Intrinsic value of Ares Commercial Real Estate - ACRE

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$13.64

  Intrinsic Value

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  Value-price divergence*

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Our model is not good at valuating stocks of financial companies, such as ACRE.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ACRE stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -4.65
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  82
  124
  127
  131
  134
  138
  143
  148
  153
  159
  165
  171
  178
  186
  193
  202
  211
  220
  230
  240
  251
  263
  275
  288
  302
  316
  331
  347
  364
  382
  400
Variable operating expenses, $m
 
  18
  19
  19
  20
  20
  21
  22
  23
  23
  24
  25
  26
  27
  29
  30
  31
  33
  34
  36
  37
  39
  41
  43
  45
  47
  49
  51
  54
  56
  59
Fixed operating expenses, $m
 
  64
  65
  67
  68
  70
  72
  74
  76
  77
  79
  81
  83
  85
  88
  90
  92
  94
  97
  99
  102
  104
  107
  109
  112
  115
  118
  121
  124
  127
  130
Total operating expenses, $m
  51
  82
  84
  86
  88
  90
  93
  96
  99
  100
  103
  106
  109
  112
  117
  120
  123
  127
  131
  135
  139
  143
  148
  152
  157
  162
  167
  172
  178
  183
  189
Operating income, $m
  31
  42
  43
  44
  46
  48
  50
  52
  55
  58
  61
  64
  68
  73
  77
  82
  87
  93
  99
  106
  113
  120
  128
  136
  145
  154
  164
  175
  186
  198
  211
EBITDA, $m
  31
  42
  43
  44
  46
  48
  50
  52
  55
  58
  61
  64
  68
  73
  77
  82
  87
  93
  99
  106
  113
  120
  128
  136
  145
  154
  164
  175
  186
  198
  211
Interest expense (income), $m
  30
  31
  31
  32
  33
  34
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  53
  55
  58
  61
  63
  67
  70
  73
  77
  81
  85
  89
  93
  98
  103
Earnings before tax, $m
  31
  12
  12
  12
  13
  14
  15
  16
  17
  19
  20
  22
  24
  26
  29
  32
  35
  38
  41
  45
  49
  53
  58
  63
  68
  74
  80
  86
  93
  100
  108
Tax expense, $m
  1
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  7
  7
  8
  9
  9
  10
  11
  12
  13
  14
  16
  17
  18
  20
  22
  23
  25
  27
  29
Net income, $m
  40
  9
  9
  9
  10
  10
  11
  12
  12
  14
  15
  16
  18
  19
  21
  23
  25
  28
  30
  33
  36
  39
  42
  46
  50
  54
  58
  63
  68
  73
  79

