Intrinsic value of Ares Commercial Real Estate - ACRE

Previous Close

$13.33

  Intrinsic Value

$16.73

stock screener

  Rating & Target

buy

+25%

  Value-price divergence*

0%

Previous close

$13.33

 
Intrinsic value

$16.73

 
Up/down potential

+25%

 
Rating

buy

 
Value-price divergence*

0%

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
  10.50
  9.95
  9.45
  9.01
  8.61
  8.25
  7.92
  7.63
  7.37
  7.13
  6.92
  6.73
  6.55
  6.40
  6.26
  6.13
  6.02
  5.92
  5.83
  5.74
  5.67
  5.60
  5.54
  5.49
  5.44
  5.39
  5.36
  5.32
  5.29
  5.26
Revenue, $m
  82
  91
  100
  109
  119
  129
  140
  151
  162
  174
  187
  200
  213
  227
  242
  257
  272
  289
  306
  324
  342
  362
  382
  403
  425
  448
  473
  498
  524
  552
  581
Variable operating expenses, $m
 
  53
  58
  64
  70
  76
  82
  88
  95
  102
  109
  117
  125
  133
  141
  150
  159
  169
  179
  189
  200
  212
  223
  236
  249
  262
  276
  291
  307
  323
  340
Fixed operating expenses, $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
Total operating expenses, $m
  51
  53
  58
  64
  70
  76
  82
  88
  95
  102
  109
  117
  125
  133
  141
  150
  159
  169
  179
  189
  200
  212
  223
  236
  249
  262
  276
  291
  307
  323
  340
Operating income, $m
  31
  38
  41
  45
  49
  54
  58
  63
  67
  72
  77
  83
  88
  94
  100
  107
  113
  120
  127
  134
  142
  150
  159
  167
  176
  186
  196
  207
  218
  229
  241
EBITDA, $m
  31
  38
  41
  45
  49
  54
  58
  63
  67
  72
  77
  83
  88
  94
  100
  107
  113
  120
  127
  134
  142
  150
  159
  167
  176
  186
  196
  207
  218
  229
  241
Interest expense (income), $m
  30
  33
  36
  40
  43
  47
  52
  56
  60
  65
  70
  75
  80
  86
  91
  97
  103
  110
  117
  123
  131
  138
  146
  154
  163
  172
  181
  191
  202
  212
  224
Earnings before tax, $m
  31
  5
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
  18
Tax expense, $m
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
Net income, $m
  40
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13

