on 6 continents. ...
  • Realty Income Corp.
Jan 25, 2023

How often does Ares pay dividends? ›

Dividend Summary

There are typically 4 dividends per year (excluding specials), and the dividend cover is approximately 1.1. Our premium tools have predicted Ares Capital Corp with 93% accuracy. Sign up for Ares Capital Corp and we'll email you the dividend information when they declare.

Is Ares a good company? ›

As of April 28, 2023, Ares Management Corp had a $24.5 billion market capitalization, putting it in the 94th percentile of companies in the Investment Management & Fund Operators industry. Currently, Ares Management Corp's price-earnings ratio is 100.5.

What is the dividend yield for Ares Capital? ›

How much is Ares Capital Corp's dividend? ARCC pays a dividend of $0.48 per share. ARCC's annual dividend yield is 10.48%.

Can you become a millionaire off of REITs? ›

For example, earning 11% annual total returns on a $300/month contribution would allow an investor to surpass $1 million after just 33 years. Setting aside $100 a month for each of these three real estate investment trusts (REITs) could make you a millionaire in the span of just over three decades.

What is the downside risk for REITs? ›

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

What is the disadvantage of REITs? ›

The potential downsides of a REIT investment include taxes, fees, and market volatility due to interest rate movements or trends in the real estate market. REITs tend to specialize in specific property types.

What is the 90% REIT rule? ›

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

What is the top 3 REITs in the world? ›

Key Points. American Tower, Prologis, and Realty Income are the largest REITs in their sectors, and among the largest overall.

What are the top 5 largest REIT? ›

The five largest REITs in the United States in 2021 are: American Tower Corporation, Prologis, Crown Castle International, Simon Property Group and Weyerhaeuser.

What is the payout ratio for Ares Capital? ›

What is Ares Capital's dividend payout ratio? The dividend payout ratio of Ares Capital is 149.6%.

Which stock has the highest dividend? ›

Comparison Results
NamePrice & ChangeDividend Yield
CVX Chevron168.58 +1.63 (+0.98%)3.42%
EOG EOG Resources119.47 +3.63 (+3.13%)7.43%
ET Energy Transfer12.88 +0.09 (+0.7%)7.76%
HESM Hess Midstream Partners29.34 +0.45 (+1.56%)7.63%
5 more rows

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The financial health and growth prospects of ARCC, demonstrate its potential to underperform the market. It currently has a Growth Score of F. Recent price changes and earnings estimate revisions indicate this would be a good stock for momentum investors with a Momentum Score of B.

Why was Ares not popular? ›

Ares was the Greek god of war. He was perhaps the most unpopular of all the Olympian gods because of his quick temper, aggressiveness, and unquenchable thirst for conflict. Ares famously seduced Aphrodite, unsuccessfully fought with Hercules, and enraged Poseidon by killing his son Halirrhothios.

Why are Ares so good? ›

Ares' special powers were those of strength and physicality. As the god of war he was a superior fighter in battle and caused great bloodshed and destruction wherever he went.

What is Ares reputation? ›

Although Ares' name shows his origins as Mycenaean, his reputation for savagery was thought by some to reflect his likely origins as a Thracian deity. Some cities in Greece and several in Asia Minor held annual festivals to bind and detain him as their protector. In parts of Asia Minor, he was an oracular deity.

Is acre a monthly dividend? ›

Regular payouts for ACRE are paid quarterly.

What is the stock price forecast for Ares Capital? ›

Stock Price Forecast

The 15 analysts offering 12-month price forecasts for Ares Capital Corp have a median target of 20.50, with a high estimate of 24.00 and a low estimate of 18.00. The median estimate represents a +15.04% increase from the last price of 17.82.

Is ARCC a monthly dividend? ›

Regular payouts for ARCC are paid quarterly.

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What Qualifies as a REIT?
  1. Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries.
  2. Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales.
  3. Pay a minimum of 90% of taxable income in the form of shareholder dividends each year.

What is a REIT commercial real estate? ›

Commercial REITs (also known as “equities”) are real estate investment trusts that are specific to business properties, such as hotels, parking lots, office buildings and more.

What does REIT mean in commercial real estate? ›

Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate.

Is a real estate mutual fund a REIT? ›

REITs typically invest directly in properties or mortgages. REITs may be categorized as equity, mortgage, or hybrid in nature. Real estate mutual funds are managed funds that invest in REITs, real-estate stocks and indices, or both. REITs tend to be more tax-advantaged and less costly than real estate mutual funds.

What is the 90% rule for REITs? ›

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

How does a REIT lose money? ›

Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Why not to invest in REITs? ›

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

What is the minimum investment for a REIT? ›

The minimum amount to invest in REIT India after SEBI's notification on July 30th, 2021, ranges from INR 10,000 to INR 15,000. In the same SEBI regulation, the minimum lot size for REITs was also decreased from 100 units to 1 unit.

Do you own the real estate in a REIT? ›

REITs—or real estate investment trusts—are corporations that act like mutual funds for real estate investing. You can invest in a REIT without having to own or manage any property yourself. Alternatively, you can go the direct real estate investing route and buy residential or commercial properties.

Is it better to own real estate or REIT? ›

A successful and busy professional: Property ownership could be costly or infeasible if you don't have time to deal with tenants or maintenance, so passively investing is likely the right choice, as REITs minimize time and effort while improving risk-adjusted returns in a mixed-asset portfolio.

What are the cons of REITs? ›

The potential downsides of a REIT investment include taxes, fees, and market volatility due to interest rate movements or trends in the real estate market. REITs tend to specialize in specific property types.

Why REITs are better than rental property? ›

Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.

What is the average return on a REIT? ›

Digging into the historical data: REITs vs. stocks
1972 to 202110.7%11.9%
Past 25 years10.2%11.5%
Past 20 years9.5%12.7%
Past 10 years16.5%12.9%
2 more rows
Dec 19, 2022

What is the most profitable REITs to invest in? ›

Highest Yielding REITs
REIT (Ticker)SpecialtyForward Dividend Yield
Ready Capital (RC)Mortgage assets12.1%
Cherry Hill Mortgage Investment (CHMI)Residential mortgage assets15.7%
Western Asset Mortgage Capital (WMC)Residential mortgage assets15.9%
Two Harbors Investment (TWO)Residential mortgage-backed securities14.1%
7 more rows
Apr 18, 2023

Can you make money with REITs? ›

There's much to be said for investing in REITs. They're more liquid than physical properties and can be a steady source of income. They appreciate (and can depreciate) along with the broader real estate market, and allow you to hedge against stock market volatility.

Are REITs better than mutual funds? ›

mutual funds Invest in a wide variety of assets whereas REITs invest only in the Real estate market. This makes Mutual funds more diversified but when compared to return angle Real estate are more beneficial, he added. According to research by the National Association of Real Estate investment trust (NAREIT).


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