We last looked at Ares Commercial Real Estate (Nasdaq: ACRE) nearly two years ago. At that time, its 12% dividend yield received an “A” rating for dividend safety.
This was one of the rare times The Safety Net got an “A” rating wrong. But to be fair, the blame lies more with Ares Commercial Real Estate execution than with the Safety Net model.
One of the key variables that Safety Net considers is the Wall Street consensus estimate for cash flow or, in Ares’ case, net interest income (NII).
In January 2023, Wall Street expected Ares’ 2022 net interest income total to come in at $100 and climb to $110 million in 2023.
In 2023, NII reached only $89 million – 19% lower than analysts’ consensus estimate.
Not surprisingly, the stock performed horribly.
In January 2024, Ares reduced its quarterly dividend to $0.25 per share, from $0.33. It was the first time the company lowered the dividend since it began paying one in 2012.
Ares Commercial Real Estate has $2 billion in outstanding loans across 40 properties. Office space makes up the largest percentage of loans at 36%, followed by multifamily housing at 24% and industrial properties at 13%.
The Mid-Atlantic Northeast is its largest geography with 36% of outstanding loans, followed by the Southeast at 24% and Midwest at 21%.
This year, Ares is forecast to increase NII, but barely, to $93 million, just $4 million ahead of last year’s total.
It’s expected to pay $84 million in dividends for a 90% payout ratio. That’s OK for a mortgage REIT, but if NII is lower than expected and dips below what the company paid in dividends, another dividend cut becomes much more likely.
Right now, it’s not looking great. Through the first nine months, NII has totaled just $41 million. If you add in other revenue it climbs to $52 million. This time last year the company had brought in $75 million.
Meanwhile it’s already paid out $41 million in dividends in 2024. That means, so far this year, all Ares’ NII is going toward the payout to shareholders. There’s not much margin for error.
Unless interest income and net interest income jump in the fourth quarter, it looks like Ares Commercial Real Estate is going to fall short of Wall Street’s expectations again. If they do, the future dividend will likely disappoint investors as well.
I hope you have a wonderful Thanksgiving.
Dividend Safety Rating: C