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
  1,461
  1,607
  1,759
  1,917
  2,082
  2,254
  2,433
  2,618
  2,811
  3,012
  3,220
  3,437
  3,662
  3,896
  4,140
  4,394
  4,658
  4,934
  5,221
  5,521
  5,834
  6,161
  6,502
  6,859
  7,232
  7,622
  8,030
  8,458
  8,905
  9,373
Adjusted assets (=assets-cash), $m
  1,327
  1,461
  1,607
  1,759
  1,917
  2,082
  2,254
  2,433
  2,618
  2,811
  3,012
  3,220
  3,437
  3,662
  3,896
  4,140
  4,394
  4,658
  4,934
  5,221
  5,521
  5,834
  6,161
  6,502
  6,859
  7,232
  7,622
  8,030
  8,458
  8,905
  9,373
Revenue / Adjusted assets
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
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
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -19
  -20
  -21
  -23
  -24
  -26
  -27
  -29
  -31
  -32
  -34
  -36
  -38
  -40
  -43
  -45
  -47
  -50
  -52
  -55
  -58
Total debt, $m
  931
  1,028
  1,133
  1,242
  1,356
  1,475
  1,599
  1,727
  1,861
  2,000
  2,144
  2,294
  2,450
  2,612
  2,781
  2,957
  3,139
  3,330
  3,528
  3,735
  3,951
  4,177
  4,412
  4,658
  4,915
  5,183
  5,464
  5,758
  6,066
  6,388
  6,725
Total liabilities, $m
  955
  1,052
  1,157
  1,266
  1,380
  1,499
  1,623
  1,751
  1,885
  2,024
  2,168
  2,318
  2,474
  2,636
  2,805
  2,981
  3,163
  3,354
  3,552
  3,759
  3,975
  4,201
  4,436
  4,682
  4,939
  5,207
  5,488
  5,782
  6,090
  6,412
  6,749
Total equity, $m
  419
  409
  450
  492
  537
  583
  631
  681
  733
  787
  843
  902
  962
  1,025
  1,091
  1,159
  1,230
  1,304
  1,381
  1,462
  1,546
  1,634
  1,725
  1,821
  1,921
  2,025
  2,134
  2,249
  2,368
  2,493
  2,625
Total liabilities and equity, $m
  1,374
  1,461
  1,607
  1,758
  1,917
  2,082
  2,254
  2,432
  2,618
  2,811
  3,011
  3,220
  3,436
  3,661
  3,896
  4,140
  4,393
  4,658
  4,933
  5,221
  5,521
  5,835
  6,161
  6,503
  6,860
  7,232
  7,622
  8,031
  8,458
  8,905
  9,374
Debt-to-equity ratio
  2.222
  2.510
  2.520
  2.520
  2.530
  2.530
  2.530
  2.540
  2.540
  2.540
  2.540
  2.540
  2.550
  2.550
  2.550
  2.550
  2.550
  2.550
  2.550
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
Adjusted equity ratio
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  40
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
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
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
Change in working capital, $m
  43
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
Cash from operations, $m
  9
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
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
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
Issuance/(repayment) of debt, $m
  150
  97
  105
  109
  114
  119
  124
  129
  134
  139
  144
  150
  156
  162
  169
  176
  183
  190
  198
  207
  216
  225
  235
  246
  257
  269
  281
  294
  308
  322
  337
Issuance/(repurchase) of shares, $m
  -1
  34
  37
  38
  40
  42
  43
  45
  47
  49
  51
  53
  55
  57
  59
  62
  64
  67
  70
  73
  76
  79
  82
  86
  90
  94
  99
  103
  108
  113
  118
Cash from financing (excl. dividends), $m  
  102
  131
  142
  147
  154
  161
  167
  174
  181
  188
  195
  203
  211
  219
  228
  238
  247
  257
  268
  280
  292
  304
  317
  332
  347
  363
  380
  397
  416
  435
  455
Total cash flow (excl. dividends), $m
  67
  135
  146
  153
  159
  166
  173
  180
  187
  194
  202
  210
  218
  227
  236
  245
  255
  266
  277
  289
  302
  315
  329
  344
  359
  375
  393
  411
  430
  450
  471
Retained Cash Flow (-), $m
  -10
  -37
  -41
  -43
  -44
  -46
  -48
  -50
  -52
  -54
  -56
  -58
  -61
  -63
  -66
  -68
  -71
  -74
  -77
  -80
  -84
  -88
  -92
  -96
  -100
  -104
  -109
  -114
  -120
  -125
  -131
Prev. year cash balance distribution, $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
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
 
  145
  106
  110
  115
  120
  125
  130
  135
  140
  146
  151
  157
  164
  170
  177
  184
  192
  200
  209
  218
  227
  237
  248
  259
  271
  283
  296
  310
  325
  340
Discount rate, %
 
  11.50
  12.08
  12.68
  13.31
  13.98
  14.68
  15.41
  16.18
  16.99
  17.84
  18.73
  19.67
  20.65
  21.68
  22.77
  23.91
  25.10
  26.36
  27.68
  29.06
  30.51
  32.04
  33.64
  35.32
  37.09
  38.94
  40.89
  42.93
  45.08
  47.34
PV of cash for distribution, $m
 
  130
  84
  77
  70
  62
  55
  48
  41
  34
  28
  23
  18
  14
  11
  8
  6
  4
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  90.9
  82.7
  75.5
  69.3
  63.8
  58.9
  54.6
  50.7
  47.2
  44.1
  41.2
  38.7
  36.3
  34.1
  32.1
  30.2
  28.5
  26.9
  25.5
  24.1
  22.8
  21.6
  20.4
  19.4
  18.4
  17.4
  16.6
  15.7
  14.9
  14.2

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 9.5
Price to Sales 4.6
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow 42.2
Price to Free Cash Flow 42.2
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 $82 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 10.5% 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 11.5%, 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 58.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 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 -10%. 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 - $419 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.

RELATED COMPANIES Price Int.Val. Rating
STWD Starwood Prope 22.19 22.34  hold
HASI Hannon Armstro 22.70 23.11  hold
LADR Ladder Capital 13.71 172.64  str.buy
RAS RAIT Financial 1.09 1.26  sell
ARI Apollo Commerc 18.07 22.04  buy
RWT Redwood Trust 16.78 3.79  str.sell
RSO Resource Capit 10.31 27.19  str.buy
BXMT Blackstone Mor 31.15 11.07  str.sell
PMT PennyMac Mortg 17.42 26.44  buy

COMPANY NEWS

▶ Ares Commercial Real Estate posts 2Q profit   [Aug-04-17 02:28AM  Associated Press]
▶ Ares Commercial Real Estates Dividend Curve   [Jul-26-17 12:09PM  Market Realist]
▶ [$$] 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
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.

FREE DOWNLOAD
Follow us on:   twitter   twitter   twitter   twitter

VALUATION THEORY       ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2017. All rigths reserved.