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  47
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,374
  1,398
  1,430
  1,467
  1,508
  1,554
  1,604
  1,659
  1,718
  1,782
  1,850
  1,923
  2,001
  2,085
  2,173
  2,267
  2,366
  2,471
  2,582
  2,700
  2,824
  2,955
  3,093
  3,238
  3,391
  3,553
  3,723
  3,902
  4,090
  4,288
  4,497
Adjusted assets (=assets-cash), $m
  1,327
  1,398
  1,430
  1,467
  1,508
  1,554
  1,604
  1,659
  1,718
  1,782
  1,850
  1,923
  2,001
  2,085
  2,173
  2,267
  2,366
  2,471
  2,582
  2,700
  2,824
  2,955
  3,093
  3,238
  3,391
  3,553
  3,723
  3,902
  4,090
  4,288
  4,497
Revenue / Adjusted assets
  0.062
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
  0.089
Average production assets, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Working capital, $m
  0
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -28
  -30
Total debt, $m
  931
  892
  915
  941
  970
  1,002
  1,038
  1,077
  1,118
  1,164
  1,212
  1,264
  1,319
  1,378
  1,440
  1,507
  1,577
  1,651
  1,730
  1,813
  1,901
  1,994
  2,092
  2,195
  2,303
  2,417
  2,538
  2,665
  2,798
  2,938
  3,086
Total liabilities, $m
  955
  990
  1,013
  1,039
  1,068
  1,100
  1,136
  1,175
  1,216
  1,262
  1,310
  1,362
  1,417
  1,476
  1,538
  1,605
  1,675
  1,749
  1,828
  1,911
  1,999
  2,092
  2,190
  2,293
  2,401
  2,515
  2,636
  2,763
  2,896
  3,036
  3,184
Total equity, $m
  419
  408
  418
  428
  440
  454
  468
  484
  502
  520
  540
  562
  584
  609
  634
  662
  691
  722
  754
  788
  825
  863
  903
  946
  990
  1,037
  1,087
  1,139
  1,194
  1,252
  1,313
Total liabilities and equity, $m
  1,374
  1,398
  1,431
  1,467
  1,508
  1,554
  1,604
  1,659
  1,718
  1,782
  1,850
  1,924
  2,001
  2,085
  2,172
  2,267
  2,366
  2,471
  2,582
  2,699
  2,824
  2,955
  3,093
  3,239
  3,391
  3,552
  3,723
  3,902
  4,090
  4,288
  4,497
Debt-to-equity ratio
  2.222
  2.180
  2.190
  2.200
  2.200
  2.210
  2.220
  2.220
  2.230
  2.240
  2.240
  2.250
  2.260
  2.260
  2.270
  2.280
  2.280
  2.290
  2.290
  2.300
  2.310
  2.310
  2.320
  2.320
  2.330
  2.330
  2.330
  2.340
  2.340
  2.350
  2.350
Adjusted equity ratio
  0.280
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  40
  9
  9
  9
  10
  10
  11
  12
  12
  14
  15
  16
  18
  19
  21
  23
  25
  28
  30
  33
  36
  39
  42
  46
  50
  54
  58
  63
  68
  73
  79
Depreciation, amort., depletion, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Funds from operations, $m
  52
  9
  9
  9
  10
  10
  11
  12
  12
  14
  15
  16
  18
  19
  21
  23
  25
  28
  30
  33
  36
  39
  42
  46
  50
  54
  58
  63
  68
  73
  79
Change in working capital, $m
  43
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
Cash from operations, $m
  9
  9
  9
  9
  10
  10
  11
  12
  13
  14
  15
  17
  18
  20
  22
  24
  26
  28
  31
  34
  37
  40
  43
  47
  51
  55
  59
  64
  69
  75
  80
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
New CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from investing activities, $m
  -43
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Free cash flow, $m
  -34
  9
  9
  9
  10
  10
  11
  12
  13
  14
  15
  17
  18
  20
  22
  24
  26
  28
  31
  34
  37
  40
  43
  47
  51
  55
  59
  64
  69
  75
  80
Issuance/(repayment) of debt, $m
  150
  20
  23
  26
  29
  32
  36
  39
  42
  45
  48
  52
  55
  59
  63
  66
  70
  74
  79
  83
  88
  93
  98
  103
  109
  114
  120
  127
  133
  140
  148
Issuance/(repurchase) of shares, $m
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  102
  20
  23
  26
  29
  32
  36
  39
  42
  45
  48
  52
  55
  59
  63
  66
  70
  74
  79
  83
  88
  93
  98
  103
  109
  114
  120
  127
  133
  140
  148
Total cash flow (excl. dividends), $m
  67
  29
  32
  35
  39
  43
  47
  51
  55
  59
  64
  68
  73
  79
  84
  90
  96
  103
  110
  117
  124
  132
  141
  150
  159
  169
  180
  191
  203
  215
  228
Retained Cash Flow (-), $m
  -10
  -8
  -9
  -11
  -12
  -13
  -15
  -16
  -17
  -19
  -20
  -21
  -23
  -24
  -26
  -27
  -29
  -31
  -32
  -34
  -36
  -38
  -40
  -42
  -45
  -47
  -50
  -52
  -55
  -58
  -61
Prev. year cash balance distribution, $m
 
  9
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  30
  22
  25
  27
  29
  32
  35
  37
  40
  44
  47
  51
  54
  58
  63
  67
  72
  77
  83
  88
  94
  101
  107
  115
  122
  130
  139
  148
  157
  167
Discount rate, %
 
