Almost two years have passed since we took a deep dive into Ares Commercial Real Estate (Nasdaq: ACRE). Back then, the company’s impressive 12% dividend yield earned a sterling “A” for dividend safety.
In retrospect, that was one of those rare moments where the Safety Net misplaced its trust with an “A” rating. However, if we’re being fair, the fault lies more with Ares Commercial’s performance than any miscalculation in the Safety Net’s assessment model.
One of the pivotal factors the Safety Net evaluates is Wall Street’s consensus forecast on cash flow, or specifically for Ares, its net interest income (NII).
By January 2023, analysts were predicting that Ares’ NII for 2022 would come in around $100 million, with a hopeful climb to $110 million the following year.
However, by 2023, NII had only managed to reach $89 million, falling short of expectations by a significant 19%.
Naturally, the stock didn’t take this well, and its performance mirrored these financial shortcomings.
To add to the woes, in January 2024, Ares had to cut its quarterly dividend from $0.33 to $0.25 per share—a first since it started its dividend payments back in 2012.
Ares Commercial Real Estate has extended approximately $2 billion in loans spread across 40 properties. The majority of these are directed towards office spaces, accounting for 36%, followed by 24% in multifamily housing and 13% in industrial properties.
In terms of geographical spread, the Mid-Atlantic Northeast leads with 36% of loans, with the Southeast and Midwest following, at 24% and 21% respectively.
Looking into this year, Ares is projected to increment its NII, albeit slightly, reaching an estimated $93 million, barely ahead by $4 million compared to last year’s figures.
The company is on track to disburse $84 million in dividends, which results in a 90% payout ratio. This number is manageable for a mortgage REIT, but if the NII doesn’t meet expectations and slips below the paid dividends, another dividend cut seems quite probable.
As of now, the prospects aren’t looking too promising. For the first nine months, the NII has only reached $41 million. Including additional revenue, this number bumps up to $52 million, which is significantly down from the $75 million collected by this time last year.
To compound the issue, Ares has already paid out $41 million in dividends in 2024, meaning all NII for the year is essentially being funneled straight back to shareholders, leaving no room for slip-ups.
Without a surge in interest income and net interest income in the fourth quarter, Ares Commercial Real Estate is likely to underdeliver on Wall Street’s expectations once again. Should this happen, it may dim investors’ hopes for future dividends.
Wishing you a joyful Thanksgiving.
Dividend Safety Rating: C
The post Risky Waters for Ares Commercial Real Estate’s 13.7% Yield appeared first on Wealthy Retirement.