  9.10
  9.56
  10.03
  10.53
  11.06
  11.61
  12.19
  12.80
  13.44
  14.12
  14.82
  15.56
  16.34
  17.16
  18.02
  18.92
  19.86
  20.86
  21.90
  23.00
  24.15
  25.35
  26.62
  27.95
  29.35
  30.82
  32.36
  33.97
  35.67
  37.46
PV of cash for distribution, $m
 
  27
  19
  18
  18
  17
  17
  15
  14
  13
  12
  10
  9
  8
  6
  5
  4
  3
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Ares Commercial Real Estate Corporation, a specialty finance company, originates, manages, and services a portfolio of commercial real estate (CRE) debt-related investments. The company operates in two segments, Principal Lending and Mortgage Banking. Its target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investments. The company also originates long-term senior loans collateralized by multifamily and senior-living properties. Ares Commercial Real Estate Corporation has elected and qualified to be taxed as a real estate investment trust for the United States federal income tax purposes under the Internal Revenue Code of 1986. As a result, it would not be subject to corporate income tax on that portion of its net income that is distributed to shareholders. Ares Commercial Real Estate Management LLC operates as the manager of the company. Ares Commercial Real Estate Corporation was founded in 2011 and is headquartered in New York, New York.

FINANCIAL RATIOS  of  Ares Commercial Real Estate (ACRE)

Valuation Ratios
P/E Ratio 9.7
Price to Sales 4.7
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow 43.2
Price to Free Cash Flow 43.2
Growth Rates
Sales Growth Rate -4.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -100%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 222.2%
Total Debt to Equity 222.2%
Interest Coverage 2
Management Effectiveness
Return On Assets 5%
Ret/ On Assets - 3 Yr. Avg. 4%
Return On Total Capital 3%
Ret/ On T. Cap. - 3 Yr. Avg. 2.3%
Return On Equity 9.7%
Return On Equity - 3 Yr. Avg. 8%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 47.6%
Gross Margin - 3 Yr. Avg. 48.3%
EBITDA Margin 74.4%
EBITDA Margin - 3 Yr. Avg. 72.1%
Operating Margin 37.8%
Oper. Margin - 3 Yr. Avg. 37.4%
Pre-Tax Margin 37.8%
Pre-Tax Margin - 3 Yr. Avg. 37.4%
Net Profit Margin 48.8%
Net Profit Margin - 3 Yr. Avg. 40.7%
Effective Tax Rate 3.2%
Eff/ Tax Rate - 3 Yr. Avg. 1.1%
Payout Ratio 72.5%

ACRE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ACRE stock intrinsic value calculation we used $122 million for the last fiscal year's total revenue generated by Ares Commercial Real Estate. The default revenue input number comes from 2016 income statement of Ares Commercial Real Estate. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ACRE stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.1%, whose default value for ACRE is calculated based on our internal credit rating of Ares Commercial Real Estate, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Ares Commercial Real Estate.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ACRE stock the variable cost ratio is equal to 14.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $62 million in the base year in the intrinsic value calculation for ACRE stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Ares Commercial Real Estate.

Corporate tax rate of 27% is the nominal tax rate for Ares Commercial Real Estate. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ACRE stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ACRE are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in Ares Commercial Real Estate operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ACRE is equal to -7.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $409 million for Ares Commercial Real Estate - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 28.378 million for Ares Commercial Real Estate is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Ares Commercial Real Estate at the current share price and the inputted number of shares is $0.4 billion.


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COMPANY NEWS

▶ [$$] Two Mortgage REITs Set for Earnings Upside   [Jun-13-17 11:52AM  Barrons.com]
▶ Ares Commercial Real Estate posts 1Q profit   [May-02-17 06:45AM  Associated Press]
▶ Ares Commercial Real Estate posts 4Q profit   [06:48AM  Associated Press]
Stock chart of ACRE Financial statements of ACRE Annual reports of ACRE
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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